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Corporation tax rates are to fall to 19% in April 2017 and again to 17% in 2020.
As previously announced, the rate of corporation tax will be cut to 19% from April 2017, and further reduced to 17% by April 2020.
This reduction to corporation tax rates follows the Government’s goal of making the UK an attractive home for corporates. The current corporation tax rate of 20% is the lowest in the G20 and these reductions will be a key factor in maintaining the UK as a highly competitive business tax regime.
Amendments previously announced in the Autumn Statement 2016 to take effect for investments made on or after 6 April 2017 include an increase to the lifetime limit, decrease in the employee limit, to clarify individuals need to be independent, and to exclude certain activities and arrangements from qualifying.
Various amendments are to be included in Finance Bill 2017 regarding the SITR scheme.
As previously mentioned, these are welcome clarifications. The increase in the lifetime limit should increase the availability and interest of the SITR scheme to social enterprises.
The amendments, previously announced in the Autumn Statement 2016, include clarification of the rules for share conversion rights, providing additional flexibility for follow on investments made by venture capital trusts (VCTs), and introduce powers to provide greater certainties to VCTs for share for share exchanges.
Various amendments are to be included in Finance Bill 2017 regarding the tax-advantaged venture capital schemes.
The Government also confirmed that a summary of responses to a consultation regarding options to streamline and prioritise the advance assurance service will be published after the Budget.
Although these amendments were previously announced, 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. It will be interesting to see the summary of responses to the consultation in relation to the advance assurance service, and more importantly how the service may be reformed.
The Government is to amend legislation to ensure that all profits realised by offshore property developers developing land in the UK, including those on pre-existing contracts, are subject to tax, with effect from 8 March 2017.
This measure amends the profits from trading in and developing land in the UK legislation introduced in Finance Act 2016 to bring all profits recognised in the accounts on or after 8 March 2017 into the charge to UK Corporation Tax or Income Tax, regardless of the date the contract was entered into.
The existing profits from trading in and developing land policy, included in the UK legislation, intended to ensure that all profits from dealing in or developing land in the UK were brought into charge to UK tax, irrespective of the residence of the person making the disposal.
The current commencement rule excludes profits from disposals made on or after 5 July 2016, but where the contract was entered into prior to 5 July 2016. The intention was to exclude the standard property disposal arrangement where the parties are committed to make the contract, but the transfer takes place a short time later. However, some contracts are entered into at an early stage in the development with transfers being made over an extended period of months or years. The result is that some profits from these long term contracts have not been within the charge. This was not the intention when the legislation was enacted.
HMRC has therefore amended the measure with the effect that all profits from dealing in or developing land in the UK that are recognised in the accounts on or after 8 March 2017 will be taxed. This will be the case even if the contract for the disposal was entered into prior to 5 July 2016.
The SSE exempts gains arising on disposals of qualifying shareholdings by corporate entities. Following the announcement made in the Autumn Statement 2016, and a subsequent consultation process, amendments to simplify these rules will take effect from 1 April 2017.
The SSE rules may apply to companies when they dispose of shares held in another company, provided certain conditions are met. The Government’s reform will apply from 1 April 2017 and will simplify the SSE rules by removing the requirement that the investing (vendor) company is a trading company (or a holding company of a trading group). It will also extend the period during which the substantial shareholding requirement is met from 12 months in the 2 years prior to disposal to 12 months in the 6 years prior to disposal. The company being sold will no longer need to be a trading company immediately after disposal unless sold to a connected party.
The Government will also enact a more comprehensive exemption for companies owned by qualifying institutional investors, this will be legislated in Finance Bill 2017.
The SSE rules prior to these changes are viewed by many as overly complex. Simplification of the rules and a reduction in the compliance burden in determining whether the investing company meets the trading test are welcome developments. These changes should result in a more competitive regime in the UK by comparison to other jurisdictions.
Losses arising on or after 1 April 2017, when carried forward, will be usable against profits from different types of income and profits of other group companies.
A restriction will be introduced on companies where company or group profits exceed £5m so they may not reduce their profits by more than 50%.
As previously announced, the Government will legislate in Finance Bill 2017 to reform the rules governing corporate losses brought forward from earlier periods, allowing additional flexibility in how the losses are utilised.
Losses arising on or after 1 April 2017, which are then carried forward into future accounting periods, will be available to shelter profits from other income streams.
Where taxable profits exceed £5 million (for standalone companies or groups), carried forward losses arising at any time will be subject to a restriction such that they may not reduce the company’s profit by more than 50%.
This reform to increase the flexibility of relief for losses will be welcome, especially for those companies that fall under the £5 million threshold. For such companies these amendments should reduce the risk of losses becoming ‘trapped’.
The 50% restriction on the use of the brought forward losses is likely to have an adverse impact on larger companies and groups, although they may still benefit from the increased flexibility of use of future losses. We do not expect that this restriction will apply to many companies or groups.
Following discussions with stakeholders, the Government will legislate for to minor changes to the hybrid and other mismatches regime. The change will be effective from 1 January 2017.
Hybrid and other 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 the Government has announced two minor changes will be introduced in Finance Bill 2017 with effect from 1 January 2017, to ensure the legislation operates as intended.
The first change removes the need to make a formal claim to extend the permitted time period during which income and deductions are compared to assess whether there is a mismatch involving either financial instruments, or hybrid transfer arrangements that transfer certain financial instruments. This is intended to reduce the compliance burden for taxpayers, given the high volume of transactions in financial instruments.
The second change is in relation to the treatment of amortisation deductions, to remove them from the scope of the hybrid mismatch rules.
The changes are welcome simplifications to what is a complex area. An important consideration for businesses with cross border transactions is how the UK rules will interact with the tax rules in the relevant overseas jurisdiction.
Following the announcements made in the 2016 Budget and Autumn Statement, the Government is extending corporation tax relief currently offered to other creative sectors (e.g. film, TV production) to include museums and galleries.
This measure is designed to encourage more, and higher quality, exhibitions, as well as to support the touring of these exhibitions across the country and overseas. The relief takes the form of an additional deduction for corporation tax, capped at the lesser of:
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 £100,000 for a touring exhibition and £80,000 for a non-touring exhibition. The relief will automatically expire in April 2022 unless it is renewed.
Eligible entities will welcome the opportunity to claim this relief for temporary and touring exhibitions from 1 April 2017. It is hoped that this additional support for the cultural sector will encourage further investment in creative industries in the UK.
Specific provisions to be added to the patent box rules where R&D is undertaken under a cost sharing arrangement by two or more companies.
Changes to the Patent Box regime, announced in the Autumn Statement 2016, modify the application of the cost sharing arrangement provisions for undertaking R&D activity. The modifications widen the circumstances in which R&D activity undertaken through cost sharing arrangements can be taken into account in calculating the R&D fraction in respect of intellectual property from which the company benefits under the arrangement. There are a number of other changes to computational provisions to take account of the way cost sharing arrangements work for the patent box regime.
These changes are helpful for those companies that use cost sharing arrangements. It is encouraging to see that points raised in earlier consultations are now being addressed.
As previously announced and following consultation, the Government will introduce legislation with effect from 1 April 2017 to limit the tax deductions that companies can claim for their interest expenses. Subject to a £2m de minimis allowance, the new measure restricts tax relief where UK interest exceeds either a fixed ratio of 30% of UK earnings before interest, tax, depreciation and amortisation (EBITDA), or with an election, the group ratio of group interest to EBITDA.
The Government will introduce a fixed ratio rule to limit corporation tax deductions for net interest expense to 30% of the group’s UK EBITDA from 1 April 2017, or alternatively by election a group ratio rule.
The group ratio rule , based on the net interest expense to EBITDA ratio for the worldwide group, is designed to prevent those groups with high external gearing for genuine commercial purposes from being adversely affected.
The rules will be subject to a de minimis group threshold of £2m of net UK interest expense and a cap on deductions based on the interest expense incurred intended to ensure net interest deductions cannot exceed those for the worldwide group . This latter cap is a modification of the existing debt cap rules which will be repealed.
Refinements to the way these rules work will remove unintended limitations on the deductibility of carried forward interest expenses. The exclusion of related party interest expense from the calculation of the group ratio rule will be limited by narrowing the definition of related party interest. The way the exemption from interest restriction rules for public infrastructure activities, works will also be simplified and further modifications introduced to take account of the impact of accounting rules on interest for insurance companies.
The UK’s generous regime on interest deductibility has long been an attractive feature for UK inbound investment. This new limitation on interest deductions will bring the UK regime more in line with various other jurisdictions and OECD recommendations. The Government has stated that a level of 30% is sufficient to cover the commercial interest costs arising from UK economic activity for most businesses, but this percentage may seem arbitrary to many multinationals. The restrictions may impact groups with only UK activities too. The amendments announced on 8 March are, however, helpful improvements to the draft legislation.
Although groups below the £2m threshold should not need to apply the rules, caution needs to be exercised, particularly by groups that are growing, acquisitive or thinking about changing their financing structure, or if interest rate rises are anticipated in the future. An allowance is calculated each year for interest deductions for the UK group, and the unused element of the allowance can be carried forward for up to five years. However in order to do this, under the rules as currently published, a full interest restriction return must be filed for the year the allowance arises and all of the intervening years up until the year that the allowance is used or expires. Consideration will need to be given to whether the full calculation should be undertaken and an interest restriction return filed on an annual basis to protect this allowance.
Many companies that are potentially affected have been reviewing their financing arrangements over recent months, and those that haven’t may wish to do so urgently.
The Government will amend the appropriations to trading stock rules to ensure that businesses are not able to convert capital losses into trading losses. This change is effective from 8 March 2017.
Currently, when an asset is appropriated from fixed asset to trading stock with a deemed disposal at market value, a business may elect that any chargeable gain or loss is rolled into the cost of the stock so that when the asset is sold, any profit or loss is treated as an income profit or loss. From 8 March 2017, companies will no longer be able to make the election in circumstances where the asset being transferred to stock is standing at a loss compared to its market value at the date of transfer.
This measure is not surprising and is part of HMRC’s on-going review of limiting opportunities for reducing highly taxed revenue income through reclassification of capital as income or vice versa.
The Government is to consult on amendments required to the tax rules for plant and machinery leasing following changes to the lease accounting rules.
Following the announcement of the International Accounting Board’s new leasing standard IFRS16 which comes into effect on 1 January 2019, the Government will consult in the Summer of 2017 on legislative changes required to update the tax rules concerning plant and machinery leasing.
New accounting standards can create uncertainty and anomalies if the corresponding tax rules are not adjusted and aligned accordingly or if details are not announced well in advance of the changes. The Government has announced its intention to update the rules to ensure that the current tax rules for leases are maintained. Given the complexity of this area, this consultation is welcome.
Following a review of the tax environment for R&D, the Government announced that it intends to simplify the claims process and improve awareness of the relief available among SMEs.
As part of the Government’s stated ambition to support investment in research and development in the UK, administrative changes are to be made to the R&D expenditure credit.
The initial review carried out concluded that the existing regime is both effective and internationally competitive, but also that changes were needed to improve simplicity and certainty around claims. In addition, it was noted that action should be taken to improve awareness of the relief among SMEs.
The precise nature of the changes have yet to be announced however we anticipate that further details will be released later this year.
The R&D tax credits regime is already one of the more generous and effective reliefs available to companies worldwide and we welcome moves to increase awareness of this among potential claimants. Equally, simplifying some of the more onerous administrative burdens will hopefully encourage a greater uptake, while reducing the time and costs involved in making a claim.
We await further details on these proposals but are quietly encouraged by the underlying intentions. In an increasingly competitive global market, particularly post-Brexit, it is important for the UK to avoid complacency and to continue to offer encouragement for long-term investment by innovative businesses.
The Government is seeking State Aid approval for the continued provision of the high-end TV, animation and video games tax reliefs beyond 2018.
The Government has announced that it will seek State Aid approval to continue providing the high-end TV, animation and video games tax reliefs beyond 31 March 2018. These reliefs work by increasing the amount of the allowable expenditure a company can claim. Where a company is loss-making, some or all of the relief can be converted into a payable tax credit.
Companies in the creative sector will welcome this announcement, and will await confirmation that State Aid has been approved.
The Government is to consult on bringing non-UK resident companies, who are currently chargeable to income tax on UK taxable income and non-resident capital gains tax on certain gains, within the scope of corporation tax.
As announced at Autumn Statement 2016, the Government is considering bringing all non-resident companies receiving taxable income from the UK into the corporation tax regime. The Government has now confirmed that it will consult on the case and options for implementing the change.
Currently non-resident companies are chargeable to income tax on UK taxable income and certain gains are taxable under non-resident capital gains tax.Under such proposals, these companies would then be subject to general corporation tax rules, including the limitation to corporate interest expense deductibility and loss relief rules.
The Government has indicated that this is an attempt to deliver equal tax treatment for all companies.
If implemented, this change could have a significant impact on non-resident companies with activities in the UK. Affected non-resident companies will need to take tax advice to determine the potential impact of these proposals.
HMRC will launch a consultation into its process for risk profiling large businesses. The consultation will review how HMRC can promote stronger compliance. The consultation will run over the summer recess..
HMRC in recent years has increased the requirements for large businesses to comply with internal reporting and controls so that HMRC may monitor tax payer behaviour, such as the introduction of the requirement to publish large business tax strategies. This previous measure includes publicising the business approach to risk management and governance regarding UK tax, attitude towards tax planning, level of UK tax risk that it is prepared to accept and its approach towards its dealings with HMRC. This consultation intends to build on the requirements already in place.
As outlined at the Autumn Statement, the Government will issue a response to consultation on changes to improve partnership taxation, together with draft legislation, with a view to enacting changes in Finance Bill 2018.
No further detail has been made available at this stage and we will await the draft legislation to see the finer detail. Although clarification of the taxation of partnerships is to be applauded, some of the consultation proposals could radically change the viability of partnerships as a UK business vehicle and it is hoped that some of the more radical proposals will be reconsidered in a more commercial light.