As we all know, the Conservative Party has won the previous election by a clear majority to the detriment of the Labour Party, bringing clarity to what will be the political scenario of the next UK government. Obviously, the main task will be having the Brexit Withdrawal Agreement Bill ratified by the European Parliament by the 31st of January 2020, but we need to be aware that another deadline not less important will lead a tax change and issues to be addressed in February Budget.
The Withdrawal Agreement vote, which took place on the 23rd of December 2019, led to the approval of the Brexit deal. This bill must still go on to further scrutiny in Parliament but it is expected to be passed easily following the Conservatives majority. Once the Withdrawal Agreement is passed, the European Parliament still needs to ratify the deal before the 31st of January 2020 deadline for Brexit to happen. This new deal includes changes to the one backed in October. The Withdrawal Agreement Bill legally prohibits the government from extending the transition period beyond the 31st of December 2020. This is a significant change as Boris Johnson will have 11 months, from the moment the UK departs the EU on the 31st of January Brexit deadline, to close the trade deal with the EU. During this transition, period the UK remains part of the EU but will not participate in EU meetings and votes. However, the EU and the UK will negotiate their future relationship. A comprehensive free trade agreement (FTA) is expected with zero tariffs on most goods and services and minimal border checks. If an FTA cannot be concluded on time, businesses could be subject to disruptions and additional costs from the 1st of January 2021. However, these hypotheses seem to be quite remote as both parties have started to be willing to start negotiating trade agreements in the foreseeable future.
IMPLICATIONS ON TAX POLICIES
After the transition period, as of the 1st of January 2021, the UK will no longer apply EU tax directives. These directives include Parent-Subsidiary Directive, which provides for tax exemption for cross-border dividends paid between related companies located in different Member States, and Interest and Royalties Directive, which abolishes wherever possible withholding taxes on interests and royalty payments between the Member States. Up till now, these EU directives allowed for exemptions or reduced withholding tax (WHT) rates. Groups may find that post-Brexit they have additional WHT costs to manage from January 2021 unless new agreements are reached or the groups themselves restructure, as extending the transition period is no longer an option.
With regards to the upcoming February Budget, the tax content from the Conservative Party´s Manifesto easily translates into Budget measures. This tax policy will focus on ensuring all tax due is collected and on keeping UK tax burden as low as possible. This is consistent with the commitments made to increase spending. Some areas which are relatively clear at this stage include an increase in the level above which national insurance becomes payable both by employers and employees (the national insurance primary and secondary threshold) from £8,632 to £9,500. Corporation tax measures that have high chances to be passed include the cancellation of the 2% cut to the enacted corporation tax rate, so that it stays at 19% from April 2020, along with with the increase in structures and building allowance (SBA) to 3%. The SBA is tax relief for capital expenditure on both new buildings and extensions/refurbishments of existing premises for construction work contracts as of the 29th of October 2018. Lastly, Research and Development (R&D) tax credit relief will increase from 12% to 13% and the definition of R&D could change to include data and cloud computing. Other areas are less clear at this stage. These include the future of digital services tax (DST), as the government could introduce a 2% tax on the revenues of search engines, social media platforms and online marketplaces which derive value from UK users, along with is the review and reform of Entrepreneurs’ Relief, which reduced the amount of Capital Gains Tax paid on business assets to 10%, and the limitation of arbitrary tax advantages for the wealthiest in society.
For employers, we may see the increase of employment allowance from £ 3,000 to £ 4,000, along with a possible increase in the amount and scope of the National Living Wage. New taxes could include a plastic packaging tax and a new Stamp Duty tax surcharge on non-residents buying UK residential property. New laws could include a new anti-avoidance and evasion law.
In light of the foreseeable Brexit deal and the future February Budget, businesses now have the chance to engage with the UK Treasury so that they will be ready to make the best of this tax policy cycle, which will begin with the Budget in February. It might be the right time for the UK government, stronger of its majority, to choose to supplement these Manifesto’s commitments with new, additional policies to reinforce that the UK is “open for business” as well as to attract and support investment.