Whoever succeeds in winning the upcoming election, one of the first things they are likely to do is to hold an ‘emergency Budget’. How, though, does this fit into a year when we already have two of the wretched things planned – one just past on 8 March, and another on a new autumn date (and planned to be held annually in the autumn thereafter)?
If the Conservatives win, it appears likely that they will want to make good on at least a few campaign promises, and also reinstate much of the ‘lost’ legislation that had to be dropped from the first 2017 Finance Bill in order for it to receive Royal Assent before the pre-election close down. It is likely that many of the provisions which we thought might have disappeared will be back on the books – it is even conceivable that they will apply from the planned 1 or 6 April 2017 date as originally drafted, although there may be a small ‘reprieve’ with some measures only taking effect from a date post-election.
Should Labour or the LibDems win, they will certainly want to hold a post-election Budget, although they may forgo the autumn one. We can expect to see anti-avoidance provisions promoted by the previous Government reinstated, but it is likely that some expected relieving provisions (such as the relaxation to the substantial shareholdings exemption (SSE) and new rules for corporate losses) may be dropped.
The future of the corporate interest restriction
Under the planned rule, from 1 April 2017, group with ‘net tax interest’ over a £2m de minimis limit would have received deductions limited by the greater of a ‘fixed ratio rule’ and a ‘group ratio rule’, and also subject to an over-riding modified debt cap. The modified debt cap was designed to further reduce a group’s interest capacity if the worldwide group’s total net interest expense was lower than 30% of the tax EBITDA, and would also prevent interest allowed under the fixed ratio from exceeding the group’s adjusted interest expense.
It is likely that whichever party is in power on 9 June, this restriction will be retained, although it may be made even more onerous under a Labour administration that has set its sights on reducing “avoidance by corporates”.
Corporation tax losses and the substantial shareholdings exemption
As a result of the snap election being called, the new rules on the interest restriction, the new corporation tax loss regime and planned amendments to the SSE regime have not been enacted. All of these were due to take effect from 1 April 2017. Many companies have done a lot of work to prepare for their introduction and, in the case of the SSE, some may have made disposals on the assumption that the changes would be made. These businesses are now left in suspense, and without a confirmed filing position.
If a Conservative Government is re-elected, it is likely that these measures will be re-introduced after the election. Whilst it may take a little time before they actually become law, there is a reasonable chance that they will be enacted with the original effective dates (i.e. back-dated to 1 April 2017). If a different party forms the new Government, the position is far from clear. We can fairly confidently expect that rules derived from Europe-wide anti-avoidance initiatives like the interest restriction will survive, however the fate of other measures is not so clear.
Whilst Labour (or the LibDems) are likely to proceed with tax raising measures and restrictions to existing reliefs, the prospects for a relaxation in the use of losses, and the proposed removal of the investor conditions from the SSE are much less certain. The worst case scenario would be if a Labour administration were to retain the tax raising aspects of these proposals (e.g. the 50% restriction on use of carried forward losses over £5m) without introducing the attendant relief. In the case of the SSE, the changes – which most agree are a sensible and measured response to concerns over how the legislation was originally drafted – may be dropped altogether.
A reprieve for non-doms?
Much of the draft legislation was cut from the committee stage debates on the pre-election Finance Bill. The draft legislation that has been cut includes the following changes applicable to non-doms and offshore trusts:
- The new concept of a returning UK dom (a.k.a. formerly domiciled resident)
- Reducing deemed domicile status from 17 out of 20 years to 15 out of the previous 20 tax years
- Introduction of deemed domicile status for income tax and capital gains tax purposes
- Treatment of offshore trusts settled by non-domiciled settlors who have retained an interest (the protections)
- Rebasing of foreign assets – to allow non-doms who have previously paid the remittance basis charge to rebase their foreign assets for capital gains tax purposes as at 5 April 2017
- Cleansing of offshore accounts –to allow non-doms who have claimed the remittance basis since April 2008 to segregate their offshore funds in the two year period to 5 April 2019
- Transfer of assets abroad legislation (which was due to stop taxing non-dom/UK resident settlors on trust income as it arises from 6 April 2017)
- The value of offshore trust benefits for UK resident beneficiaries
- Inheritance tax on overseas property representing UK residential property – due to be treated as UK property from 6 April 2017
The clauses that have been dropped are expected to return in a Bill after the election regardless of who wins, for scrutiny at committee stage – however, as with the corporate changes discussed above, if Labour or the LibDems are elected, the rules may actually be tightened still further, and possibly some planned protections may be dropped.
A number of people have already planned ahead based on new rules from 6 April however it is possible that the start date for the legislation – if introduced – will be moved from 6 April, to the date of Royal Assent to the post-election Finance Bill, leaving many in an uncomfortable situation.
Making tax digital – is it too late to put the brakes on?
Making Tax Digital (MTD) was one of several measures dropped from the pre-election Finance Bill. While this decision will be welcomed by many businesses, celebrations are probably premature as it is unlikely we’ve seen the back of MTD.
Will it survive? At present, we simply don’t know, although we think it will.
We know that this is a key part of the Government’s efforts to reduce the tax gap, so it is likely that HMRC will continue to push hard to ensure the project stays on track. However, introducing MTD from April 2018 was already a challenging timetable and the June election makes it harder for the Government and HMRC to achieve a 2018 start date for mandatory tax filing.
If the Conservatives win, they will almost certainly issue a Finance Bill immediately after the election and it is likely that it will receive Royal Assent in late July, so there would in theory be no impact at all on the current MTD timetable. The new Government may however feel it is politically expedient to offer a concession on MTD – possibly allowing people to use the system voluntarily from April 2018, but pushing mandation back to April 2019. A delay would give the opportunity (which many people have felt is lacking from the proposals) for a large scale trial.
If Labour wins the election, we think it likely that they will still push MTD through – eventually. All that Mr Corbyn has really said on the topic is that he thinks there should be a relaxation for small businesses – whether that means they shouldn’t go have to use MTD at all (which would defeat HMRC’s objective of helping close the tax gap at that level), and whether he means to keep the ‘turnover under the VAT threshold’ criterion, we simply don’t know…
One thing that won’t change, however, is the push to get businesses online. The future for record keeping is definitely digital and many small businesses could see great advantages from moving to cloud based accounting systems, including the ability to track costs in virtually real time, and to monitor profitability and adapt their strategies accordingly.