The Budget was focussed on the “end of austerity” and increases in UK Government spending rather than tax. Phillip Hammond's headline grabbing tax measures were also mostly tax reductions and reliefs.
The increase in personal allowances to £12,500 compares favourably to Guernsey’s proposed allowance for 2019 of £11,000, but it should be remembered that most Guernsey residents remain better off (in terms of overall taxation) than their UK counterparts when the combined effect of tax and social security are taken into account.
Also topical, in the context of the Guernsey Budget debate, are the freezes to fuel and most alcohol duty proposed for the UK. As a measure to help protect UK retailers, small businesses in England and Northern Ireland are having their Business Rates cut by a third for 2 years, which compares with an above inflationary TRP rise for Guernsey commercial property of 10%. Whilst it is only fair to say that Business Rates in England are generally much higher than TRP, this does say much for the UK Government’s sense of priorities in this area.
One area of the UK Budget of particular interest for Guernsey residents and businesses are the proposed changes to the taxation of UK property. More details of this are available here Link
The Chancellor announced two potential new taxes. The first is a proposed tax on plastics not made from recycled materials. If this works as he hopes, then there is likely to be a positive change in the economics of recycling plastic in the UK. Guernsey is likely to be an indirect beneficiary of this, both environmentally and in terms of reducing the cost of its own recycling.
The other tax is an attempt to charge large digital platforms (Google, Amazon, Facebook etc.) with a transaction tax of 2% of their revenues derived from UK customers. As this is limited to groups with global revenues of over £500 million this is unlikely to affect many Guernsey businesses.
The UK Government has again confirmed its intention to consult on changes to the taxation of trusts. However, it has still not announced a date for this consultation.
The Budget includes proposals to simplify and slightly relax the rules under which UK companies have to report business visits by overseas residents (including from Guernsey) to the UK.
There is also a change to restrict the use of brought forward capital losses by UK tax resident companies.
Other UK Budget announcements affecting businesses include changes to the taxation of Intellectual Property. The first change is to restore tax relief, for businesses taxable in the UK, on purchased intellectual property.
There is also a measure to remove withholding taxes deducted from royalties paid from the UK and impose income tax on the overseas recipient, but on a much wider base. This means that Guernsey businesses holding intellectual property will potentially fall within scope of this particular tax. However, the Chancellor says that the new tax will not apply to businesses that meet substance requirements in the home jurisdiction, so it is possible that the new measures proposed in Guernsey will have a positive impact where local businesses can meet these requirements.
Value Added Tax
There were a number of announcements concerning VAT. The one most likely to have an effect on Guernsey businesses is the positive news that the VAT registration threshold (beyond which there is a requirement to register for VAT) will not be reduced.
There are also other measures announced that affect the VAT treatment of unreturned deposits and vouchers, although these will only affect VAT registered businesses who issue or redeem gift vouchers or accept deposits which are not returned to customers in some circumstances.
No UK Budget would be complete without the announcement of some anti-avoidance measures.
Those most likely to affect Guernsey businesses concern the practices of artificial “fragmentation”, whereby activities are split between different legal entities (or connected individuals) to ensure that UK profits are minimised or that no UK taxable presence is created at all.
Another practice under challenge is so-called “VAT looping”. This is where a UK business makes a supply of services to the overseas affiliate of a UK customer. Because the supply is overseas no VAT is charged (unlike a supply in the UK). The overseas affiliate then recharges the UK beneficiary, again without VAT, thereby avoiding UK VAT on the transaction(s).
For further information, contact a member of BDO’s tax team.