Planning opportunities prior to Budget 2020

With the Chancellor’s announcement that 2020 Budget will take place on 11 March 2020, we highlight some possible planning opportunities to consider prior to any potential changes in legislation.

Please note that any decisions made before the Budget is announced must take into consideration non-tax aspects, such as commercial feasibility.  

However, postponing or fast-tracking transactions to produce most tax efficient result in the highlight of potential changes may be worth considering. Some of these are set out below.

Corporation tax rate from 1 April 2020

With the planned reduction of corporation tax to 17% from 1 April 2020 (currently 19%) likely not to go ahead, companies previously planning to delay significant gains or other profits until after 1 April 2020 no longer need to. Of course, this is subject to other commercial considerations.

The remodelling of QIP calculations should be considered to ensure they to reflect the continuation of the 19% corporation tax rate. This will minimise any potential interest charged on underpaid instalments.

In addition is the impact on cash flow forecasts. Companies will need to calculate the impact this change will have on the value of deferred tax assets and liabilities in their financial statements (such as the value of carried forward tax losses).

Entrepreneurs’ Relief

Entrepreneurs’ relief (ER) is likely to be reviewed and face a change in the way the tax relief is applied. A review of the relief, which reduces the capital gains tax (CGT) rates from 20% to 10% on disposals of certain business assets from 20% to 10%, was in the Government’s manifesto.

A substantial saving can be made when compared to CGT rates on capital gains above the basic rate band of 20%. Should the relief be restricted in the budget, a commercial decision should be made on the sale of any business assets prior to the new restrictions.

Research and development (R&D)

Expenditure incurred post 31 December 2017 currently receives R&D relief at 12%. Companies who are looking to make a relief claim may want to delay expenditure until after the Budget announcement. The Government suggested an increase to 13% in their manifesto therefore, companies should consider any significant expenditure to take advantage of the higher rate of relief.

The government’s manifesto also suggested a revision of R&D definition to ensure that investments in cloud computing and data fall within its scope. Another reason for companies within this sector to delay their spending in case the Budget widens the R&D range.

Increase in NIC threshold

A potential rise in the NIC threshold may also be on the horizon. The manifesto did promise to increase the NIC threshold to £9,500 from April 2020.

This will benefit owner-managed companies when it comes to extracting profits. A tax efficient way of extracting profits is to take a salary to equal to the NIC earnings threshold. The remainder of any distributable profits are then taken by way of dividends.

In 2019/20, the NIC earnings threshold was £8,632, the potential increase will allow an additional £868 to be taken as salary by the owners, which should face no tax liability if done correctly

Of course until the Budget is actually released, it is not certain exactly what changes the Government are going to make. Given a turbulent 3 years and Brexit on the horizon there could be some potential surprises thrown in there as we look to a post-Brexit United Kingdom.