By Tom Lickess, Line of Service Lead, Tax Advisory, Radius
The UK’s Autumn Budget, released November 22 and explained in a speech by Chancellor of the Exchequer Philip Hammond, lowers the country’s economic growth forecast as it moves towards Brexit.
For multinationals, the budget offers a carrot-and-stick approach. It leaves the internationally competitive 19 percent corporate tax rate in place and provides funding designed to lure technology companies and keep existing businesses from relocating. But it also vows to tighten tax rules and crack down on online sales. Here are some of the main points of interest for corporations:
Slow Growth Ahead
The Office for Budget Responsibility cut the projected growth rate for this year from 2 percent to 1.5 percent, dropping to 1.3 percent for 2020. Projections for 2021 shrank from 2.1 percent to 1.6 percent. In contrast, the European Union expects growth of 2.3 percent this year and 2.1 percent next year. Once one of the strongest economies in Europe, Britain is now expected to lag behind other EU nations. The budget sets aside a whopping 3 billion pounds ($3.9 billion) over next two years to help the country achieve a successful EU exit.
The government pledged to invest over 500 million pounds ($663 million) to develop advanced technology, including artificial intelligence and 5G broadband. “A new tech business is funded every hour and I want that to be every half hour,” Hammond said in his speech. The new budget will also allow companies to deduct the full cost of investments in energy and water technology and increases a credit for research and development from 11 percent to 12 percent.
These incentives come on top of technology initiatives announced November 14 pledging to double the number of visas for foreign workers — used predominantly by technology companies — to 2,000, as well as establish tech hubs in 10 cities, provide training in cybersecurity, fund artificial intelligence initiatives and allow companies to test self-driving cars.
The UK is intent on attracting and retaining talent amid Brexit uncertainties. The technology sector has been growing faster than the rest of the economy and now employs 1.5 million people, but up to 40 percent of such companies have considered leaving after Brexit.
Corporate Tax: No More Inflation Indexing
Though widely expected to cut the corporate tax rate, the government left company tax at 19 percent, which is already the lowest rate among the G7 countries, according to the Institute for Fiscal Studies. The rate has been cut by 10 percent over the past decade, with plans to further reduce the corporate tax rate to 17 percent in 2020.
To broaden its tax base, the UK will stop indexing corporate capital gains for inflation starting in January 2018. Doing so brings the country in line with other major economies, Hammond said. The measure is expected to raise more than 525 million pounds ($698 million) by 2023.
Pressing Online Companies on VAT and Withholding Tax
Slower growth means the government expects to collect less tax revenue, and it is seeking to close perceived noncompliance and loopholes. One thorn in its side has been collecting VAT from online companies, including giants Amazon and eBay. A government committee report estimates that the country has missed out on up to 1.5 billion pounds (nearly $2 billion) from third-party sellers on online sites who don’t charge customers the tax.
The new budget proposes to tighten the rules, holding online companies partly responsible for third-party sellers that don’t collect the tax — even if the sellers don’t have a tax presence in the UK. All sellers will be required to display a VAT number online. Amazon and eBay said they were working with HMRC on the issue.
The budget also saw the Chancellor announce proposals to broaden the circumstances under which royalty payments to non-UK tax residents fall within the scope of UK withholding tax. Specifically, the proposals are directed at intellectual property payments made to low- or no-tax countries. While Treasury has yet to provide details, the proposals would bring within the scope of UK tax previously non-UK taxable income and send a message to global companies that they should account for this in their tax planning.
Real Estate Tax
Starting in April 2018, international companies that own and profit from commercial real estate investments will be charged tax on capital gains. The move could put a damper on Asian investment in London real estate, which has surged in recent months despite Brexit, in part because of the cheaper pound.
Increased Customs Powers
Finally, the budget broadens the power of customs agents, allowing them to unpack and examine goods after they have been cleared if they suspect wrongdoing.
The bulk of the budget’s provisions are geared towards solving domestic problems, such as reducing stamp taxes for first-time homebuyers. But its aims for multinational corporations continue the consistent line: Help the UK become a global innovation center, and pay your fair share of taxes.