Jeff Soar 29 Oct 2018 07:23pm

What the budget means for financial services

When he stood up to deliver his 2018 Budget, the chancellor of the exchequer, Philip Hammond, needed to show that the promise made by his boss, prime minister Theresa May, about the end of austerity at the Conservative Party conference was not just hot air

He had more money to play with than expected, but he could do nothing about the continuing uncertainty over Brexit. He spent most of the extra money on the NHS but also accelerated the rise in income tax thresholds by one year, which will benefit almost all taxpayers. He promised an emergency Budget in the Spring in the event of the UK leaving the European Union without a deal while dangling the carrot of a Brexit dividend if the negotiations are successful.

After several years where it has seen taxes rise, the financial services industry will be relieved that the Budget did not hit them with any significant new imposts or expensive compliance requirements. Brexit has meant that banks, insurers and fund managers enjoy a better bargaining position than they have done in the past, but they continue to pay an enormous amount of tax on their profits and the salaries of their employees, not to mentioned insurance premium tax and irrecoverable VAT.

Read all the news, analysis, and comment on this year's Budget here

As it happened, financial services hardly featured in the chancellor’s speech. One significant development in the material released by HMRC after Mr Hammond had sat down is a new regime for regulatory capital. At the moment, the Taxation of Regulatory Capital Securities Regulations 2013 provide special rules for debt instruments issued by banks, insurers and fund managers as part of their regulatory capital. These rules ensure that interest paid on this debt is taxable and deductible even though the equity-like features of this capital might otherwise preclude a tax deduction.

It was announced at the Budget that from 1 January 2019, the regulations will be repealed and replaced by a general set of rules covering certain hybrid debt instruments. The exemption for regulatory capital from the hybrid mismatch rules is also due to be amended. It is intended that the new rules will largely mirror the current regime, although it will be necessary to analyse the detail to determine whether there could be some changes at the margins. The new rules also apply to all industries where hybrid debt is issued, not just to financial services.

The Budget contained the usual raft of anti-avoidance measures. Of those likely to be of specific interest to the financial services industry, a new rule on stamp duty reserve tax (SDRT) provides that the SDRT on a transfer of listed securities between connected companies is calculated on the market value of the shares rather than the amount actually paid. HMRC allege that some transfers were taking place at an undervalue to reduce the SDRT liability. The new rule has effect from Budget day. There are also measures which focus on the routing of services through overseas services companies by insurers.

Last year, new rules came into effect restricting relief for losses brought forward to 50% of profits in excess of £5m. The Government has announced that, from April 2020, it intends to extend these rules so that they cover capital losses as well. The £5m allowance will now cover both income and capital losses.

Finally, the rules that apply to off-payroll working in the public sector are due to be extended to the private sector from April 2020. It is likely that these rules may require additional compliance from businesses in the financial sector when they use freelance workers.

Jeff Soar is EY’s UK tax leader, financial services