Updating the tax system for the digital age

A UK Digital Services Tax service will be launched by April 2020, raising £400m a year.

This afternoon’s budget saw the chancellor introduce the “narrowly targeted tax of the UK revenues from digital business models.”

The Chancellor stressed that the tax was not aimed at online sales goods, but was instead aimed at profitable firms with at least £500m in global revenues.

Hammond said: “We are serious about this reform. It is only right that these global giants with profitable business in the UK pay their fair share towards our public services.”

He added that it would mean that tax avoidance could be clamped down on and that it was about “updating the tax system for the digital age.”

Hammond said that he would also like the HMRC the preferred creditor of payments for insolvencies.

He also announced a new tax on the manufacturing and importing of packaging which has more than 30% of plastic within it. He said he had considered a levy on disposable plastic cups but a tax in isolation would not deliver a decisive shift from disposable to reusable cups.

The Chancellor also introduced new mandatory business rates for public lavatories, whether publicly or privately owned. Hammond also said  the government were to extend changes to the way self-employment status is taxed, from the public sector to medium and large private companies, from 2020.

There were also changes to the R&D Tax Credit announced, with caps set at three times a company’s NIC and PAYE bill.

Steven Holmes, Business Tax Director at Garbutt + Elliott, said of the R&D Tax Credit: “It is a huge shame that the government are consulting on capping R&D credits at three times a company’s PAYE and NIC bill.  This will have a huge impact on small businesses struggling to get by , paying themselves nothing as they focus all of their efforts on developing technology.

“However the government have introduced it to prevent fraudulent claims of £300 million.  As the proposal is under consultation hopefully the government can come up with a way to stop the fraudulent claims whilst also support fledgling technology companies.  Its infuriating that people will look to exploit something that benefits so many hard working Yorkshire businesses.”

Of the changes to the Entrepreneurs Relief, he added: “There have been a couple of changes to Entrepreneurs Relief which could easily go unnoticed.

“The Chancellor mentioned in his speech that the ownership period to qualify for ER has increased from 1 year to  2.  However he also added two new tests which could easily be missed.   Currently if selling shares you must hold 5% of the share capital and voting rights of the company, now you must also have 5% of the distributable profits and 5% of assets available for distribution to equity holders on a winding up.

“I see a lot of specific share classes where share rights have been limited, typically where shares are held by minority shareholders.  A lot of these arrangements will need to be looked at closely to see whether they are still eligible for ER.”