The Good News and Not So for Investors
Investors seeking Entrepreneurs’ Relief (ER) sees a positive change. An extension will be given to external investors who do not qualify for SEIS and/or EIS in order to attract new capital in companies. This means the 10% rate of Capital Gains Tax will be charged on sale of shares in non-listed companies i.e for startups.
Entrepreneurs’ Relief extended to shares held in unlisted trading companies (other than by officers and employees) for 3 years.
In order to qualify, the investment must be in shares in an unlisted company which have been issued after 17 march 2016 and held for 3 years before disposal. This will hopefully open up more potential funding, alongside the existing Enterprise Investment Scheme and Seed Enterprise Investment Scheme reliefs.
This is not only good news for investors making new investments, but also for startups looking to raise new funds, as the new relief comes as an extra incentive for investors.
However whilst he announced measures to extend entrepreneurs relief to external investors in private companies, to support wealth creators, a lot of these investors will have invested under EIS, their capital gains will be tax free anyway, plus these new rules only apply to shares acquired from now and held for 3 years ie. existing investments do not qualify, though the Capital Gains rate is dropping to 20% from 6 April 2016. The measure is therefore headline grabbing but won’t cost him anything for three years and even then is unlikely to significantly reduce his revenues.
Tax Relief for “Micro Entrepreneurs”
Announcing “a tax break for the digital age”, Mr Osborne unveiled two new £1,000 allowances for “micro-entrepreneurs” who use web sites like Airbnb to rent out rooms in their homes and sell items on sites such as eBay. He said at least 500,000 people would benefit and there would be no tax return forms to fill in.
The corporation tax main rate will be cut to 17% by 2020, which will benefit over one million companies. Based on legislated plans, the UK will have the lowest corporation tax rate in the G20.
There will also be a reduction in the main rate of capital gains tax from 28% to 20% for higher rate tax payers, and from 18% to 10% for basic rate taxpayers from 6 April 2016 so even investors who don’t qualify for ER will benefit from the reduced rates.
VAT for marketplaces
All businesses selling goods in the UK on online marketplaces pay VAT. The new rules will mean overseas companies having to appoint a UK established VAT representative to ensure compliance & HMRC to have the discretion to direct them. Importantly, for any online marketplace, HMRC will have the power to make them liable for any unpaid VAT which is a real issue any marketplace connecting overseas businesses into the UK will need to take on board.
Key Fact’s for Startups
- Reduction in corporation tax to 17% from April 2020. One of the most competitive nations in the world.
- A 50% restriction on brought forward losses being set off against current year profits from April 2017 where profits above £5m.
- Relaxations in the group relief rules for carried forward losses and loss streaming rules from April 2017
- Restrictions on interest relief to 30% of UK earnings or a worldwide interest/earnings ratio where net UK interest is more than £2m
- VAT to apply to UK sales made by offshore online sellers
- Further anti avoidance in respect of hybrid rules involving Permanent Establishments and withholding tax on royalty payments
- Cuts to business rates for small businesses and small properties. The Budget report states that that this will take 600,000 small firms out of business rates completely.
- A new Sugar Levy to be introduced on soft drinks manufacturers and importers
- Crackdown on the avoidance of UK tax by offshore property developers
- Termination payments made after April 2018 will be subject to employer NICs
- The rate of tax that applies to loans to participators in close companies increased to 32.5% from April 2016
- Further anti avoidance on disguised remuneration for loans from EBTs
- Self employed class 2 NICs abolished from 2018
- Reduction in capital gains tax rates to 20% and 10% for disposals after 6 April 2016. Reductions do not apply to residential property disposals and carried interest
- Entrepreneurs’ Relief extended to shares held in unlisted trading companies (other than by officers and employees) for 3 years.
- Effective rate of 10% and separate £10m lifetime limit
- Introduction of lifetime ISAs for under 40s. Up to £4,000 of annual savings topped up by £1,000 from government
- Annual ISA limit increased to £20,000 from April 2017
- Introduction of a cap of £100,000 on exempt capital gains through Employee Shareholder Status.
- Non doms will be able to rebase their offshore assets for capital gains tax as at April 2017
Key Rates for Founder’s:
- Corporation Tax 20%, 19% from 2017, 17% from 2020
- Income Tax, basic rate 20%, higher rate 40%, top rate 45>#/li###
- Personal allowance – £10,600, £11,000 from 2016, £11,500 from 2017
- 40% tax rate threshold – £42,385, £43,000 from 2016, £45,000 from 2017
- Capital gains – basic rate taxpayers 10%, other taxpayers 20% from April 2016
- New rates on dividends of 7.5%, 32.5% and 38.1% for basic, higher and top rate taxpayers and £5,000 allowance from 2016
- VAT 20>#/li###
- IPT 10% from October 2016
This was another budget from George Osborne which, from a tax perspective at least, was driven by politics rather than economics. He announced measures to extend entrepreneurs relief to external investors in private companies, a lot of these investors will have invested under EIS, their capital gains will be tax free anyway, plus these new rules only apply to shares acquired from now and held for 3 years.
He also continued his assault on the tabloid pantomime villains – with the new 20% CGT rate and 17% corporation taxes. Similarly the new sharing economy exemptions will generate positive headlines at a negligible cost to the exchequer.
Overall, the budget is good news for start ups as George did attempt to focus on easing the burden on small businesses with some expensive tax breaks but it remains to be seen whether this trend of fiscal policy can be upheld.