The UK’s first post-Brexit budget has important tax implications
By Michael Jarvis, Manager, International Tax Advisory
HM Treasury’s 2020 Budget was announced last week and contains an array of measures that could lead to large capital injections into the UK economy. The budget is in part a response to the COVID-19 outbreak, but also seeks to broadly promote UK business growth.
The budget’s introduction notes that it is the first of the new decade and the first since Brexit. It “lays the foundations of the UK’s future prosperity and delivers on the government’s promises to the British people.” The budget will invest an estimated 640 billion pounds into transport, health, energy and digital infrastructure between 2020 and 2024.
This post summarizes some important tax-related announcements from the budget, and points out some notable omissions.
Research and development tax credits
As part of a pledge to increase investment in science, innovation and technology to 22 billion pounds by 2024-25, the government increased the potential research and development (R&D) tax credit from 12 percent to 13 percent beginning 1 April 2020.
The government also will consult on including data- and cloud-computing costs within the definition of qualifying R&D expenditures. This would benefit many tech firms who make use of these services as part of their R&D activities.
Digital services tax
Despite the OECD’s condemnation of unilateral measures and its recent announcement about Pillar One, the UK government did not announce plans to suspend its digital services tax (DST), set to take effect 1 April 2020. The narrowly targeted 2 percent tax will apply to “the revenues of search engines, social media platforms and online marketplaces which derive value from UK users.”
Calculation and application of the UK’s DST is potentially quite complicated. With the first returns due sometime in early 2021, businesses should be implementing processes to comply.
Plastic packaging tax and other environmental matters
Starting April 2022, the government will introduce a levy on plastic packaging that contains less than 30 percent recycled plastic. The exact application of the tax is not known at this point, but groups that sell tangible products in the UK should consider how the levy will affect their supply chains.
The government also announced changes to various existing climate change levies, as well as changes to: capital allowances, employee benefits involving environmentally friendly vehicles, duties on subsidised fuel, and capital injections for certain green industries.
These are strong signals that UK authorities are taking climate change seriously and will use the tax system to influence taxpayer behaviour and foster green businesses.
Tax avoidance and compliance
Notably, the 2020 budget does not address the subject of the UK’s DAC6 legislation. DAC6 is an EU directive that must be implemented by EU member states. Essentially, DAC6 is a framework for reporting certain cross-border transactions.
Following its exit from the EU on 31 January 2020, the UK is no longer obligated to comply with the DAC6 directive. The UK government, however, appears to be committed to co-operating with the EU on tax matters, particularly when it comes to combatting tax avoidance and evasion. For now, then, it appears UK taxpayers and their advisors will have to report details of certain cross-border arrangements in accordance with the UK’s DAC6 legislation, starting 1 July 2020.
The government also announced it will consult on whether taxpayer-funded grants should be available to businesses that do not have clean compliance records. Authorities are also making additional investments in compliance officers and technology so HMRC can more effectively combat tax avoidance.
Starting April 2021, large businesses will be required to notify HMRC when they take a tax position which HMRC is likely to challenge. The details of the notification process aren’t yet known, but even businesses that do not engage in aggressive planning may be required to report.
A number of value-added tax measures were introduced in the budget. Here are some of the more important changes.
From 1 January 2021, postponed accounting for VAT will apply to all imports of goods, including those from the EU. This will aid with business cash flow, since businesses are generally now required to pay import VAT at the time goods arrive in the UK, and must wait to reclaim it on the next VAT return.
This change relates to cross-border transactions. In the context of cross-border VAT, call-off stock refers to the following situation:
- the supplier knows the identity of the person acquiring the goods at the time the goods are transported to another member state
- a transfer in title to the goods will change at a later date and after the goods have arrived in the destination member state
The current rules governing call-off stock arrangements require the supplier to register for VAT in the recipient country. Under the new rules, businesses will no longer need to register for VAT in the destination member state, provided certain conditions are met.
The measure is retroactive and applies to goods removed from an EU member state to the UK (or vice versa) on or after 1 January 2020.
E-books, e-newspapers and academic e-journals will be entitled to the same zero-rating VAT treatment as their physical counterparts, starting 1 December 2020. This will align the UK’s VAT rules on e-publications with those of EU countries.