Tax rates and allowances
The rate of corporation tax will remain at 19% in 2018/19. The Government has previously announced its intention to reduce the rate to 17% in 2020/21, though this was not specifically re-affirmed in the Budget.
For a table of the main tax rates and allowances for 2018/2019, see page see HM Revenue & Customs tax rates and allowances for 2017/18 below.
Removal of indexation allowance
To bring the UK in line with other major economies, the corporate indexation allowance will be frozen from 01 January 2018.
Current rules calculate corporate indexation allowance up to the month in which the disposal occurs. The new rules will freeze the corporate capital gains indexation allowance for disposals which occur after 01 January 2018 so that the allowance is only based on the Retail Price Index for December 2017.
The Government hopes that this change will simplify companies’ tax computations and remove potential errors. Doing so will also significantly increase the tax take by removing relief for inflation that is not available elsewhere in the tax system, particularly if inflation continues to increase. Another stealth tax?
Following consultation in summer 2017, the Government has announced that it will take forward its plans to bring income that non-resident companies receive from UK property into charge to corporation tax rather than income tax from April 2020. Also from that date, gains that arise to non-resident companies on the disposal of UK property will be charged to corporation tax rather than capital gains tax (CGT) (see below).
Non-resident companies: taxation of gains on UK commercial property
Currently non-resident investors can only be subject to UK tax on capital gains from direct sales of residential property which are within the scope of the charge on ATED-related gains or non-resident capital gain tax (NRCGT). The UK does not tax non-resident investors on gains from UK commercial property or gains from indirect disposals of UK property (commercial or residential).
The Government announced today significant changes to this status quo with effect from April 2019. When taken together with the measures, also announced today, to bring non-resident companies within the charge to UK corporation tax on UK income and gains from April 2020, this constitutes a major shake-up of the taxation of non-residents investing in UK property and the likely erosion of post-UK tax returns for many non-UK residents from UK property from April 2019 onwards.
Contrary to previously stated intentions in relation to the taxation of capital gains from UK commercial property held by non-UK resident corporates, the Government has announced that capital gains accruing on commercial property from April 2019 will be subject to UK tax for both non-UK tax resident individuals and non-UK tax resident corporates at the same rates applicable to the corresponding UK resident. For non-resident corporates, the charge will initially be to UK capital gains, moving to UK corporation tax from April 2020, when the wider changes to bring non-resident companies into UK corporation tax have effect.
The new rules are intended to apply both to direct disposals of UK property and indirect disposals of UK property by way of selling assets (eg shares in a company) which derive sufficient of their value from UK property.
The indirect disposal rules will apply where an entity (referred to as an “envelope”) is “property rich”. That is broadly where 75% or more of the entity’s gross asset value (ie value before financing liabilities) at disposal is derived from UK immovable property (as well as direct property interests, this covers indirect interests, options and certain other arrangements). A charge will only be triggered where the person holds, or has held at some point within the five years prior to the disposal, a 25% or greater interest in the property rich entity. The 25% threshold will take account of connected persons and persons acting together, which will add to the challenge of monitoring the 25% threshold over the requisite five year period.
The charge on both direct and indirect disposals will only apply to gains which arise from April 2019 based on market value rebasing as at that point.
In addition to bringing gains arising to non-residents from commercial property within UK tax for the first time, the Government has announced that from April 2019 it will also extend the scope of capital gains tax on UK residential property so that it applies to direct disposals by widely held companies (removing the existing exclusion for disposals by such companies), as well as to indirect disposals. Where non-residents are currently within the charge to existing NRCGT an earlier rebasing point of April 2015, rather than April 2019, will continue to apply to direct disposals of the relevant asset.
The core aim of this new legislation is to align the tax treatment of UK property for non-UK tax residents with that for UK tax residents. In the case of UK corporates, the Government has also announced an intention to abolish the benefit of indexation allowance on gains, so gains falling within the new legislation will in all likelihood be taxed without taking into account the effect of inflation on a non-UK resident corporate’s tax cost in the relevant asset.
Some of the UK’s double tax treaties do not allow the UK to tax gains on indirect disposals of UK property. Whilst this may protect existing structures from the new UK tax charge on an indirect disposal, anti-avoidance provisions will be introduced with the intention of combatting arrangements implemented on or after 22 November 2017 with a main purpose of benefitting from such a treaty.
There are expected to be exemptions from the new charge where the property is owned by pension fund or other exempt investors, although these remain to be confirmed. In appropriate cases, these changes could increase interest in restructuring existing investments into a UK Real Estate Investment Trust (REIT), as well as structuring new investments via a REIT.
Amendments to the corporate interest restriction rules
Almost inevitably, barely a week after the corporate interest restriction (CIR) rules entered the statute book when Finance (No.2) Act 2017 received Royal Assent, the Government has announced changes to this new regime. These are advertised as “technical amendments to ensure the regime works as intended”.
No fewer than eight changes have been announced, including four relevant to the public benefit infrastructure exemption (PBIE). In general the changes are taxpayer-friendly modifications and clarifications (including among other things (i) an alignment of the calculation of group EBITDA with the approach taken in relation to R&D Expenditure Credits and (ii) ensuring that having insignificant amounts of non-taxable income does not jeopardise the status of a qualifying infrastructure company for the purposes of the PBIE). However, the amendment likely to attract most interest is an anti-avoidance restriction to the PBIE to prevent avoidance of the limitation on relief for related-party interest through use of a conduit company, such that the creditor is not a “related party” – the natural conclusion being that HMRC is aware or suspects that some taxpayers were intending to try and work around the rules in this way.
Corporate tax and the digital economy: withholding tax on royalties
In a measure intended to level the playing field for “digital and bricks and mortar” businesses and raise £800 million by March 2023, royalties paid in connection with sales to UK customers and to a no/low tax jurisdiction will be brought within the scope of UK withholding tax, irrespective of whether the company paying the royalties has a presence in the UK. The measure will be introduced with effect from April 2019 and following a period of consultation on the detail. This is good news since there are some obvious questions still to be answered, such as how the UK will seek to enforce this withholding tax where neither the payer nor the recipient of the royalties has a presence in the UK. The Government is equally coy about how the measure will interact with double tax treaties, merely stating that “it will respect the international obligations in the UK’s tax treaties in the application of the measure”.
Clearly the Government is grappling with the “changing nature of our economies in the digital age”. This royalties withholding tax measure along with its position paper on corporate tax and the digital economy seem intended to engender international debate on, and prompt multilateral solutions to, the question of whether the current international tax framework is fit for purpose in taxing digital businesses in a way that is aligned with how and where their value is generated. The Government’s stated aim is that its paper and the debate it stimulates will “inform the interim report being presented by the OECD Task Force on the Digital Economy to the G20 next spring”. The question is an interesting one. Businesses globally are being fundamentally changed by digitalisation. Automation of business processes and increased connectivity and flexibility mean that digital businesses do not need to be physically located in the places where they do business. So how does the UK ensure it receives its fair share of tax revenues from such businesses? The answer is less clear. The Government wants reform but it seems we will have to wait a little longer to get clarity on what exactly the Government and international community propose to do.
Withholding tax exemption for the London Stock Exchange’s new International Securities Market MTF… eventually
Earlier this year, the London Stock Exchange launched its new International Securities Market (the ISM). This is a new UK multi-lateral trading facility (MTF) on which debt securities can be listed and traded on wholesale markets (ie between institutional investors) – and the first UK MTF which is regulated by the London Stock Exchange rather than the UK Listing Authority. This is part of the UK’s endeavours to catch up with other jurisdictions such as Ireland and Luxembourg whose MTFs have been very successful and already enjoy exemption from UK withholding tax under the Quoted Eurobond exemption (by counting as a “recognised stock exchange”). Until now, UK MTFs have been at a competitive disadvantage because they have had to be regulated by the (slower and more cumbersome) UK listing authority in order to access the Quoted Eurobond exemption, whereas their competitor overseas MTFs are regulated in a much nimbler and user-friendly way by their local stock exchanges. So UK MTFs have not previously taken off, and the lack of access to the Quoted Eurobond exemption has also (somewhat inevitably) caused the UK’s new ISM to have very little take-up so far – limited to overseas issuers able to pay interest free of withholding tax without relying on the Quoted Eurobond exemption, or secondary listings of securities which rely on their primary listing to access this exemption.
The Budget seeks to address this issue, albeit without the level of urgency that it deserves. Changes to the Quoted Eurobond exemption are proposed to correct the current anomaly that prevents exchange regulated UK MTFs from qualifying for the Quoted Eurobond exemption from withholding tax though permits exchange regulated MTFs outside the UK to qualify. From 01 April 2018 the Quoted Eurobond exemption will also apply to MTFs operated by any recognised stock exchange in the EEA. This includes (and indeed is wholly motivated by a desire to include) the ISM even though the Budget announcement is carefully crafted to avoid mentioning it by name! The 01 April 2018 timing is disappointingly slow, though in line with previous announcements, and effectively confirms the London Stock Exchange’s new ISM will have to wait until April before it can really get going. The Government’s intentional foot-dragging on this measure reflects politics more than policy – there is already considerable political sensitivity over the Quoted Eurobond exemption due to previous Labour Party manifesto promises to restrict its scope, so the Government is keen to tread gingerly. The London Stock Exchange was effectively required to launch the ISM without the access to the Quoted Eurobond exemption that it needs to make it commercially viable, because of Government perceptions that the political will to expand the Quoted Eurobond exemption would be easier to acquire in favour of a market that already exists (albeit mostly only theoretically). At least from April all will hopefully be well, and the ISM will finally be able to move forward in earnest with the WHT exemption it needs.
The changes also expand the scope of sharia compliant ‘sukuk’ bonds treated as debt instruments for UK tax purposes to include sukuk admitted to trading on an MTF.
R&D tax credits
In a Budget that was tinged with futurism and focussed on productivity and growth, it should come as no surprise that the Government is increasing tax relief for companies that carry out qualifying research and development and claim research and development expenditure credit (also known as “above the line” credit). By increasing the rate from 11% to 12% (with effect for expenditure incurred on or after 01 January 2018), the Government aims to incentivise companies to carry out research and development activities, by enabling them to claim more support for doing so.
The Budget announcement on Bank Levy changes largely reconfirms existing policy ie Bank Levy rates will continue to be scaled down annually until they reach 0.10%/0.05% for short term/long term liabilities from 2021, and from 2021 UK banking groups will be subject to Bank Levy only on UK balance sheet equity and liabilities to level the playing field with non-UK banking groups. The changes announced in this Budget are largely technical in nature but generally helpful ie dealing with the mechanics to implement the existing policy (which involves substantial change to the Bank Levy legislation), and building in some related simplifications and additional flexibilities into existing legislation. However, one key substantive point clarified in the Budget is that UK entities will be able to disregard liabilities attributable to overseas branches (from 2021), which will also be helpful in ensuring parity between UK and non-UK headquartered banking groups. Also, a new deduction from a group’s equity and liabilities subject to Bank Levy will eventually be introduced of certain loss-absorbing instruments issued by overseas subsidiaries – though details are not expected for some time until appropriate regulatory standards are in place for this. Overall the Budget announcements on Bank Levy are taxpayer-friendly (eventually) and moving in the right direction, but only at a very leisurely pace.
Double tax relief and permanent establishment losses
With effect for accounting periods ended on or after Budget day, UK companies with foreign permanent establishments (PE) will be restricted in the amount of credit or deduction they will be given in the UK for foreign taxes suffered in circumstances where losses of the foreign PE have been set off against non-PE profits in the foreign jurisdiction in the same or earlier periods. This measure is aimed at ensuring that relief for foreign tax is only given in the UK to the extent that the profits are taxed twice (in the UK and foreign jurisdiction). The available double taxation relief will be limited by adjusting the amount of foreign tax suffered by the PE to take account of the reduction of foreign tax resulting from the PE’s losses being relieved against non-PE profits in the foreign jurisdiction.
Corporation tax changes relating to intangible fixed assets
Two anti-avoidance measures were announced that will have effect for transactions made on or after Budget day.
The profit or loss for UK corporation tax purposes made on the disposal of intangible fixed assets is calculated by reference to the proceeds for accounting purposes, which for cash transactions is generally the amount received, subject to any market value adjustment. The first measure clarifies that for UK tax purposes the proceeds of realisation for accounting purposes should recognise the market value of any non-cash consideration paid, such as shares or other assets, so that such transactions are treated similarly to cash transactions.
The second measure is aimed at preventing unfair tax advantages when a licence of intangible fixed assets is granted to a related party. The mischief counteracted relates to where the granting of the licence is treated by the licensor as a disposal at “cost” or “net book value” but the licensee recognises the higher commercial value or “step up” in the value of the asset acquired, creating asymmetrical tax treatment of the transaction price. There was previously no market value adjustment to the disposal value recognised by the licensor because no transfer of an underlying asset occurs on the grant of the licence. The new measure will close this loophole by applying the market value adjustment rule to the grant of licences between related parties in the same way as it applies to transfers.
In addition, the Government announced that it will consult in 2018 on the tax treatment of intellectual property under the Intangible Fixed Asset regime. The consultation 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.
Powers to implement the Multilateral Instrument
The Government will enact changes to the existing powers for giving effect to double taxation arrangements in UK law. The amendments will allow the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (the MLI), which was signed by the UK on 07 June 2017, to be implemented and ensures that the UK can give full effect to the MLI provisions. The measure will take effect on the date of Royal Assent to Finance Bill 2017-18.
Changes to the hybrid and other tax mismatch regime
Finance Bill 2017-18 will amend UK anti-hybrid and other tax mismatch legislation, which aims to counteract tax mismatches in relation to entities, permanent establishments and financial instruments, to ensure that it operates as intended. This appears to be an admission by the Government that the anti-hybrid legislation is overly complex and was not fully thought through before being introduced. The legislation was introduced earlier, and in a form that goes further, than the OECD required in connection with the Action 2 of Base Erosion and Profit Shorting (BEPS).
The legislation counteracts hybrid tax mismatches that involve the double deduction of the same expense or deduction of an expense without the corresponding receipt being recognised for tax purposes. Some of the clarifications being introduced by Finance Bill 2017-18 include clarifying that withholding taxes are ignored for the purposes of the regime, disregarding taxes charged at the nil rate, clarifying the scope of the legislation in relation to multinational companies, and taking account of adjustments made for accounting purposes that fully or partially reverse hybrid mismatches in earlier periods that have already been counteracted under the legislation.
The amendments relating to taxes charged at a nil rate and multinational companies will take effect from 01 January 2018. Other changes will take retrospective effect from the date the anti-hybrid mismatch regime took effect (ie 01 January 2017).
Capital gain on depreciatory transactions within a group
The Government has confirmed its intention to amend the capital gains treatment of depreciatory transactions. This change targets an increasing tendency for companies to hold onto valueless subsidiaries for a specific period of time in order to avoid rules on capital loss adjustment.
Current rules require companies to adjust their calculations of losses on the shares that they have sold where certain intra-group “depreciatory transactions” have stripped value out of those shares prior to them being sold. Section 176(1) TCGA 1992 currently requires companies to reduce the amount of loss they can calculate on a just and reasonable basis where assets have been transferred out of the company being sold within a period of six years ending with the disposal. Companies only have to adjust the loss figure if the transaction has materially reduced the value of the shares.
The latest changes seek to remove the six year limitation. This will mean that companies will have to consider the entire history of asset transfers when calculating a loss. They will also be required to adjust for any prior depreciatory transactions.
The Government believes that implementing this measure will mean that it will gain access to additional revenue where the six year time limit is yet to expire. The Government expects to gain an additional £10m in revenue each year between 2018 and 2023 as a result of this change.
Assets transferred to non-resident companies: reorganisations of share capital
Legislation is to be introduced to correct an existing anomaly which results in an unintended tax charge which occasionally arises in corporate reconstructions. This change comes into effect on and after 22 November 2017.
Current rules in TCGA 1992 allow for a postponing of any chargeable gains where a UK company transfers the trade and assets of its foreign branch in exchange for shares in that company. This postponement lasts until the overseas company then ultimately sells the assets. However, an unintended consequence is that where the shares that are exchanged qualify for the substantial shareholding exemption (SSE), the postponed tax charge may in fact become immediately payable.
The measure will insert new rules to ensure that corporate structures are able to benefit from SSE while ensuring that the ‘no disposal’ treatment for share exchanges continues to apply. Existing international corporate structures should not need to restructure as a result.
Tax advantaged schemes
No Budget would be complete without the announcement of various tweaks to the tax regimes applicable to the UK’s various tax-advantaged investment schemes: Venture Capital Trusts (VCTs), Enterprise Investment Scheme (EIS), Seed Enterprise Investment Scheme (SEIS) and the lesser-known Social Investment Tax Relief (SITR). Today’s instalment did not disappoint in this regard - measures announced were:
In relation to all of EIS, SEIS and VCTs:
- Introduction of a new qualifying condition for investments made on or after 06 April 2018 to exclude tax-motivated investments where the tax relief obtained provides most of the investor’s return and the original capital is preserved/subject to only limited risk – the new condition has two limbs and looks at (i) whether the company’s objectives look to growth and development over the long term; and (ii) whether there is a significant risk that there could be a loss of capital to the investor of an amount greater than the net return. Guidance published today suggests that the condition depends on taking a reasonable view as to whether an investment has been structured with the intention to provide a low-risk return, with all relevant factors being considered holistically.
In relation to EIS and VCTs:
- Increases in investment limits for investments in knowledge-intensive companies (KICs): the annual limit for individuals investing in KICs under EIS will increase to £2m for shares issued after 06 April 2018, provided that anything above £1m is invested in KICs; and the annual EIS and VCT limit on the amount of tax-advantaged investments an individual KIC may receive will be increased to £10m for shares issued on or after 06 April 2018 or new VCT qualifying investments made on or after the same date.
- In addition the “permitted maximum age” rules applicable to KICs will be relaxed to allow a KIC to measure the period from the date from which its annual turnover exceeded £200k, rather than the date of its first commercial sale.
In relation to EIS, VCTs and SITR:
- The EIS and VCT rules both use a concept of “relevant investments” in relation to the lifetime investment limit on the amount of EIS and VCT investments a company may receive. However, for historic reasons certain investments received before 2012 do not currently count towards this limit. The Government has today announced that the definition will be amended to ensure that all investments, including all risk finance investments made before 2012, count towards the lifetime limit. In addition the revised definition of relevant investment will extend to the new lifetime limit for the purposes of SITR. The change will apply in relation to qualifying investments made on or after 01 December 2017.
In relation to VCTs only:
- A retrospective limitation on the scope of an existing anti-abuse rule applying to share buy-backs by VCTs which was introduced to target “bed and breakfasting” where (i) a new subscription by an investor in one VCT takes place within six months of a buy-back from that investor of shares in another VCT and (ii) the relevant VCTs merge – for subscriptions made on or after 06 April 2014, income tax relief may not be withdrawn if the merger is more than two years after the last share subscription, or where one of the main purposes of the merger is not to obtain a tax advantage.
- Changes to the rules on VCT investments relating to: expiration of grandfathering provisions (06 April 2018), the level of new funds raised during an accounting period which must be invested in qualifying holdings within 12 months after the end of the accounting period (30% with effect from 06 April 2018), the permitted time period for reinvesting gains (doubled to 12 months) and the proportion of VCT funds which must be held in qualifying holdings (increased from 70% to 80%) (both from 06 April 2019) and requiring qualifying loans to be unsecured and returns on loan capital above 10% to represent no more than a commercial return (with effect from Royal Assent).
First year allowances for energy saving assets
The energy-saving first year allowances (FYA) scheme allows 100% of the cost of a business’ investment in certain energy-saving technologies to be written off against the taxable income of the business in the period in which the investment is made. This is particularly beneficial for businesses that have fully used their annual investment allowance (AIA).
A statutory instrument will amend the list of technologies that qualify for the energy-saving scheme. It will add three new products, modify nine products and remove two items. The updates (with certain grandfathering provisions) will come into effect soon after the Autumn Budget 2017 for those businesses that have fully used their AIA.
Loss-making businesses are able to surrender the losses attributable to these FYAs in exchange for cash payments known as First Year Tax Credits (FYTC). The current rate of claim for FYTC is 19%. This was two-thirds of the prevailing 28% rate of corporation tax when the scheme started in 2008. The Finance Bill 2017-18 will amend the existing legislation to extend the scheme for five years until 31 March 2023 and set the rate of claim at two-thirds of the corporation tax rate. The changes to the scheme will come into effect on 01 April 2018.