The Government has published a position paper setting out their view on the challenges posed by the digital economy in establishing the amount of profit that should be taxed in the UK. The paper also sets out proposals to address those challenges.
"The paper is realistic that any significant changes will need long term, multilateral reform. Its proposal for interim measures need to be fully considered, particularly for their impact on the UK's competitiveness if, as suggested, the Government is ready to implement unilateral measures if necessary."
From 1 January 2018, the R&D expenditure credit will increase from 11% to 12%. There will also be a new Advanced Clearance Service introduced for R&D expenditure credit claims.
"The increase in the credit is a welcome change, as it should result in further support to companies undertaking qualifying research and development activities.
It remains to be seen whether or not the new Advanced Clearance Service for R&D expenditure credit claims will be better utilised."
From 1 January 2018, HMRC has frozen the indexation allowance available to companies disposing of a capital asset that gave rise to a chargeable gain. This means that the indexation allowance is only calculated to 31 December 2017 for capital disposals made after this date.
"Since 2008, companies have continued to benefit from indexation allowance where individuals and non-incorporated business have not. While the disparity may have prompted HMRC to address this position, the measure is forecast to raise over £1.5 billion in the next 5 years and will have a significant impact for companies with investment assets set to increase in value."
The Government will publish a consultation on 1 December 2017 to consult on expanding the range of circumstances that withholding taxes will need to be deducted from royalty payments, and payments for certain rights, to non-UK persons located in nil or low tax jurisdictions.
"The announcement to increase the range of circumstances in which a withholding tax obligation should arise in the UK comes as no surprise, in association with the Base Erosion Profit Shifting project’s recent focus on treaty abuse relating to royalty withholding tax payments. The difficulty is how to identify the relevant amount that will be subject to tax when the sale takes place."
The Government plans to consult in 2018 on the tax treatment of intellectual property (the Intangible Fixed Asset regime). This will consider whether there is an economic case for targeted changes to this regime, so that it better supports UK companies investing in intellectual property.
"The taxation of intangible fixed assets is a key area of the ongoing Base Erosion and Profit Shifting (BEPS) programme, which is being led by the OECD. This is a further indication of the UK’s willingness to adopt the principles of BEPS and to review the existing tax rules for intangible fixed assets."
The Government has amended, with immediate effect, the rules around the taxation of non-cash consideration received on the disposal of intangible fixed assets and introduced new rules in relation to licences between related parties so that they recognise the market value of the licence.
The legislation will provide that from 22 November 2017, for companies subject to corporation tax, the grant of a licence or other right by the company to a related party, or vice versa, is to be treated as being at market value. This will impact on the grantor and licensee.
The proposed revisions will also provide that when the non-cash consideration is received, it should be recognised at its open market value.
These measures are intended to address tax avoidance involving net book value accounting, including licensing arrangements between related parties which have resulted in an asymmetrical tax treatment of the transaction price.
"These measures should ensure that all transactions involving non-cash consideration and related party license agreements are taxed at market value and in line with cash transactions.
While these rules are intended to address tax avoidance involving net book value accounting and licensing arrangements between related parties, they will need to be taken into account by all companies undertaking intangible fixed asset transactions with related parties or receiving non-cash consideration, regardless of their motives.
Companies need to be aware that these new rules apply to transactions made on or after 22 November 2017."
The substantial shareholding exemption legislation and share reconstruction rules will be amended to avoid unintended chargeable gains arising where a UK company incorporates foreign branch assets in exchange for shares in an overseas company. This will impact trading groups with overseas branches who are looking to incorporate their overseas activities.
Under existing legislation, where the trade and assets of a UK company’s foreign branch are transferred to an overseas company in exchange for shares, there is a postponement of the tax charge until the disposal of the shares. The postponement is temporary and only comes into charge when the UK company sells the shares in the overseas company. Where, however, a corporate reconstruction takes place which falls within the substantial shareholding exemption, the postponed tax charge become payable, even though the group still owns the shares of the overseas company. This is an unintended anomaly and the Government will legislate in Finance Bill 2017-18 to correct this. The provisions will come into effect at Royal Assent.
"These provisions will be welcomed by international groups looking to reorganise their trading activities. However must be taken to ensure the overseas tax aspects are also taken into account when carrying out a reorganization."
Disincorporation relief applies to companies in particular circumstances where trade and assets are transferred to their shareholders on disincorporation. The relief was introduced in FA 2013 for a 5 year period and the Government has confirmed today that the relief will not be extended beyond the current expiry date,. 31 March 2018.
Disincorporation relief was introduced in the Finance Act 2013 to enable companies in some circumstances to transfer their trade and assets to their shareholders on disincorporation at the lower of cost and market value, rather than the deemed disposal taking place at market value. When it was introduced the relief was intended to be for a five year period, and is due to expire on 31 March 2018. The Government has confirmed that the relief will not be extended beyond the current expiry date of 31 March 2018.
"Whilst expected, it is disappointing that this relief is not being extended beyond 31 March 2018, and where the conditions for the relief are met companies should consider to making use of the relief prior to this date."
The Government has decided not to proceed with plans, announced at the Spring Budget 2017, to increase the main rate of Class 4 National Insurance Contributions (NIC) from 9% to 10% in April 2018, and to 11% in April 2019.
Class 4 NIC is payable by the self-employed, including partners in partnerships and members of LLPs. Two rates apply with a main rate of 9% on profits between £8,424 and £46,350 and a rate of 2% on profits exceeding this. The plan to increase the main rate to 10% from April 2018, with a further increase to 11% from April 2019 proposed in the 2017 Spring Budget has now been withdrawn. The original intention was partly to counterbalance the removal of class 2 NIC and to reflect the alignment of most state benefits between the employed and self-employed.
"The decision not to increase the main rate of Class 4 NIC will be welcomed by the self-employed but it will be interesting to see if this measure is reintroduced at a later date, given that the disparity between NIC rates for the self-employed and employed will increase following the abolition of class 2 NIC from 6 April 2019.
The proposed rules first set out in September will be revised with a stated view of being more compatible with commercial arrangements.
"The alignment of partnership taxable profits with commercial profits looks innocuous but may well generate considerable difficulties both for mixed partnerships with corporate and individual partners and for partners on a fixed interests who could see their effective tax rates rise."
The Government will update the energy-saving technology list (ETL) to include a further three technologies that qualify for the First Year Allowance from December 2017. In addition, loss making businesses will have First Year Tax Credits (FYTC) extended for five years until 31 March 2023.
The Government has announced that the energy-saving technology list (ETL), on which First Year Tax Credits and First Year Allowances (FYA) apply, will be extended. The list has been updated to:
First Year Tax Credits will also be set at two thirds of the rate of corporation tax, which is a reduction compared to the current rate of 19%, and extended for five years. This measure provides a cash payment to loss making businesses that purchase energy efficient and environmentally beneficial technology and products, encouraging investment in the most efficient plant and machinery.
"These measures should further encourage businesses, including loss making companies, to invest in energy saving technology and products, thereby reducing overall energy costs and result in wider environment benefits."
The Government will extend first year allowances for zero-emission goods vehicles and gas refuelling equipment.
The 100% first year allowances for businesses purchasing zero-emission goods vehicles or gas refuelling equipment will be extended for a further 3 years to March/April 2021.
"The extension of the first year allowances is welcome and should assist in helping to meet environmental objectives of the Government."
Where a capital loss arises on the sale of shares, 'depreciatory transactions' that took place more than six years ago must now be taken into account.
"The Government has stated that its intention is to prevent companies from waiting until the previous six year time limit has passed. The removal of this time limit will mean that more detailed historic analysis may need to be carried out where a capital loss may arise in the future on the disposal of shares."
From April 2020, non-resident companies' income from UK property will be chargeable to corporation tax rather than income tax. In addition, gains that arise to non-resident companies on the disposal of UK property will be charged to corporation tax rather than CGT.
"The change will mean an additional compliance burden for taxpayers, moving from income tax to corporation tax including adapting to the differing legislative and reporting requirements. This will probably affect smaller non-resident companies that have no experience of corporation tax and should seek advice on the transition.
The deadlines for reporting under making tax digital in respect of income tax and corporation tax may differ and so will need also careful consideration."
The government will legislate in Finance Bill 2017-18 to correct an anomaly whereby a postponed tax charge may become payable when a new holding company is inserted directly above an overseas company to which a UK company has previously transferred the trade and assets of a foreign branch in return for shares.
Under the current rules, an unintended consequence is that if the shares exchanged during the reconstruction fall within the conditions for the Substantial Shareholding Exemption (SSE) to apply, the postponed tax charge may become payable even though the group still owns the shares of the overseas company.
"The change will affect UK companies that have previously transferred the assets and trade of a foreign branch to an overseas company in exchange for the issue of shares in that company. Whilst this change is welcome, it is anticipated to have a limited impact due to the specific nature of the proposed changes."
The scope of the Bank Levy for UK headquartered banks is changing from 2021 so that they are only levied on their UK balance sheet liabilities.
"The changes will essentially reduce the scope of the levy for UK headquartered banks, from applying the Bank Levy on worldwide balance sheets of UK headquartered banks to only UK balance sheet liabilities. This is a welcome change. The benefit of the changes will not be felt for some time, as the changes will not be effective until 2021."
There will be a restriction on claiming double tax relief where the losses of an overseas branch have already been offset against profits which are not generated by that branch.
"This measure prevents tax relief from being received twice for the same branch losses. Companies will have to monitor where relief can be claimed for branch losses to ensure they are applied in the most efficient way."
Rules tackling the exploitation of differences in tax treatments between two jurisdictions will be amended to clarify how and when the rules apply, and to ensure that the rules operate as intended.
"These technical changes have been introduced following extensive informal consultation with stakeholders. It is good to see HMRC listening and reacting where the rules might give results which are out of line with the original policy intentions, but the number of amendments illustrates the difficulty of introducing a complex piece of legislation."
Two consultations will be published on 1 December 2017 on the changes needed to the tax legislation following the introduction of the new international accounting standard for leasing, IFRS 16.
"The taxation treatment of leasing transactions is largely dependent upon the accounting treatment, which under IFRS 16 will change significantly for lessees with effect from 1 January 2019 and is likely to impact many companies.
Further technical amendments will be made to the new corporate interest restriction (CIR) rules.
"The new corporate interest rules are complex and therefore tweaks to the detail of the rules had been expected to make their practical application work as intended given the wide range of circumstances that the rules can cover. These amendments are specific to certain areas of the CIR rules, and therefore their impact is expected to be limited."