This article was written by Samantha Coleman.
Chancellor of the Exchequer, Philip Hammond, announced the UK Budget on 29 October 2018. This analysis highlights some key UK tax changes that may interest both UK and non-UK residents.
1. Introduction of new economic test for entrepreneurs’ relief (ER)
ER is a relief from UK capital gains tax (CGT) that can provide significant tax savings for individuals by way of a reduction in the rate of CGT from 20% to 10% on up to £10 million of lifetime gains.
In order to claim ER on a disposal of shares, the company must be trading or a holding company of a trading group, the individual must be an officer or employee and hold at least 5% of the ordinary share capital, together with 5% of the voting rights, for at least 1 year prior to the disposal.
Up until Budget Day, it was possible to satisfy the ordinary share capital test by holding 5% of the nominal value of the shares, along with 5% of the votes. To satisfy the test now, managers also need to be entitled to at least 5% of the company’s distributable profits and 5% of the assets available to equity holders on a winding-up.
These conditions need to be met throughout a one year period prior to the disposal, increasing to 2 years from 6 April 2019. This increased time period will also apply to individuals who acquire shares on the exercise of enterprise management incentives (EMI) options, with the two year period starting from the date of grant of the option (as opposed to the acquisition of their shares). Fortunately for EMI option holders, it appears that their shares under option still do not need to pass the 5% tests in order to qualify for ER.
2. CGT on residential property disposals
As previously announced, disposals of UK residential property by UK residents on or after 6 April 2020 will require a return and payment on account of CGT to be made within 30 days of completing the disposal. The new rules will apply to disposals made by non-UK residents on or after 6 April 2019. This will tie in with the commencement date of the proposed new CGT and corporation tax provisions taxing non-UK residents on the disposal of residential or non-residential interests in UK land.
3. Extension of UK income tax to non-UK residents in relation to intangible property
As another example of the extension of the UK tax regime in recent years to non-UK residents, the government has announced that with effect from 6 April 2019, UK income tax liabilities will arise for certain non-UK residents in relation to income from intangible assets (e.g. IP rights) that is referable to the sale of goods or services in the UK. The tax will arise regardless of whether the non-UK resident has a UK taxable presence, but it will only arise to the extent the income is received in a low tax jurisdiction where the UK does not have a full double tax treaty (including a non-discrimination article). It is proposed that there will be a £10 million de minimis threshold in relation to UK sales, along with other exemptions where income is taxed at appropriate levels and/or there is local substance.
4. UK permanent establishments: BEPS anti-avoidance change to definition
UK corporation tax liabilities generally arise when a non-resident company has a permanent establishment in the UK. Certain activities are classed as exempt for these purposes and do not create a UK permanent establishment of a non-UK resident business, such as, preparatory or auxiliary activities, storing the company’s own products, purchasing goods or collecting information for the non-resident company.
With effect from 1 January 2019, non-UK companies will no longer be able to take advantage of these exemptions where the activities may have been artificially split into different locations across the UK or through different entities in order to avoid creating a permanent establishment.
5. Introduction of a Digital Services Tax
From April 2020, the UK will introduce a new 2% digital services tax (DST) for large digital services companies on revenues exceeding £25 million that are derived from UK users of social media platforms, online marketplaces and search engines.
Unlike the European Commission’s proposed DST, a safe harbour will be included for businesses that are loss-making or have very low profit margins, the details of which will be subject to consultation. It is acknowledged that the UK’s proposed DST will be an interim measure until agreement is reached in the G20, OECD and EU on a long-term solution for tackling tax in the digital economy.