ICAS comments on the draft Finance Bill
Susan Cattell reviews ICAS comments on the draft Finance Bill submitted to HMRC.
The ICAS tax team, in conjunction with the ICAS Tax Board and its technical committees, were busy in January and February reviewing the draft Finance Bill and submitting comments to HMRC. The full ICAS comments can be found on our Tax Consultations and Submissions page but here are the highlights.
The Finance Bill is due to be published on 20 March so we look forward to seeing the outcomes then.
Deductibility of corporate interest payments
The ICAS comments highlighted two major concerns with the draft legislation.
The extension of the carry forward for excess capacity from three years to five years was welcome. However, the operation of the Modified Debt Cap rule (MDCR) is likely to mean that, unless the rules are amended, UK groups will be disadvantaged and may be unable to make use of carried forward interest.
A wholly UK group which is loss making should be able to use its carried forward interest amounts once it becomes profitable. However, as currently drafted the MDCR will cap the deduction at the amount of group level net third party interest - leaving it without any capacity to use brought forward amounts. By contrast a company or group which is part of a larger multinational group will be unlikely to suffer the same permanent restriction of its interest deduction. UK competitiveness is important post-Brexit so this needs to be addressed.
The other important concern related to the treatment of mark to market losses on bonds, which is a significant issue for the life insurance sector.
Corporate loss restrictions
The draft legislation relating to corporate losses (like that relating to interest deductibility) was published in two tranches with different deadlines for comments. It was therefore difficult to comment on the complete picture. In view of the very short time allowed for comment and the publication of the legislation in two stages ICAS suggested that the new corporate loss and interest provisions should both be subject to a formal short term review by HMRC and the government, so that issues which arise post-implementation can be addressed quickly through amendments to the legislation.
ICAS submitted two responses on the corporate loss restriction draft clauses. The first dealt with an apparent anomaly in the draft legislation which in some circumstances restricts the set off to below 50% of the taxable profit. This is contrary to the statement in the Business Tax Roadmap that the government would restrict “to 50% the amount of profit that can be offset through losses carried forward”.
This response also expressed concerns that many restructurings that might save distressed businesses may not be pursued in future, as a direct consequence of the tax liability that will now arise, due to the loss restriction. ICAS suggested that if a general corporate rescue exemption is unacceptable, the government should instead consider extending an existing insolvency exemption in CTA 2009 and removing the 50% restriction on the use of losses where taxable income arises directly from steps that are part of a statutory insolvency arrangement.
The second ICAS response on losses dealt with the draft clauses covering changes of company ownership and loss buying. These extend the time limit for considering whether there has been a major change in the conduct or nature of a trade, from three to five years. Companies must already consider a six-year period around the date of the change of ownership; this will therefore increase to 10 years.
For commercial reasons the purchaser of a company is likely to want to take steps to rationalise the acquisition or to integrate it into the existing group as soon as possible. The proposed extension might prevent some commercial acquisitions from going ahead, with negative consequences for the loss-making company, its employees and HMRC.
Simplification of the tax and National Insurance treatment of termination payments
ICAS noted that the draft legislation on the calculation of the taxable amount leads to unfairness where an employee’s pay drops in the year preceding redundancy; this could be due to maternity leave, a period of sickness, moving from full-time to part-time working or employees agreeing to reduced pay to try to save jobs. In certain circumstances this could be discriminatory.
Making Tax Digital
Our main concern is that the draft Finance Bill clauses are mainly enabling legislation, delegating much of the detail to regulations that will be issued later. ICAS does not support the extensive use of secondary legislation, particularly when this relates to something as fundamental to business and the economy as Making Tax Digital with its new reporting requirements.
The policy objective of the draft clause relating to the cash basis is to simplify the rules for capital expenditure for unincorporated businesses using this basis. Given the number of sub-sections in the proposed legislation, the introduction of new terms and the number of the requirements it is far from clear that the result will be simplification.
As a more general point ICAS remains unconvinced that the extension of the cash basis to larger business is appropriate. There are good business reasons for businesses which trade over the VAT threshold to prepare accounts on an accruals basis.
Find out more about the Finance Bill
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.