Business and company tax
ICAEW Tax Faculty provides analysis of the announcements relating to business and company taxes in the Autumn Budget 2017.
Corporate tax and the digital economy
HM Treasury published a position paper Corporate tax and the digital economy on Budget Day to consider how to ensure that multinational businesses pay tax in the countries in which they generate value.
The paper sets out how the government intends to achieve this:
- It will push for reforms to the international tax framework, to ensure that the value created by the participation of users in certain digital businesses is recognised in determining where those businesses' profits are subject to tax.
- Pending reform of the international framework, the government will explore interim options to raise revenue from digital businesses that generate value from UK users, such as a tax on revenues that these businesses derive from the UK market. The UK will work with other countries to consider how such a tax could be targeted, designed and co-ordinated to minimise business burdens and distortion. However, the government stands ready to take unilateral action in the absence of sufficient progress on multilateral solutions.
- The government will take more immediate action against multinational groups, primarily in the digital sector, who achieve low-tax outcomes by holding their valuable intangible assets such as intellectual property in low-tax countries where they have limited economic substance. This action, which is taken in accordance with the UK’s international treaty obligations, will help to prevent groups achieving unfair competitive advantages in the UK market in which they operate. It will also help to ensure that the discussion on how value is created by the users of certain digital businesses starts from a more sustainable position.
The government previously pledged that by the end of this parliament 600,000 businesses will not pay business rates again. To support businesses further, a package of additional relief measures worth £2.3bn was announced:
- From 1 April 2018 indexation on property valuations will be based on the Consumer Prices Index (CPI) rather than the Retail Prices Index (RPI).
Non-domestic property valuations will take place every three years rather than every five years. There will be a consultation in the spring to consider how best to implement this change.
- Support for pubs, first announced in the Spring Budget 2017, will be extended for one year from 1 April 2018 where there is a rateable value of up to £100,000.
- Draft legislation will be published to allow businesses affected by the ‘staircase tax’ to have their valuation recalculated and their bills backdated to April 2010 based on previous rules.
The so-called 'staircase tax' meant that businesses operating over several floors within the same property were assessed separately to business rates for each occupied floor, rather than billed for their premises as a whole. This backdated change was made after a Supreme Court ruling in August 2017. It was widely criticised for unfairly penalising firms with separate office spaces in the same building.
The Red Book states that local government will be compensated for income lost as a result of these measures.
Partnership taxation: proposals to clarify tax treatment
The government will legislate in FB 2017-18 to clarify the taxation of partnerships. This follows HMRC’s consultation Partnership taxation: proposals to clarify the tax treatment in 2016. 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 as to who the ultimate partner is. There was also concern in relation to the allocation of profits.
Draft legislation was published on 13 September 2017 to which we responded in ICAEW REP 115/17. In our response we stated: “there are a number of commercial reasons why taxable profits are not allocated in the same proportion as accounting profits, the most common example being disallowable expenditure, ie, private use of car adjustments which relate directly to a particular partner. In such cases the disallowable expenditure will be allocated to the specific partner rather than being adjusted for at the partnership level.” We note that, following technical consultation, “the legislation has been revised to be more compatible with commercial arrangements”.
Enhanced capital allowances
Enhanced capital allowances are available on certain energy-saving technologies and the list of qualifying assets will be updated through FB 2017-18. This will allow businesses to invest in energy-saving plant and machinery that might otherwise be unaffordable.
First year allowances
The 100% first year allowance was due to expire on 31 March 2018 for zero-emission goods vehicles and gas refuelling equipment. The government announced an extension to both schemes at Budget 2015 and it has now been confirmed that the relief will be available for another three years. This measure will encourage businesses to invest in energy-efficient vehicles while protecting the environment for the next generation.
First year tax credits
The first year tax credit scheme will be extended to the end of this parliament. The credits enables loss-making businesses to claim tax relief for investment in energy-saving technology. The credit will be set at two-thirds of the corporation tax rate.
Corporate indexation allowance
Indexation allowance on corporate chargeable gains will be frozen from 1 January 2018, removing relief for inflation which accrues from this date. The announcement, which was not unexpected, will bring the calculation of corporate gains in line with the personal tax regime. The measure will be felt by companies holding properties that continue to rise in value since their acquisition date.
It has been confirmed that disincorporation relief will not be extended beyond its expiry date of 31 March 2018. The Office of Tax Simplification (OTS) published a focus paper, Disincorporation relief – what of the future? earlier this year to assess how useful the relief has been to businesses. Since its inception in 2013 fewer than 100 companies have claimed it.
R&D expenditure credit
From 1 January 2018 the research and development expenditure credit (RDEC) will increase by 1% to 12% for expenditure incurred on or after that date. RDEC is available to large companies incurring qualifying R&D expenditure although certain SMEs are also eligible for the relief. The relief was first introduced in April 2013 at a rate of 10% and is currently available at 11%.
This measure is expected to have an impact for 4,000 businesses claiming RDEC. A policy paper Corporation tax: increasing the rate of R&D expenditure credit gives more detail. The cost of this additional relief is estimated to be £750m over the five years from 2018/19.
R&D tax credits: raising awareness and increasing certainty
The government will launch a campaign to increase awareness and encourage the take-up of R&D credits among smaller businesses and SMEs. The government will focus on businesses developing and using emerging technologies.
For businesses making RDEC claims the government will pilot a new advance clearance service to increase certainty about tax relief available. The new service will provide companies with a pre-filing agreement for three years.
Substantial shareholding exemption: unintended CGT consequences
The substantial shareholding exemption (SSE) legislation and the share reconstruction rules will be amended to avoid unintended capital gains being triggered when a UK company incorporates foreign branch assets in exchange for shares in an overseas company.
The policy paper published on the day of the Budget – Corporation tax: capital gains assets transferred to non-resident company – reorganisation of share capital – explains the problem as follows:
“Where the trade and assets of a UK company’s foreign branch are transferred to an overseas company in exchange for shares in that company, existing legislation allows tax on any capital gains on this disposal of assets to be postponed. The postponement is temporary, until the overseas company sells the assets, or the UK company disposes of the shares in the overseas company, other than in exchange for further shares during a corporate reconstruction. Under the current rules, an unintended consequence is that if the shares exchanged during the reconstruction fall within conditions for the SSE to apply, the postponed tax charge may become payable, even though the group still owns the shares of the overseas company.”
BEPS: the multilateral instrument
FB 2017-18 will amend the powers by which double taxation arrangements with other territories are given effect in the UK. The changes are being made to ensure that the powers are sufficient to give full effect to the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (known as the multilateral instrument (MLI), which was signed by the UK in June 2017.
The MLI was developed by the OECD Base Erosion and Profit Shifting (BEPS) project. It enables changes to made to all existing tax treaties in one go, rather than having to renegotiate them individually.
The changes will have effect on and after Royal Assent of FB 2017-18.
Intangible fixed asset regime
There will be a consultation in 2018 on the tax treatment of intellectual property to consider what changes need to be made to the current regime to better support UK companies investing in intellectual property.
Changes were announced to combat ‘related party step up schemes’ and these proposals are covered in the section below on Avoidance, evasion and compliance.
Bank levy changes
Bank levy is going to be amended so that for UK-headquartered banks it will apply only on their UK balance sheet liabilities. Minor changes will also be made to the administration of the bank levy. Full details are in the policy paper Bank Levy: changes to the scope and administration
The changes to the bank levy’s scope will have effect for chargeable periods ending on and after 1 January 2021, while other changes will have effect on or after Royal Assent of FB 2017-18, or for chargeable periods ending on and after 1 January 2018.
Education Authority (Northern Ireland): exemption from CT
The Education Authority (Northern Ireland) is to be exempted from corporation tax so that it is treated in the same way as equivalent bodies providing state-funded education in other parts of the UK.
The changes will have effect on and after 1 April 2015.
Accounting changes for leasing: tax changes
The introduction of a new accounting standard for leasing, IFRS 16, creates the need for changes to tax legislation. The government will publish two consultations on 1 December 2017:
- firstly, on the legislative changes required by the new accounting standard to ensure that the income and corporation tax rules for leased plant and machinery continue to work as they do currently, and on the wider impact of the accounting change for income and corporation tax; and
- secondly, to evaluate options for the corporation tax treatment of lease payments under the new corporate interest restriction rules at Part 10, Taxation (International and Other Provisions) Act 2010.
Oil and gas: transferable tax history
FB 2018-19 will introduce transferable tax history for oil and gas companies. This follows publication of a discussion document at Spring Budget 2017 on tax issues for late life oil and gas assets, and the establishment of an expert panel to examine the issue. This change will have effect on and after 1 November 2018.
The government has published An Outline of Transferable Tax History which explains how transferable tax history is intended to work, and sets out a timeframe for publication of draft legislation and technical consultation. Draft legislation will be published in spring 2018 for consultation. The government intends to legislate in FB 2018-19 and the legislation will apply, with retrospective effect, to deals completed on or after 1 November 2018.
PRT: treatment of retained decommissioning liabilities
FB 2018-19 will amend the petroleum revenue tax (PRT) rules to enable more flexibility over retention of decommissioning. A technical consultation will be issued in spring 2018.
Tariff receipts: ring fence corporation tax
FB 2017-18 will clarify that all activities of UK petroleum licence holders that give rise to tariff income in relation to UK oil and gas assets are oil extraction activities and as such the profits are subject to ring fence corporation tax and supplementary charge.
Patient Capital Review: summary of responses
At Autumn Statement 2016 the Chancellor announced the government’s commitment to provide more support for UK infrastructure and innovation, as part of the government’s Patient Capital Review. The review, led by a panel of industry experts chaired by Sir Damon Buffini, considered the factors affecting the supply of patient capital (defined as “long term investment in innovative firms led by ambitious entrepreneurs who want to build large-scale businesses”).
As part of the review HM Treasury published a consultation document Financing growth in innovative firms which looked at the availability of long-term finance and the barriers faced by companies seeking to access patient capital. ICAEW responded in ICAEW REP 102/17.
A summary of consultation responses has now been published and members might be particularly interested in chapter 3 which deals with current tax interventions. In the document the government sets out the policy response to the issues raised which include seeking to address the issue of investors using tax-advantaged schemes purely for capital preservation and doubling the annual investment limit for Enterprise Investment Scheme (EIS) investors to £2m.
The industry panel leading the review has also published a response document in which they specifically recommend the investment limit for the enterprise investment scheme (EIS) is increased.
Venture capital schemes: risk to capital condition
In response to the Patient Capital Review the government will legislate to ensure that venture capital schemes are targeted at high risk, growth companies. The schemes are: venture capital trusts (VCTs), the EIS and the seed enterprise investment scheme (SEIS). Relief will no longer be available where arrangements are intended to provide capital preservation in low risk companies, and HMRC will no longer provide advance assurance for such investments. These changes will have effect for investments made on or after the date that FB 2017-18 receives Royal Assent.
Venture capital schemes: streamlining the advance assurance service
In December 2016 the government consulted on ways in which to streamline the advance assurance service for companies using EIS, SEIS, VCT and social investment tax relief (SITR). ICAEW responded in ICAEW REP 19/17, in which we said that publication of a checklist of common errors and issues, to be completed before an advance approval application is accepted by HMRC, would result in improved application documents and help reduce workload. A summary of responses was published on 20 March 2017 and the government response will be published on 1 December 2017.
EIS and VCT: increased limits for knowledge-intensive companies
The Patient Capital Review considered how the tax system could incentivise more investment in knowledge-intensive companies. As a response, the government will double the amount an individual can invest under EIS to £2m, provided that any amount over £1m is invested in one or more knowledge-intensive companies. The annual investment limit for such companies receiving funds through EIS and VCTs will double to £10m.
These changes will have effect from 6 April 2018.
EIS and VCT: relevant investments
The government will legislate to amend the definition of ‘relevant investments’ following changes introduced in Finance (No. 2) Act 2015 to better target EIS and VCTs at high-growth companies. This means that all investments will count towards the lifetime limit (£20m for knowledge-intensive companies and £12m for others). This includes all risk-finance investments made before 2012 that were not previously included due to previous transitional arrangements.
EIS: innovative fund
A consultation will be published in 2018 to consider a new knowledge-intensive EIS fund structure. This follows responses to the Patient Capital Review in which stakeholders called for flexibility to use capital raised over a longer period of time.
VCTs: anti-abuse provisions
Anti-abuse rules exist to prevent income tax relief being claimed where an investor sells shares in a VCT and within six months subscribes for shares in either the same VCT or in another VCT where those two merge. The government will legislate in FB 2017-18 to relax the rules, ensuring that income tax relief is not withdrawn where the VCTs merge more than two years after the subscription of shares or where the merger is for commercial reasons. The change will have effect for VCT subscriptions made on or after 6 April 2014.
VCT: other reforms
Further announcements were made to ensure that VCTs are appropriately targeted at higher-risk, growth investments.
From the date of Royal Assent of FB 2017-18 a new anti-abuse rule will be introduced to prevent VCTs making secured loans to investee businesses.
From 6 April 2018 the government will:
- remove grandfathering rules which allow VCTs to invest in companies under rules in place at the time funds were raised; and
- require that VCTs invest 30% of funds raised in an accounting period in qualifying holdings within 12 months after the end of the accounting period.
From 6 April 2019:
- the proportion of funds that must be held in qualifying holdings will increase from 70% to 80%; and
- the time limit to reinvest proceeds from the disposal of qualifying holdings will increase from six months to 12 months.
Social investment tax relief: care home accreditation
Under current rules, investment in nursing and residential care homes does not qualify for SITR. The government plans to consult on how to extend the relief to this sector and has proposed that the system will allow for a minimum proportion of local authority funded beds.