Corporate tax measures in the Spring Budget 2017
The Chancellor said that ‘a strong economy needs a fair, stable and competitive tax system, creating the growth that will underpin our future prosperity’. He confirmed that the corporation tax rate will reduce to 19% from April 2017 and to 17% in 2020. This continues the trend of recent years which has seen the rate for large companies fall from 28% in 2010.
However, the headline rate is not the only thing which matters. Some large companies, having to deal with the previously announced restrictions to loss set off and interest deductibility, which take effect from April, will certainly feel that more stability would be desirable. They may therefore be relieved at the absence of further announcements of major changes in the Budget.
Highlights from the announcements relevant to companies are outlined below. Full details can be found in the Overview of tax legislation and rates (OOTLAR).
Converting capital losses into trading losses
The Chancellor’s speech included a reference to action ‘to stop businesses from converting capital losses into trading losses’. This refers to the rules relating to the appropriation of capital assets to trading stock. These appropriations are treated as taking place at market value and can give rise to chargeable gains or allowable losses. However, prior to the Budget announcement an election could be made which had the effect of reducing the gain or the loss to zero and instead rebasing the transfer value for the purpose of calculating trading profits. This could have the effect of converting what would have been a capital loss into a more flexible trading loss.
In future, an election will only be allowed where the appropriation would give rise to a chargeable gain and not where it gives rise to an allowable loss. The capital loss will therefore crystallise and will remain within the chargeable gains rules for any future set off. The change has immediate effect by preventing the election being made for appropriations into trading stock made on or after 8 March 2017.
Plant and machinery leasing
Some companies were probably awaiting news on changes to the tax rules related to plant and machinery leasing. Changes are needed following the announcement of the new accounting standard for leasing (IFRS16) which comes into effect on 1 January 2019.
There was an initial discussion document last year and a response and further consultation will be published in summer 2017. The government has apparently decided that it will maintain the current system of lease taxation “by making changes which enable the rules to continue to work as intended”, so it would appear that the more radical options outlined in the discussion document are no longer being considered.
Oil and gas
The Chancellor listened to North Sea oil and gas producers and the Scottish government and intends to provide some support, through the tax regime, for the transfer of late-life UK oil and gas assets. To determine the best approach a formal discussion paper will be published on 20 March. A new advisory panel of industry experts will also be created to consider the issue.
Research and Development
The Chancellor made clear in his speech that he believes the UK R&D regime is globally competitive. Following a review of the tax environment for R&D, which included informal consultation with business, he announced that there will be changes to the R&D tax credit regime intended to deliver a reduction in the administrative burdens. This will be welcome and may (as the Chancellor suggested) make the UK even more attractive for R&D but some may wish that he had gone further and increased the value of the reliefs.
There were a couple of measures which should help to facilitate investment into the UK:
The existing double taxation treaty passport scheme, which provides administrative simplifications to help foreign lenders and UK borrowers, will be renewed and extended. It was restricted to corporate lenders and corporate UK borrowers but from 6 April 2017 this restriction will be removed so the scheme will apply to all types of overseas lenders and UK borrowers. Guidance and revised terms and conditions for the scheme will be published on 6 April.
There will also be a consultation (to be issued on 20 March) on Withholding Tax Exemption for Debt Traded on a Multilateral Trading Facility.
HMRC Large Business Risk Review
HMRC will launch a consultation into its process for risk profiling large businesses. The consultation, which is scheduled for summer 2017, will consider how HMRC could promote stronger compliance. Companies with a ‘low risk’ rating under the current process will want to look closely at the proposals.
Patent Box – cost sharing arrangements
Legislation will be included in Finance Bill 2017 to add provisions to the new Patent Box rules (introduced in Finance Act 2016) covering situations where research and development is undertaken collaboratively by two or more companies under a cost sharing arrangement. The intention is to ensure that companies are neither penalised, nor able to gain an advantage, by operating in this way.
The government announced in the Autumn Statement that it intended to consult on the case and options for bringing non-UK resident companies, which are currently chargeable to income tax on UK taxable income and non-resident CGT on certain gains, into the scope of corporation tax. This would mean that these companies would be brought within the scope of the restrictions on interest deductibility and the restrictions on the use of corporate losses. We now know that the consultation will be issued on 20 March.
Amendments to previously announced measures
OOTLAR makes clear that there will be amendments to some of the key corporate measures already announced and included in the draft Finance Bill. We shall have to wait for publication of the Finance Bill on 20 March for the full details but areas where OOTLAR indicates there will be amendments include: substantial shareholdings exemption, corporate loss relief and interest deductibility.
The major changes to corporate loss relief and interest deductibility take effect from 1 April 2017. Some of the changes will undoubtedly be designed to fix problems identified during consultation on the draft Finance Bill legislation (published in December and January) and will be welcomed – but companies affected by the new rules will have very little time to digest the changes before implementation.
Find out more about tax in uncertain times
Attend the ICAS Tax Conference 2017, which takes place at the Radisson Blu Hotel, Edinburgh on Tuesday 23 May. Cost: Members and Students: £192 Non-members: £234 CAPS Firm: £174. All prices include VAT.