Business taxes

Government is recommitting to the business tax road map

The Government has recommitted to the business tax road map as set out on March 2016. The rate of corporation tax will reduce further from 20% to 17% by 2020. The burden of business rate will be reduced by £6.7bn over the next 5 years.

Corporation tax rates have dropped since 2010 from 28% to 20%, eliminating the distinction between the main rate and small companies rate. The Chancellor has confirmed the Government’s plan to continue with the business tax road map as proposed in the 2016 Budget, resulting in the rate of corporation tax falling to 17% by 2020.

Business rates will be reduced by £6.7bn over the next 5 years ensuring the smallest businesses pay no rates at all. The Government has also stated its desire to modernise business rates; however, specific details have not yet been published.

This is welcome news and will help ensure that the UK has the lowest rate of corporation tax in the G20. Providing further reassurances for corporation tax rates to 2020 will help provide stability for UK companies. 

 

100% first year allowances for electric charge-points

Electric charge-point equipment acquired by businesses on or after 23 November 2016 will qualify for 100% first year allowances.

In order to promote the uptake of electric vehicles, this measure is designed to support the installation and development of recharging equipment for such vehicles. When computing capital allowances, businesses will be able to claim full relief in the year of acquisition for their expenditure on such equipment as an alternative to the 18% per annum plant and machinery rates. The legislation to provide for this change will be introduced in Finance Bill 2017 and backdated to take effect from 23 November 2016 but will expire in March 2019. 

Businesses incurring expenditure on the acquisition of new and unused electric charge points will welcome the acceleration of relief that this measure offers. This may further encourage businesses and individuals to invest in electric cars or, at the very least, increase the nationwide coverage of electric charge-points.

 

Clarification of partnership tax treatment

Following a consultation, the Government will release draft legislation for technical consultation, which will change certain aspects of partnership taxation. The main aim is to ensure partner profit allocations are calculated 'fairly' for tax purposes.

With no further detail given in the Autumn Statement on the draft changes, we will have to await the draft legislation to see the finer detail. 

Any clarification on the taxation of partnerships is to be welcomed. The concept of 'fair' tax is difficult to measure and some of the consultation proposals could radically affect the attractiveness of partnerships as a UK business vehicle. It is to be hoped that following receipt of the consultation responses some of the more radical consultation proposals will be considered in a more commercial light.

 

Changes to tax-advantaged venture capital schemes

A number of changes will be included in Finance Bill 2017 for tax-advantaged venture capital schemes. The changes include clarifying the EIS and SEIS rules for share conversion rights and providing additional flexibility for follow-on investments made by VCTs in companies within certain group structures to align with the EIS provisions.

The announcements were:

  • clarification of the EIS and SEIS rules for share conversion rights to apply to shares issued on or after 5 December 2016;
  • the introduction of a power to enable VCT regulations to be made in respect of certain share for share exchanges, to provide greater certainty for VCTs to will take effect from Royal Assent;
  • additional flexibility for follow-on investments made by VCTs in companies within certain group structures to align with the EIS provisions to be applicable for investments made on or after 6 April 2017; and
  • a consultation into the possible options to streamline and prioritise the advance assurance service.

The Government will not be taking forward the introduction of flexibility for replacement capital within the tax-advantaged venture capital schemes at this time; however this will be reviewed over the longer term.

The proposed clarification/new rules regarding the various aspects of SEIS, EIS and VCT investment is welcome news. That said the impact and specific implications will be dependent on the precise detail of the legislation, which will have to be assessed when released.

There have been various discussions regarding changes to the advance assurance process to date, and any improvements will be a positive step.

It is disappointing that the Government is not taking forward at this time its previous proposals on flexibility for 'replacement capital', but it positive that this remains a proposal for future consideration.

 

Increase in social investment tax relief (SITR

For investment social enterprises aged up to 7 years the amount that can be raised and qualify for SITR will increase to £1.5M. The government will review of SITR within two years of its enlargement.

From 6 April 2017 the amount available for qualifying enterprises to raise via SITR will increase from €344,827 (about £250,000) to £1.5m, although the limit on full-time equivalent number of employees will drop from 500 to 250.

Certain trading activities will not qualify, including asset leasing and on-lending. Investment in nursing homes/residential care homes will initially be excluded, but the government intends to introduce an accreditation system to allow such investment to qualify in the future. These non-qualifying activities are in addition to the existing non-qualifying activities, such as property development.

The Government will undertake a review of the SITR within two years of its enlargement.

This is welcome news. The previous relatively low limit of €344,827 deterred enterprises from seeking this relief, given the costs of a fund-raising. The increase to £1.5m starting from 6 April 2017 will undoubtedly generate wider interest in the scheme. 

 

Fundamental changes to the corporation tax loss relief rules

As announced at Budget 2016, reforms will be introduced from April 2017 to restrict the amount of profit each year that can be offset against brought forward losses, whilst allowing brought forward losses to be used more flexibly against different types of profits.

The Government will introduce two reforms from 1 April 2017.

  • Companies with carried forward losses will only be available to offset these losses against 50% of their profits. This restriction will be subject to a £5 million allowance for standalone companies and groups.
  • Losses arising after 1 April 2017 that are carried forward will be available for utilisation against profits from other income streams.

The level of profits that banks are able to offset with losses incurred prior to April 2015 will remain at 25%.

The measure to increase the flexibility of relief for post 31 March 2017 losses will be welcomed particularly by those UK companies who will fall comfortably within the £5 million allowance. For such companies the amendments to the rules should reduce the possibility of trading losses becoming ‘trapped’.

The 50% restriction on the use of brought forward losses is likely to have an adverse impact on larger companies and groups, yet they may still benefit from the increased flexibility of use of future losses.

It remains to be seen whether the complexity created by these changes as revealed in the consultation document will be reduced when the draft legislation is available.

 

Restrictions on deductibility of corporate interest expense

Following a consultation process, the overnment has confirmed it will be introducing rules to limit corporation tax deductions for UK interest expenses from 1 April 2017.

The new rules (as announced in Budget 2016) will restrict corporation tax deductions for groups with net interest expenses exceed £2m, where:

  • net interest expenses exceed 30% of UK earnings before interest, tax, depreciation and amortisation (EBITDA); and
  • the group's net interest to earnings ratio in the UK exceeds that of the worldwide group.

The rules to restrict interest deductibility are in line with the recommendations made by the OECD in its work to counter base erosion and profit shifting (BEPS) by multinational enterprises.

The UK's current regime on interest deductibility has long been an attractive feature for UK inbound investment. The new limitation on interest deductions brings the UK regime more in line with various other jurisdictions and EU recommendations. It remains to be seen how the new limitation interacts with the UK's existing rules on transfer pricing and thin capitalisation, which already seek to disallow excessive interest deductions in UK entities. Affected groups will also be keen to understand how relief for any restricted interest costs can be obtained in the future.

Multinational groups should assess their global financing arrangements now to determine whether any refinancing may be required in advance of the application of the new rules from 1 April 2017. Consideration should also be given to the impact of the new rules on potential future corporate acquisitions or other arrangements involving debt finance.

 

Bringing non-resident companies' UK income into the corporation tax regime

The Government has announced that there will begin a consultation at Budget 2017 on bringing non-resident companies receiving taxable income from the UK into the corporation tax regime.

The consultation will consider the case and options for implementing this change. The Government wants to deliver equal tax treatment to ensure all companies are subject to the rules applying for the purposes of UK corporation tax, including the restrictions on corporate interest expenses and loss relief.

The Government's intentions for this potential change are not yet clear as detail is not yet available. However, the announcements could at least constitute a significant change for non-resident companies currently subject to income tax on UK source income, and could be even more far reaching.

One potential implication may be that those companies currently subject to income tax could see a benefit when the rate of corporation tax falls. However, this will need to be further considered in the context of restrictions on interest deductibility and loss relief. If the proposals are to make non-resident companies with no UK permanent establishment subject to UK corporation tax based on their customer base being in the UK, this would represent a major change to the taxation of companies in the UK. There would be far reaching implications for cross-border transactions and double taxation implications.

We await the consultation for further detail on the options being considered and what this might mean for non-resident companies.

 

UK bank levy

There will be an exemption for certain UK liabilities relating to the funding of non-UK companies and an exemption for UK liabilities relating to the funding of non-UK branches. Legislation is intended for 2017-18.

The Summer Budget in 2015 included a phased reduction to the bank levy rate with a view to changing the scope of the charge from 1 January 2021 to UK balance sheet liabilities. Following consultation, the government now confirms that there will be an exemption for certain UK liabilities relating to the funding of non-UK companies and of non-UK branches. Further details are expected to be set out in the government’s response to the consultation with a view to coming into legislation in Finance Bill 2017-18. 

The confirmation of the exemption is welcome for those group’s with overseas companies or branches. Further guidance is anticipated to take account the implications of the UK leaving the EU.

 

Simplification of the Substantial Shareholding exemption (SSE) rules.

The SSE exemption exempts gains arising on disposals of qualifying shareholdings by corporates. The SSE rules are viewed by many as overly complex. The announcement made today simplifies the rules by removal of the investing requirement.

The SSE exemption may apply to companies when they dispose of shares held in another company, provided certain conditions are met. The Government’s reform will simplify the SSE rules by removing the 'investing requirement' that the vendor company is a trading company (or a holding company of a trading group), for the latest 12 month period by reference to which the substantial shareholding requirement is met, and ending with the disposal, as well as meeting the trading requirement immediately after the disposal. The Government has also announced intentions to enact a more comprehensive exemption for companies owned by qualifying institutional investors.

The SSE rules are viewed by many as overly complex, so the announcement to simplify the rules is welcomed, and should result in a more competitive regime in the UK by comparison to other jurisdictions.

It is not clear from the Autumn Statement announcements how the changes will impact qualifying institutional investors, and we will need to see further details to assess these changes.

 

Claiming tax credit on distributions made by authorised investment funds

The Government will change the rules on the taxation of distributions made to exempt corporate investors by authorised investment funds. This concerns the ability of exempt investors to obtain credit for the tax paid by the authorised investment fund.

Exempt corporate investors, such as pension funds, will see a change in how they obtain credit for the tax paid by the AIF on dividend distributions. HMRC will publish proposals in draft secondary legislation in early 2017. 

The changes may be helpful for pension funds investing in AIFs. However, it is not clear how the rules will apply to non-exempt corporate investors, for whom dividend income from AIFs is currently either exempt from corporation tax or treated as a taxable credit on creditor loan relationships. We wait to see HMRC’s proposals in early 2017.

 

Tax relief for museums and galleries

The Government will broaden the scope of tax relief announced in the 2016 Budget. The museums and galleries tax relief will be set at a rate of up to 25%, subject to a cap per exhibition, for expenditure on qualifying exhibitions from 1 April 2017.

This measure is designed to encourage the creation of a greater quantity and higher quality of exhibitions, as well as to support the touring of these across the country and overseas. The relief takes the form of an additional deduction for corporation tax, capped at the lesser of 80% of core expenditure incurred in any country, or the total core expenditure incurred in the EEA. Where this additional deduction for corporation tax would result in a trading loss, it may be surrendered for a payable tax credit.

The overall relief that may be claimed is capped at a maximum of £500,000 of qualifying expenditure per exhibition. A ‘sunset clause’ means that the relief will automatically expire in April 2022 unless it is renewed.

This is a further example of support for the cultural sector following on from the introduction of tax relief for TV, video games, theatres and orchestras. Those who are eligible for the relief will welcome the extension to include non-touring exhibitions. 

 

Disguised remuneration schemes - employers

The Government intends to take steps to make disguised remuneration avoidance schemes less attractive by denying tax relief for employer contributions to disguised remuneration schemes unless tax and national insurance are paid within a specified period.

This approach is consistent with the availability of corporate tax deductions for remuneration arrangements using third parties such as employee benefit trusts. 

 

SME's trading in Northern Ireland to benefit from the NI corporation tax regime

The Government will amend the Northern Ireland corporation tax regime in Finance Bill 2017 to give all small and medium sized enterprises trading in Northern Ireland the potential to benefit.

The Autumn Statement has confirmed all small and medium sized enterprises trading in Northern Ireland will have the potential to benefit.

The Northern Ireland Executive has committed to setting a rate of 12.5% in April 2018. Further amendments to Finance Bill 2017 are expected to minimise the risk of abuse of the regime and will be ready for commencement if the Northern Ireland Executive demonstrates its finances are on a sustainable footing.

We await further clarification on the government’s proposals, and on any demonstration of the sustainability of Northern Ireland's finances. 

 

Amendment to patent box rules

Specific provisions are to be introduced for cases where Research & Development (R&D) is undertaken collaboratively under a 'cost sharing arrangement.

The confirmation of the exemption is welcome for those group’s with overseas companies or branches. Further guidance is anticipated to take account the implications of the UK leaving the EU. 

It is unclear at the moment what effect this will have on the interaction between R&D relief and the Patent Box regime. We will await the release of further details before assessing its impact.

 

Tax clarification for investors in co-ownership authorised contractual schemes

The Government is to clarify the rules on capital allowances, capital gains and tax information reporting for investors in co-ownership authorised contractual schemes.

An Authorised Contractual Scheme (ACS) is an onshore collective investment scheme. It has no legal personality and does not constitute an entity in its own right. It is essentially a pool of assets held and managed on behalf of a number of investors (institutional investors or those investing at least £1m) who are co-owners of the assets.

Due to the transparent nature of such vehicles and the fact that there was no formal tax reporting regime for them, consultation took place over the late summer on how investors would get the benefit of any capital allowances due, and how capital gains should be accounted for and reported.

Among other ideas, the consultation proposed that the operator of the CoACS should be able to compute capital allowances for investors looking at the ACS as a whole, and have the ability to make capital allowance s198 elections on the investors' behalf. It also proposed that the ACS should be required to provide investors with sufficient information to claim their capital allowances and report their capital gains, and that the ACS should be obliged to file information with HMRC.

Formalising the tax administration rules around ACSs should help make them more useful investment vehicles and we look forward to considering whether this is achieved once the draft legislation is available from 5 December 2016.

 

 

Changes to the hybrid and other mismatches legislation

As part of the multilateral BEPS project, legislation was introduced in FA 2016 to deal with tax avoidance arising from the use of hybrids and other mismatches. This legislation is being amended.

Hybrid mismatch outcomes can arise from hybrid financial instruments, hybrid entities, dual resident companies and arrangements involving permanent establishments. The Finance Act 2016 provisions apply from 1 January 2017 and seek to neutralise any tax mismatch otherwise resulting in a deduction for various payments where there is no corresponding inclusion in ordinary income, or in double deductions from ordinary income.

The rules are complex and a number of late amendments were proposed before FA 2016 was finalised.

Minor changes are to be introduced in Finance Bill 2017 also with effect from 1 January 2017 to ensure the legislation works as intended.

An important consideration for businesses with cross border issues is how the UK rules will interact with the tax rules in the relevant overseas jurisdiction. It is not surprising that further amendment to these complex rules is required to make them work as intended. Further detail on the changes should be available on 5 December. 

 

Tax framework for insurance linked securities

A consultation and draft regulations have been issued setting out a proposed tax and regulatory regime for insurance linked securities. Insurance linked securities are an important feature of the global reinsurance market permitting insurance and reinsurance firms to transfer risk (insurance risk transformation) to the capital markets.

Following earlier consultation the Government has proposed a tax regime for insurance linked securities (ILS) that:

  • exempts the insurance special purpose vehicle (ISPV) from corporation tax on profits arising from the activity of insurance risk transformation;
  • provides an exemption from withholding tax obligations on the payment of interest on an ILS to foreign investors, putting them in the same position as UK investors in this respect; and
  • UK investors in ISPVs would be taxed according to their particular circumstances.

The tax exemptions do not apply in certain circumstances, such as where:

  • investors have more than a 20% interest in the insurance vehicle and are also linked with the undertaking from which the insurance risk transformation is assumed; or
  • the insurance vehicle is subject to certain tax administration penalties or has been set up with a main purpose of securing a tax advantage.

The proposals also offer the possibility of using protected cell companies and a supervisory framework consistent with the Financial Service and Markets Act and Solvency II.

Following earlier consultation the Government has recognised that it is unlikely to attract any insurance linked security business to the UK unless it has a bespoke tax regime that competes with jurisdictions where this business is currently located, such as Guernsey and Bermuda.

The successful creation of a suitable regulatory and taxation environment for these insurance structures will enhance the UK’s standing as an international financial centre.

 

Read our full commentary here.

Smith & Williamson websites use cookies. Find out about cookies here. By continuing to browse this site you are agreeing to our use of cookies.