The Chancellor of the Exchequer delivered his Spring Statement on 13 March 2018. There was a little about tax in the speech, though several new consultations were announced.
VAT: registration threshold
Last year’s review of the VAT system by the Office of Tax Simplification identified a ‘bunching’ of businesses below the VAT threshold, with businesses deliberately avoiding further growth therefore avoiding coming within the VAT regime. In the Autumn Budget, the government therefore announced that the threshold would be frozen at its current level (£85,000) pending a consultation on potential changes to the threshold. The Spring Statement has brought a call for evidence to start this process. It sets out several, broad-ranging, options for reform, including ‘administrative smoothing’ such as giving businesses a longer period to submit their first VAT returns and ‘financial smoothing’ for example having VAT rates gradually increase as turnover grows, to avoid the current cliff-edge position.
VAT: split payments
Another proposal with its roots in the challenges of the digital economy is that to introduce a split payment mechanism for certain transactions. Broadly, the government is proposing that VAT is deducted at the payment stage – for example by the merchant acquirer or, where relevant, by the online platform hosting the transaction – and paid direct to HMRC.
The current proposals would apply only to overseas businesses selling online, but the government is open to expanding this to cover UK online sellers in the future.
The tax system currently gives tax relief for some training costs – for example, those reimbursed by an employer, or those incurred by a self- employed individual in maintaining their existing skills – but not others. The government is considering expanding the relief available, with an emphasis on supporting individuals needing to retrain or upskill.
Taxation of the digital economy
A key issue in the taxation of multinational groups is determining to what extent overall group profits should be taxed in each company. This is achieved through transfer pricing, and currently transfer pricing theory assigns group profits by looking at the ‘value chain’. It might be argued a company creates most of its value in the US, where the company has very significant technology expenditure and R&D, and very little in the UK, where it mainly operates a sales force.
The government has published a new paper setting out its developing thoughts in this area, proposing a change in the way that transfer pricing operates to take account of the fact that digital platforms derive some of their value from their communities of users.
Entrepreneurs’ Relief – gains before dilution
Currently, Entrepreneurs’ Relief (ER) on shares requires, in most cases, the vendor to hold at least 5% of the ordinary share capital of the company for at least one year prior to the sale. Therefore, entitlement to ER can be lost where a company issues shares to raise capital, and in doing so dilutes an individual’s holding below the 5% threshold for relief.
To avoid this acting as an unintentional brake on business growth, the government is proposing to allow individuals to crystallise a gain immediately before such a share issue. This was announced in the Autumn Budget, but we now have more details concerning their proposed solution.
Enterprise Investment Schemes: knowledge intensive funds
Enterprise Investment Scheme (EIS) funds have been available for many years and are typically nominee structures, similar in approach to a discretionary investment portfolio account. The nominee invests the funds on the individual’s behalf, and EIS certificates are issued on an asset by asset basis. There are also ‘approved EIS funds’, although these offer mainly administrative benefits only and are relatively rare.
The government is considering the introduction of a new EIS fund structure aimed at encouraging investment specifically in knowledge- intensive companies (KICs). KICs are companies which have beneficial status under the EIS rules, being able to take on additional levels of investment and have higher annual investment limits.
Under the proposals, funds would need to be approved by HM Revenue & Customs (HMRC), and would be restricted to investing “nearly entirely” in KICs
The Chancellor of the Exchequer is looking to make the taxation announcements in this Budget rather than in a Spring Statement, ensuring taxation changes only occur once a year and therefore giving businesses and individuals stability. This is expected to be in November 2018.