Autumn Statement 2016: tax measures

A brief overview of the main tax items from the Autumn Statement delivered on 23 November 2016 of interest to the business community.

  • Submitted 23 November 2016
  • Applicable Law UK
  • Topic Tax > Budget

Today’s Autumn Statement was the first, and last, to be delivered by new Chancellor Philip Hammond. It contained a number of tax announcements of interest to the business community, despite the main focus being very much on the Government’s spending plans to boost the economy through an expected period of economic uncertainty in the run up to Brexit. Most notably perhaps, the Chancellor pledged to follow the Business Tax Road Map announced in March by his predecessor, including fulfilling the promise of cutting corporation tax to 17% by 2020. Against this, however, a number of less popular proposals remain on track for April 2017, such as the interest restriction and loss relief reforms and changes to the taxation of non-UK domiciled individuals.

With the emphasis on spending and no appetite to increase general taxation, predictably a further £2bn of tax raising measures addressing tax planning, tax avoidance and tax evasion featured prominently. In particular, salary sacrifice schemes are to be closed down (with some exceptions), disguised remuneration in the self-employed sector will be tackled and a controversial new penalty will be introduced for any person who has “enabled” another to use a tax avoidance arrangement that is later defeated by HMRC. There was also more stealth taxation through a further increase in insurance premium tax.

No major changes were announced to the general tax rates and the updated table of tax rates and thresholds for 2017/18 can be found here.

Finally, perhaps the most surprising tax announcement was the change to the annual timetable of Budgets and Finance Bills. From the end of next year, we can expect the Budget to take place in the autumn with the Finance Act enacted in time for the new tax year starting in April. This seems a sensible reform, though few will be relishing the prospect of two full Budgets in the transitional 2017 year!

Business tax

Business tax road map

To continue providing the certainty that businesses need to make their long-term investments, the Government is recommitting to the business tax road map, which it published in the March 2016 Budget and which set out plans for major business taxes to 2020 and beyond in particular as regards corporation tax and business rates (a reduction of £6.7bn over the next five years). (Autumn Statement paragraph 4.23 (paragraph 5.7 of the hyperlinked version)).

Corporation tax rates

As part of its pledge to keep to the Business tax road map, the Chancellor confirmed that the Government intends to cut the rate of corporation tax to 17% by April 2020. (Autumn Statement paragraph 4.23 (paragraph 5.7 of the hyperlinked version)).

Tax deductibility of corporate interest expense

Following recent consultation and rejecting widespread calls to delay its introduction, the Government announced that it will bring forward rules that limit the tax deductions that large groups can claim for their UK interest expenses from April 2017. These rules will limit deductions where a group has net interest expenses of more than £2m, net interest expenses exceed 30% of UK taxable earnings and the group’s net interest to earnings ratio in the UK exceeds that of the worldwide group. However, the Government will widen the provisions proposed to protect investment in public benefit infrastructure. Despite concerns over the application of the rules to banks and insurers, the Government has also announced that banking and insurance groups will be subject to the rules in the same way as groups in other industry sectors. It remains to be seen whether a number of technical issues that had been identified with the original proposals have been resolved. (Autumn Statement paragraph 4.24 (paragraph 5.8 of the hyperlinked version)).

Reform of loss relief

Following consultation, the Government has announced that it will restrict the amount of profit that can be offset by carried-forward losses to 50% from April 2017, while allowing greater flexibility over the types of profit that can be relieved by losses incurred after that date. The restriction will be subject to a £5m allowance for each standalone company or group. The amount of profit that banks can offset with losses incurred prior to April 2015 will continue to be restricted to 25% given the level and nature of losses in this sector. (Autumn Statement paragraph 4.25 (paragraph 5.8 of the hyperlinked version)).

Non-resident companies

The Government is considering bringing all non-resident companies receiving taxable income from the UK into the corporation tax regime. Currently, only non-resident companies with a UK permanent establishment pay UK corporation tax. The Government will consult on the case and options for implementing this change at the time of the 2017 Budget. The thinking here appears to be to ensure that all companies are subject to the rules which apply generally for the purposes of corporation tax, including the limitation of corporate interest expense deductibility and loss relief rules. In addition to companies trading in the UK without a UK permanent establishment, this will potentially change the taxation of companies investing in UK property. (Autumn Statement paragraph 4.26 (paragraph 5.8 of the hyperlinked version)).

Substantial Shareholding Exemption (SSE) reform

Following consultation, the Government will make changes to simplify the rules, remove the investing company requirement within the SSE and provide a more comprehensive exemption for companies owned by qualifying institutional investors. The changes will take effect from April 2017. It remains to be seen whether this will result in a broader participation exemption as sought by many respondents to the consultation. (Autumn Statement paragraph 4.28 (paragraph 5.8 of the hyperlinked version)).

Employee shareholder status (ESS)

The income and capital gains tax advantages linked to shares awarded under ESS will be abolished for arrangements entered into on, or after, 01 December 2016. The status itself will be closed to new arrangements at the next legislative opportunity. This is in response to evidence suggesting that the status is primarily being used for tax planning instead of supporting a more flexible workforce. This will not be a surprise to many, given the feedback when ESS was originally proposed. (Policy Paper and Autumn Statement paragraph 4.31 (paragraph 5.9 of the hyperlinked version)).

Tax treatment of partnerships

Following recent consultation, the Government has announced that it will legislate to clarify and improve certain aspects of partnership taxation to ensure profit allocations to partners are fairly calculated for tax purposes. Given the significant adverse feedback in relation to a number of proposals, it will be interesting to see the measures that the Government has decided to adopt. The changes will take effect from 01 April 2017. (Autumn Statement 2016: tax updates and technical changes (paragraph 2.7)).

Patent Box rules

The Government has announced that it will legislate in Finance Bill 2017 to add specific provisions to the Patent Box rules, covering the case where research and development (R&D) is undertaken collaboratively by two or more companies under a "cost sharing arrangement". The provisions ensure that such companies are neither penalised nor able to gain an advantage under these rules by organising their R&D in this way. This will have effect for accounting periods commencing on or after 01 April 2017. It is hoped that the new provisions will not add undue complexity to the existing regime. (Autumn Statement 2016: tax updates and technical changes (paragraph 2.3)).

Bank taxation

As set out in previous Budgets, the bank levy will be restricted to UK balance sheets from 01 January 2021 and in the meantime bank levy rates reduce gradually over time. The 8% corporation tax supplement for banks is already in force, though banks do at least benefit from the gradual reductions to the mainstream corporation tax rate (see “Corporation tax rates” above). The Autumn Statement announced that exemptions from bank levy will be provided for certain UK liabilities funding non-UK companies or branches - details of this will be set out in the Government’s consultation response with a view to legislating in Finance Bill 2017/18. The Government also announced it is continuing to consider the balance between revenue generation and competitiveness on bank taxation, in view of the impact of Brexit which and the likely resulting competitive disadvantages for UK banks in accessing EU markets. (Autumn Statement paragraph 4.27 (paragraph 5.8 of the hyperlinked version)).

Insurance linked securities

A further consultation on the introduction of a new regime for UK “ISPVs” (ie insurance SPVs which issue debt and equity securities transferring insurance risk into the capital markets). Current proposals involve exemption from UK corporation tax for UK ISPVs authorised by the PRA and FCA, on their risk transformation activities and also exemption from UK withholding tax on their payments to debt or equity investors. This will be subject to anti-avoidance rules to ensure there is genuine transfer of insurance risk through an ISPV to third party capital markets investors - for example the insurer and parties connected to it must not hold more than 20% of the ISPV’s debt or equity securities. Additionally, the corporation tax exemption does not apply to any activities of an ISPV beyond risk transformation - for example administrative or management activities, or holding investments beyond what is reasonably required to fund the insurance risks it takes on - or if obtaining a tax advantage is one of the main purposes of the ISPV arrangements. Some quite draconian rules are also proposed causing an ISPV to permanently lose its tax exemptions for compliance failures such as delays or errors in its tax returns. The Government also proposes to introduce UK protected cell companies for ISPVs only, and the PRA and FCA have launched a concurrent consultation on the regulatory treatment of ISPVs. Consultation responses are due by 18 January 2017 and the regulations are to be finalised in Spring 2017. (Further consultation and annexed draft regulations).

Tax-advantaged venture capital schemes

The Government will amend the requirements for the tax-advantaged venture capital schemes - the Enterprise Investment Scheme (EIS), the Seed Enterprise Investment Scheme (SEIS) and Venture Capital Trusts (VCTs) to:

  • clarify the EIS and SEIS rules for share conversion rights, for shares issued on or after 05 December 2016
  • provide additional flexibility for follow-on investments made by VCTs in companies with certain group structures to align with EIS provisions, for investments made on or after 06 April 2017 
  • introduce a power to enable VCT regulations to be made in relation to certain shares for share exchanges to provide greater certainty to VCTs, and
  • a consultation will be carried out into options to streamline and prioritise the advance assurance service.

The Government will not be introducing flexibility for replacement capital within the tax-advantaged venture capital schemes at this time, and will review this over the longer term. (Autumn Statement 2016: tax updates and technical changes (paragraph 2.8)).

Authorised investment funds: dividend distributions to corporate investors

The Government will modernise the rules on the taxation of dividend distributions to corporate investors in a way which allows exempt investors, such as pension funds, to obtain credit for tax paid by authorised investment funds and will publish proposals in draft secondary legislation in early 2017. It remains to be seen whether the “corporate streaming” rules will be updated more generally. (Autumn Statement paragraph 4.29 (paragraph 5.8 of the hyperlinked version)).

Offshore funds

To equalise the treatment of onshore and offshore funds, the Government will legislate to ensure that performance fees incurred by offshore funds, and which are calculated by reference to any increase in the fund’s value, are not deductible against reportable income from April 2017 and instead reduce any tax payable on disposal gains. This will result in additional complexity for affected managers and investors, both in terms of defining a “performance fee” and tracking relevant amounts when computing future gains. (Autumn Statement paragraph 4.32 (paragraph 5.9 of the hyperlinked version)).

Personal taxation

Personal allowances and thresholds

The Government will raise the income tax personal allowance to £12,500 and the higher rate threshold to £50,000, by the end of this Parliament. In 2017, the personal allowance will rise to £11,500 and the higher rate threshold to £45,000. Once the personal allowance reaches £12,500, it will then rise in line with CPI as the higher rate threshold does, rather than in line with the NMW. The changes will take effect by the end of this Parliament. (Autumn Statement paragraph 4.5 and 4.6 (paragraph 5.2 of the hyperlinked version)).

National insurance thresholds

As recommended by the Office of Tax Simplification (OTS), the National Insurance secondary (employer) threshold and the National Insurance primary (employee) threshold will be aligned from April 2017, meaning that both employees and employers will start paying National Insurance on weekly earnings above £157. (Autumn Statement paragraph 4.5 and 4.6 (paragraph 5.2 of the hyperlinked version)).

Personal service companies

Following consultation, the Government will reform the “off-payroll” working rules in the public sector from April 2017 by moving responsibility for operating these rules, and paying the correct tax, to the body paying the worker’s company. (Autumn Statement paragraph 4.11 (paragraph 5.2 of the hyperlinked version)).

Termination payments

Following consultation, tax will only be applied to the equivalent of an employee’s basic pay if their notice is not worked, making it simpler to apply the new rules. The Government will monitor this change and address any further manipulation. The first £30,000 of a termination payment will remain exempt from income tax and National Insurance. However, as previously announced, from April 2018 termination payments over £30,000, which are subject to income tax, will also be subject to employer NICs. (Autumn Statement paragraph 4.10 (paragraph 5.2 of the hyperlinked version)).

The taxation of different forms of remuneration

The Government is concerned at the way that the tax system treats different forms of remuneration inconsistently. Therefore, the Government will consider how the system could be made fairer between workers carrying out the same work under different arrangements and will look specifically at how the taxation of benefits in kind and expenses could be made fairer and more coherent. Specific actions are listed below. (Autumn Statement paragraph 4.13 (paragraph 5.2 of the hyperlinked version)).

Salary sacrifice

Following consultation, the tax and employer National Insurance advantages of salary sacrifice schemes will be removed from April 2017, except for arrangements relating to pensions (including advice), childcare, Cycle to Work and ultra-low emission cars. Arrangements in place before April 2017 will be protected until April 2018, and arrangements for cars, accommodation and school fees will be protected until April 2021. (Autumn Statement paragraph 4.13 (paragraph 5.2 of the hyperlinked version)).

Valuation of benefits in kind

The Government will consider how benefits in kind are valued for tax purposes, publishing a consultation on employer-provided living accommodation and a call for evidence on the valuation of all other benefits in kind at Budget 2017. (Autumn Statement paragraph 4.13 (paragraph 5.2 of the hyperlinked version)).

Employee business expenses

The Government will publish a call for evidence at Budget 2017 on the use of the income tax relief for employees’ business expenses, including those that are not reimbursed by their employer. (Autumn Statement paragraph 4.13 (paragraph 5.2 of the hyperlinked version)).

New tax allowance for property and trading income

The Government will create two new income tax allowances of £1,000 each, for trading and property income. Individuals with trading income or property income below the level of the allowance will no longer need to declare or pay tax on that income. The trading income allowance will now also apply to certain miscellaneous income from providing assets or services. The changes will take effect from April 2017. (Autumn Statement paragraph 4.14 (paragraph 5.2 of the hyperlinked version)).

Reforms to the taxation of non-domiciled individuals

The Autumn Statement confirmed the following changes to the taxation of non-domiciled individuals:

  • from April 2017, non-domiciled individuals will be deemed UK-domiciled for tax purposes if they have been UK resident for 15 of the past 20 years, or if they were born in the UK with a UK domicile of origin. As previously announced, non-domiciled individuals who have a non-UK resident trust set up before they become deemed-domiciled in the UK will not be taxed on income and gains arising outside the UK and retained in the trust
  • from April 2017, inheritance tax will be charged on UK residential property when it is held indirectly by a non-domiciled individual through an offshore structure, such as a company or a trust.
  • the Government will change the rules for the Business Investment Relief (BIR) scheme from April 2017 to make it easier for non-domiciled individuals who are taxed on the remittance basis to bring offshore money into the UK for the purpose of investing in UK businesses.

As widely anticipated, despite feedback in the wake of the Brexit vote, the Government is committed to these reforms and it remains to be seen what impact that may have. (Autumn Statement paragraph 4.15 (paragraph 5.3 of the hyperlinked version)).

Indirect taxes

Insurance Premium Tax (IPT)

The standard rate of IPT will rise to 12% from 01 June 2017. (Autumn Statement paragraph 4.40 (paragraph 5.13 of the hyperlinked version)).

Value Added Tax (VAT)

The Government will consult on VAT grouping following in informal consultation earlier in 2016. (Autumn Statement paragraph 4.41 (paragraph 5.13 of the hyperlinked version)).

Landfill Tax

Following consultation, the Government has confirmed that it will amend the definition of a taxable disposal for Landfill Tax purposes in Finance Bill 2017 with a view to clarity and certainty for taxpayers on the Landfill Tax liability of activities carried out at a landfill site. This measure will be brought into effect after Royal Assent of Finance Bill 2017, on a day to be appointed by Treasury Order. (Autumn Statement 2016: tax updates and technical changes (paragraph 3.1)).

Tax avoidance and evasion

Disguised remuneration schemes

The Government has announced that it will extend the scope of previously announced concerning the use of disguised remuneration schemes by employers and employees to tackle the use of disguised remuneration avoidance schemes by the self-employed. The proposal on self-employed persons is new and will be interesting to review in the light of recent changes such as the disguised investment management fee rules. Furthermore, the Government will take steps to make it less attractive for employers to use disguised remuneration avoidance schemes, by denying tax relief for an employer’s contributions to disguised remuneration schemes unless tax and National Insurance are paid within a specified period. (Autumn Statement paragraph 4.46 (paragraph 5.19 of the hyperlinked version)).

Tax avoidance sanctions and deterrents

The Government has confirmed it will introduce a controversial new penalty for any person who has enabled another person or business to use a tax avoidance arrangement that is later defeated by HMRC. The Government state that this new regime will reflect an extensive consultation and input from stakeholders, with details published in draft legislation “shortly”, but it remains to be seem how much these may address the significant concerns of advisers. The Government will also remove the defence of having relied on non-independent advice as taking "reasonable care" when considering penalties for any person or business that uses such arrangements. (Autumn Statement paragraph 4.48 (paragraph 5.14 of the hyperlinked version)).

Requirement to correct

The Government will introduce a new legal requirement to correct a past failure to pay UK tax on offshore interests within a defined period of time, with new sanctions for those who fail to do so. (Autumn Statement paragraph 4.54 (paragraph 5.19 of the hyperlinked version)).

Requirement to register offshore structures

The Government has announced that it will consult on a new legal requirement for intermediaries arranging complex structures for clients holding money offshore to notify HMRC of the structures and the related client lists. (Autumn Statement paragraph 4.53 (paragraph 5.19 of the hyperlinked version)).

Hybrids and other mismatches

In an announcement which tacitly recognises the complexity of the original legislation, the Government has announced it will make minor changes to ensure that the hybrid and other mismatches legislation works as intended. Legislation will be included in the Finance Bill and will take effect from 01 January 2017. (Autumn Statement 2016: tax updates and technical changes (paragraph 2.5)).

VAT Avoidance Disclosure Regime

Legislation will be introduced to strengthen the regime for disclosure of avoidance of indirect tax. Provision will be made to make scheme promoters primarily responsible for disclosing schemes to HMRC and the scope of the regime will be extended to include all indirect taxes. This will run counter to feedback by many respondents to the Government’s consultation on this topic. Legislation will be included in the Finance Bill and take effect from 01 September 2017. (Autumn Statement 2016: tax updates and technical changes (paragraph 6.1)).

Tax administration

Making Tax Digital

In January 2017, the Government will publish its response to the Making Tax Digital consultations and provisions to implement the announced changes. (Autumn Statement paragraph 4.42 (paragraph 5.14 of the hyperlinked version)).

Tax simplification

The Government has responded to the reviews the OTS has published this autumn, including on the alignment of income tax and NICs. The Government has now asked the OTS to carry out reviews on aspects of the VAT system and on Stamp Duty on share transactions. The latter review will be particularly of interest, given the outmoded nature of Stamp Duty on shares. (Autumn Statement paragraph 4.43 (paragraph 5.14 of the hyperlinked version)).

Tax Enquiries: Closure Rules

The Government will legislate to provide earlier certainty on individual matters in large, high risk and complex tax enquiries. (Autumn Statement paragraph 4.44 (paragraph 5.14 of the hyperlinked version)).

Simplifying the Pay as You Earn Settlement Agreement (PSA) process

Following consultation, the Government will legislate in Finance Bill 2017 to simplify the process for applying for and agreeing PSAs. This will have effect in relation to agreements for the 2018 to 2019 tax year and subsequent tax years. The changes will take effect in the Finance Bill 2017. (Autumn Statement 2016: tax updates and technical changes (paragraph 1)).

Budget timetable

The Chancellor announced that following the spring 2017 Budget and Finance Bill, Budgets will be delivered in the autumn, with the first one taking place in autumn 2017. From winter 2017, Finance Bills will be introduced following the Budget. The aim will be to reach Royal Assent in the spring, before the start of the following tax year. (Autumn Statement press release)).

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.