Autumn Statement 2016: Business and company tax
- Publish date: 25 November 2016
- Archived on: 01 January 2019
ICAEW Tax Faculty provides analysis of the announcements relating to business and company tax in the 2016 Autumn Statement.
Business tax road map
The government is recommitting to the Business tax road map published at Budget 2016 and to the principles that it sets out. These include cutting the corporation tax rate to 17% by 2020 and reducing the burden of business rates.
The principles as set out in the Foreword to the (March 2016) business tax road map are:
"Taxes should be low, but must be paid. There should be a level playing field, including between large businesses and small, and between different corporate structures. The system must encourage entrepreneurship and not reward aggressive tax planning. Wherever possible, [the government] will take opportunities to simplify the tax code, and make the administration of tax fit for modern business practices.”
Tax deductibility of corporate interest expenseThe government confirmed that a limit on the tax deductions that large groups can claim for their UK interest expenses will be effective from 1 April 2017. These rules will limit deductions where a group has:
- net interest expenses of more than £2m;
- net interest expenses exceeding 30% of UK taxable earnings; and
- a net interest to earnings ratio in the UK exceeding that of the worldwide group.
There was a consultation in the summer on the detailed policy design and implementation, to which the Tax Faculty responded in ICAEW REP 119/16.
The government has now confirmed there will be a widening of the public interest exemption which aims to ensure that projects for the public benefit are not affected by the new restriction.
A somewhat unexpected development is that banking and insurance groups will be subject to the rules in the same way as groups in other industry sectors. Originally it was thought targeted rules for banks and insurance companies would be required. Banking and insurance companies typically generate net interest income and should not be affected by the rules. Their inclusion, however, is an indication that targeted rules will not be introduced on the basis that existing financial regulation places sufficient restrictions on these sectors. The limitation will apply to external debt as well as internal debt. It is not yet known whether there will be any grandfathering provisions for existing debt.
Reform of CT loss relief
The government has confirmed that the proposed changes to the carried-forward tax loss relief rules, announced in Budget 2016 and subsequently consulted on, will go ahead broadly as planned from April 2017. Tax Faculty responded to the consultation in ICAEW REP 125/16.
There are two principal measures:
- tax losses arising after 1 April 2017 will be available for carry forward against profits from the company’s other income streams and profits of other group companies; and
- for profits arising after 1 April 2017, only 50% of group profit can be sheltered by carry forward losses (subject to a £5m profit de minimis).
The potential impact of the loss restriction is eased by the £5m profit de minimis which means that the majority of businesses will not be adversely affected by this element of the package and the burden will fall only on larger groups.
The requirement to stream tax losses has long been a frustration for those who consider that a company’s tax bill should align with its economic profit and so this relaxation is welcome. While there is no indication that the government is thinking of moving to full group tax consolidation, the ability to offset a carried-forward loss in one company against a profit of another company is a welcome improvement to the existing group relief system.
The government has also stated that it wishes to simplify the administration of the new rules. It will be interesting to see whether, since the consultation, there has been any movement away from the schedular system and the need to stream trading and non-trading losses and profits.
Banks will continue to be able to shelter only 25% of their profits by pre-April 2015 tax losses. In respect of their post-April 2015 tax losses, banks will continue to be treated in the same way as other companies.
The patent box rules will be amended in FB 2017 for cases where research and development (R&D) is undertaken collaboratively by two or more companies under a cost sharing arrangement. The new provisions will ensure that there is neither an advantage nor disadvantage for the companies involved from organising the R&D activity in this way. The change will take effect for accounting periods beginning on or after 1 April 2017.
Substantial shareholdings exemption reform
The government undertook a consultation exercise on the substantial shareholdings exemption after the March 2016 Budget, to which the Tax Faculty responded in ICAEW REP 124/16. We welcome the announcement that the government is going to make changes to simplify the rules from April 2017.
Currently, to qualify for the exemption, both the investor group and the investee subgroup must meet a trading status requirement. The proposal is that the exemption will be reformed to remove the test for the investor group. From April 2017 it is the trading status of the investee company (and, if relevant, its subgroup) which counts. This should help groups with a combination of trading and investment activities, eg a mixed property group may access the exemption when selling its development subsidiary. Furthermore, the new approach has the advantage that the UK company should itself have ready access to the required information. In the case of foreign owned groups, obtaining information about the foreign parent’s wider group activities has proved onerous and the proposed change should remove this requirement.
The Chancellor also indicated that a more comprehensive exemption will be introduced for companies owned by ‘qualifying institutional investors’. Beneficiaries may include pension funds and sovereign wealth funds whose gains would be tax exempt when investing directly, but are currently taxable when investing through a UK company. This has caused some to invest through offshore holding companies, and the reform is designed to remove that incentive. This change could benefit UK companies which own at least 10% of the equity of another company when they sell at a gain.
Extension of corporation tax to non-resident companies
The government will consult in 2017 on whether the UK income of non-UK resident companies should be brought within the charge to corporation tax so that such companies will be subject to the same rules as UK resident companies.
With the exception of non-UK resident companies undertaking a trade in UK land, currently, non-UK resident companies which trade in the UK without a permanent establishment are, in principle, chargeable to UK income tax. UK income tax also applies to the rental income of non-UK resident companies holding UK real estate for the purposes of investment. There are already some significant differences in the tax rules between income tax and corporation tax which can mean that such companies are not charged to tax in the same way or at the same rate as companies already within the charge to UK corporation tax. In addition, certain changes to corporation tax announced in this Autumn Statement, along with the reduction in the headline rate of corporation tax to 17% by April 2020, will result in a marked difference between companies chargeable to income tax and corporation tax unless the treatment of both is aligned.
If the proposal is implemented, it could have a significant effect, in particular for non-UK resident owners of UK investment property. While such businesses might benefit from future reductions in corporation tax rates, they would become subject to the same restrictions to interest deductibility which will apply to UK corporates from April 2017. As property investment activity is often highly geared, this could result in a significant additional tax burden.
Companies that are affected by the change could find themselves liable to UK CGT, as non-UK resident companies are generally only chargeable to CGT on residential property in the UK.
Bank levy reform
As announced at Summer Budget 2015, the bank levy charge will be restricted to UK balance sheet liabilities from 1 January 2021. Following consultation 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. Details will be set out in the government’s response to the consultation, with the intention of legislating in a future Finance Bill.
The government will continue to consider the balance between revenue and competitiveness with regard to bank taxation, taking into account the implications of the UK leaving the EU.
Petroleum revenue tax: reducing administrative burden
Two measures were announced to reduce administrative burdens for participators in the petroleum revenue tax (PRT) regime.
The first measure will remove the conditions for opting fields out of PRT so that opting out can be achieved by a simple election. The measure has effect from 23 November 2016. A draft clause and draft explanatory notes have been published.
The second measure will simplify the reporting requirements for those that remain. Both this measure, and the first measure, are explained in a Technical Note PRT: cutting administrative costs for the oil industry. The second measure will remove the oil allowance reporting requirements from the PRT 1 and 2 forms. There will also no longer be a requirement to report the tax liability instalment on the PRT 6 form. Both measures will take immediate effect. This means that a responsible person will be able to elect to opt fields out of the PRT regime for chargeable periods beginning on or after 1 January 2017 and the simplified reporting will apply to the current chargeable period (ending 31 December 2016) and any subsequent reporting periods.
Hybrids and other mismatches
The government will issue a technical note on 5 December to improve the new hybrid mismatch regime introduced by FA 2016. The regime was introduced as a result of the OECD Base Erosion and Profit Shifting project and is designed to counter the use of hybrid or mismatch structures – essentially situations where an amount is deductible in one jurisdiction but not taxed in any other, or is deductible more than once.
Following consultation there are going to be technical modifications in two areas of the legislation. These concern financial sector timing claims and the rules concerning deductions for amortisation. The technical note will set out the detail of the changes required. These modifications will take effect along with the new regime on 1 January 2017. The necessary legislation will be introduced in FB 2017.
Authorised investment funds: distributions to corporate investors
The government will amend the rules on the taxation of dividend distributions to corporate investors so that exempt investors, such as pension funds, can obtain credit for tax paid by authorised investment funds. Proposals will be published in draft secondary legislation in early 2017.
Insurance linked securities (ILS)
The government is consulting on a new regulatory and tax framework for Insurance Linked Securities business in the UK which will enable insurers to transfer large and complex risks to capital market investors.
The consultation document sets out the approach to tax and regulation of ILS vehicles in the UK. It contains details on:
- the background to the consultation and the government’s aims for the ILS project;
- the responses received to the first ILS consultation in March;
- the corporate structure of ILS vehicles to be used in the UK, which will provide for ILS vehicles to be set up as protected cell companies;
- the taxation treatment of ILS vehicles and their investors; and
- the approach to authorisation and supervision of ILS vehicles by the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA).
Tax treatment of partnerships
The government will seek to legislate changes to clarify the taxation of partnerships following HMRC’s consultation partnership taxation: proposals to clarify the tax treatment earlier this year. A number of areas had been identified as unclear, in particular where the partners named on the tax return differ from those registered at Companies House and where there are multiple levels of partnership structures making it unclear who the ultimate partner is.
While the majority of partnerships will not be affected by the changes, we made the following key points in ICAEW REP 170/16:
- In January 2015 the Office of Tax Simplification (OTS) conducted a review of partnerships and listed 17 recommendations for consideration by HMRC. We are disappointed that none of these recommendations have been considered in this consultation document, in particular the treatment of partner specific expenses (recommendation five of the OTS report).
- Rather, the focus of this consultation is to consider “areas where the government has identified that the tax rules may be seen as unclear or produce an inappropriate outcome” (paragraph 1.2) which appear to be peripheral and relevant to only large and complex partnerships (as the consultation document itself states at paragraph 1.3, “it will have no effect on the vast majority of partnerships”).
- The proposals in this consultation intend to place responsibility on the nominated partner. Where there is a lack of information (for example in structures where an LLP is a member of another LLP and foreign entities are involved) this will lead to undue administrative and possible financial burdens on a typically compliant partner.
Draft legislation will be published for consultation, when we will see to what extent the proposals have been adapted for comments received.
Capital allowances for electric car charge-points
From 23 November 2016 businesses acquiring new and unused electric charge-points will be eligible to claim a 100% first year allowance (FYA). This is a temporary measure which will expire on 31 March 2019 for companies, and 5 April 2019 for businesses subject to income tax. It is introduced to encourage the use of electric vehicles in a bid to improve air quality in towns and cities across the UK. We support this relief which complements the 100% FYA available on the purchase of low emission cars.
Contributions to grassroots sports
A corporation tax deduction will be available for companies that make contributions to grassroots sports from 1 April 2017. This measure, announced at Autumn Statement 2015, was consulted on during Spring 2016 and we responded in ICAEW REP 90/16. FB17 will provide details of which sports will be eligible and the types of expenditure which will qualify for the relief.
Museums and galleries tax relief
Further details of the new museums and galleries tax relief were announced in the green book. Budget 2016 announced that tax relief would be available for temporary and touring exhibitions but it is now confirmed that it will be extended to include permanent exhibitions, a move which we believe supports the government’s aim to encourage the creation of high quality exhibitions. The relief will take effect from 1 April 2017 and will be available at 25% for touring exhibitions and 20% for non-touring exhibitions. Relief will be available on 80% of qualifying expenditure (in line with other creative sector tax reliefs) and will be capped at £500,000 per exhibition.
Social investment tax relief
Certain changes will be made to social investment tax relief with effect from 6 April 2017, including an increase in the amount of investment social enterprises can raise to £1.5m. While at the moment investment in nursing and residential care homes is not entitled to the relief, the government will consider the introduction of an accreditation system which will allow such investments to qualify in the future. Other changes announced include a reduction to the limit on full time equivalent employees to 250.
Tax advantaged venture capital schemes
A number of changes will be made in FB17 to the Enterprise Investment Scheme (EIS), Seed Enterprise Investment Scheme (SEIS) and Venture Capital Trust (VCT) rules.
The government will clarify the treatment of share conversion rights for EIS and SEIS shares issued on/after 5 December 2016. This is intended to provide more certainty to those making investments and help reduce the backlog of cases.
In relation to VCTs the government will:
- for investments made on/after 6 April 2017, provide additional flexibility for follow-on investments made by VCT companies in companies with certain group structures to align with EIS provisions, and
- introduce a power to enable VCT regulations to be made in relation to certain shares for share exchanges to provide greater certainty for VCTs.
It was also announced that the government will consult on the advance assurance service it offers.
More information about these measures will be available in the draft legislation and supporting documentation to be published on 5 December.
Budget 2016 announced the permanent doubling of small business rate relief from 50% to 100%. The government has now confirmed it will double rural rate relief to 100% to remove the inconsistency between small business rate relief and rural rate relief. This will take effect from 1 April 2017.
There will be a new 100% business rates relief for new full-fibre infrastructure for a five-year period from 1 April 2017, designed to support roll-out to more homes and businesses.