Retroactive tax measures confirmed

Financial district
Donald-Drysdale By Donald Drysdale for ICAS

25 July 2017

Donald Drysdale comments on the forthcoming Autumn Finance Bill and the amended retroactive measures which it is expected to introduce.

Lost proposals to be reinstated

Typically, by this time of year the annual Finance Act has reached the statute book and tax specialists, after a short break, will embark on a long autumn of representations and consultations on draft legislation for inclusion in next year’s Finance Bill.

This year it’s all different. Substantial tax proposals were dropped from the Finance Bill when the general election was called for 8 June. At that time Westminster’s majority Conservative administration confirmed there would be no policy change and the provisions in question would be legislated for at the first opportunity in the new Parliament.

Then the Government lost its majority. Nonetheless, it confirmed in a written parliamentary statement on 13 July that it expects to re-introduce the withdrawn provisions in a new Finance Bill as soon as possible after Parliament returns from its summer recess on 4 September.

Retroactive effect

The new Finance Bill will legislate for policies previously announced, retaining the commencement dates originally proposed. Many of the tax changes will apply from April 2017 or in some cases even earlier. There has been some debate about whether these are ‘retroactive’ and indeed whether this is objectionable, given that they were known about and had been the subject of full consultation. In some instances, such as changes to the regime for non-domiciled individuals, taxpayers might be disadvantaged if commencement dates were changed.

On 13 July, to provide a measure of certainty about the exact provisions which will apply, the Government published revised draft clauses for those measures taking effect before the new Bill is introduced.

Carried forward losses

Proposals to reform the tax treatment of certain types of carried-forward corporation tax losses are to go ahead from 1 April 2017.  This will provide greater flexibility than hitherto in how losses arising on or after 1 April 2017 can be relieved when they are carried forward. It will also limit the amounts against which all carried-forward losses (whenever they arise) can be relieved to 50% of profits, subject to an annual allowance of £5 million.

Amended draft legislation alters the proposals that were in the original Finance Bill.  Technical changes will prevent the loss restriction from impacting insurer’s regulatory capital requirements, or applying to insolvent insurers with a long tail of health-related employer liability claims, or applying to the reversal of an onerous lease provision that arises from a corporate rescue.

The revised provisions will allow post-1 April 2017 trading losses to be transferred between companies under common ownership, but not for avoidance purposes.  Amendments have also been made to the group relief rules and oil and gas provisions.  Certain changes will take effect only from 13 July 2017, and in these cases new transitional provisions will apply.

Corporate interest restriction

Proposals to impose a restriction on the amount of interest and other financing amounts that a company may deduct in computing its profits for corporation tax purposes are to be re-introduced, taking effect from 1 April 2017 as originally proposed.

Revised draft provisions bring some modifications to the public infrastructure exemption rules, the definition of tax-interest, and the related party provisions, plus a number of other changes.

Deemed domicile

For income tax and capital gains tax, certain non-domiciled individuals are to be treated as domiciled in the UK. As originally proposed, this will apply from 6 April 2017. It will affect individuals domiciled outside the UK who were born in the UK with a UK domicile of origin, and those who have been resident in the UK for at least 15 of the preceding 20 tax years. Amended draft clauses contain a number of technical changes and transitional protections.

Employment income provided through third parties

A new ‘loan charge’ on loans from disguised remuneration schemes will apply to loans made after 5 April 1999 that are outstanding on 5 April 2019. There will be several exemptions and the charge can be postponed in certain circumstances.  Modified draft legislation contains minor amendments which clarify the application of the legislation.

Hybrid and other mismatches

The hybrid and other mismatch rules deal with tax mismatches involving entities, financial instruments, permanent establishments and dual resident companies. Two changes had been proposed, affecting amortisation of intangible fixed assets and formal claims for timing mismatches. Amended draft clauses re-introduce these from 1 January 2017, together with a third change to be made from 13 July 2017 in relation to the treatment of local taxes.

Inheritance tax on overseas property representing UK residential property

Inheritance tax is to be extended to UK residential property held by a non-domiciled individual through an overseas structure. This will go ahead from 6 April 2017 as originally planned.  Revised draft legislation incorporates some minor drafting changes to tackle potential avoidance and clarify certain technical points.

Substantial shareholding exemption

With effect from 1 April 2017 a simplified form of the substantial shareholdings exemption is to be introduced that has fewer qualifying conditions for companies which are wholly or partly owned by certain institutional investors. It will apply without regard to the nature of the business activities – whether of the company making the disposal or the company in which it has a substantial shareholding. Any gain or loss on the disposal is exempt if qualifying institutional investors own at least 80% of the ordinary share capital of the investing company, with partial exemption available where they own between 25% and 80%.

Amended draft provisions update the definition of ‘qualifying institutional investor’ in respect of life assurance businesses to ensure that the legislation works as intended.

Making Tax Digital

The Autumn Finance Bill will also include draft legislation, not yet published, for Making Tax Digital (MTD). In a welcome U-turn by the Government, businesses with turnover above the VAT registration threshold will not be required to use MTD until April 2019 – and then only to meet VAT obligations. Businesses below the VAT threshold will not have to use MTD but may choose to do so.

The Government will not widen the scope of MTD beyond VAT before the system has been shown to work well, and not before April 2020 at the earliest. This aims to ensure that there is time for adequate testing of MTD and for digital record-keeping to become more widespread.

Continuing lack of certainty

At the best of times, retroactive tax laws create uncertainty. At the worst of times, a minority administration may have difficulty securing support for all the tax measures it wishes to include in a Finance Bill.

Practitioners with clients likely to be affected by the new provisions will wish to study the amended draft clauses. They should also beware that further changes might be made before these are enacted.

Article supplied by Taxing Words Ltd


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