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Budget changes relating to intellectual property

From 07 November 2018, the government has implemented changes to de-grouping charge rules, which apply when a group sells a company that owns intangibles, so that they more closely align with the equivalent rules elsewhere in the tax code.  Consequently, tax charges arising from previous group restructuring of intangible assets can benefit from the substantial shareholding exemption, to exempt a chargeable gain for corporation tax (provided the conditions are met).

At the announcement of the Budget, the Chancellor confirmed the introduction of a targeted tax relief for the acquisition of IP-rich businesses.  The change is set to come in from 01 April 2019 and represents a partial reinstatement of a relief which was withdrawn previously in 2015.  Details of the relief to be made available for the cost of goodwill in the acquisition of businesses with eligible intellectual property are expected following the government's consultation.

Off-payroll working changes to apply to private companies

The Budget has confirmed the extension of the intermediaries rules (contained in IR35) to cover medium and large private sector businesses.  These changes will not affect small companies.  A company is considered small if it has any two of the following:

  • A turnover of £10.2m or less
  • £5.1m or less on its balance sheet
  • 50 employees or less

Currently, where a private sector business engages a contractor through a personal service company, it is the personal service company who has to consider whether the contractor would have been an employee of the business if engaged directly rather than via the personal service company.  Should they find they would have been an employee, the personal service company must deduct income tax and NICs via PAYE, removing the potential tax advantage of operating through them.

HMRC believes that just 10% of individuals working through personal service companies apply the correct tax rules, leading to hundreds of millions of pounds in lost tax and NICs.

Under the new rules, it will be the engaging business who will need to determine whether or not a contract falls within IR35 rules  rather than the personal service company.  HMRC predicts this will generate £1.165bn in additional tax in 2020-2021, with ongoing additional revenue in excess of £0.5bn thereafter.

The changes will mean private companies will likely need to make changes to current payroll, finance and HR processes. Companies should therefore prepare early to make sure they are ready for the changes coming into play in April 2020.

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