Tax: Surge of new draft legislation

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Donald-Drysdale By Donald Drysdale for ICAS

14 December 2016

Draft provisions for next year’s Finance Bill have been published, and Donald Drysdale discusses a selection of the topics included.

The burden of change

Alterations to the UK tax regime are a burden on British businesses, but can be a boon to tax practitioners who thrive on change. The publication on 5 December of some 1,700 pages of draft legislation, explanatory notes, impact assessments and new consultations has provided much food for thought.

The draft Finance Bill 2017 provisions alone run to 400 pages so far. Given that significant measures anticipated in the Bill have not yet been brought forward, we can expect the Finance Act 2017 to be a hefty tome.  It will create new compliance headaches for companies and other businesses, and opportunities for alert tax advisers.

Business tax

Among changes of particular interest to large companies are the restriction of relief for corporate interest expense and the reform of relief for carried forward losses.

The current debt cap rules will be repealed.  Instead, from 1 April 2017 onwards UK companies with net interest expense above £2 million a year may suffer a restriction on tax relief for interest, applied after all other UK legislation that may restrict such relief.  Clause 20 and Schedule 6 are broadly in line with the government’s original proposals, although some welcome amendments have been made in response to recent consultation.  See an article here about the ICAS submission.  The new measure will impose significant compliance burdens on businesses affected: just how much remains unclear, because some elements of the draft legislation are not to be published until January.

Also from 1 April 2017 a new ‘loss restriction’ will apply to the amount of profit that can be offset against brought forward losses, whenever they arose.  Each standalone company or group will be entitled to a £5 million annual allowance, and profits within the allowance will not be restricted.  Where profits exceed that allowance, use of brought forward losses will be limited to 50% of such excess profits.  Banking companies are subject to different limits.

From the same date a new ‘loss relaxation’ will mean that losses arising from 1 April 2017, when carried forward, can be set more flexibly against total taxable profits of a company and its group members, rather than the set-off being restricted to particular types of income.

This loss restriction and loss relaxation proposed by clause 21 and Schedule 7 will apply to trading losses, non-trading deficits on loan relationships, management expenses, UK property losses, and non-trading losses on intangible fixed assets. See an article here about the ICAS response to the recent consultation. Whilst the treatment of pre-April 2017 trading losses will not be relaxed, companies will have the flexibility to choose whether or not to use pre-April 2017 trading losses before other available losses.

There are other important draft provisions relating to corporation tax.  The Patent Box rules as revised by Finance Act 2016 are to be modified to facilitate cost sharing by companies collaborating on research and development (clause 24).  Changes to the qualifying conditions for the substantial shareholdings exemption (SSE), and a new form of SSE for companies wholly or partly owned by certain institutional investors, will make the exemption more widely available (clauses 27–28).  And a wider range of SMEs with trading activity in Northern Ireland are to be given the potential to benefit from the prospective Northern Ireland rate of corporation tax, which is likely to be implemented on 1 April 2018 (clause 25 and Schedule 9).

A brief article such as this can’t address all 98 draft clauses and 22 draft Schedules, but a few other provisions deserve mention at this point.

Non-domiciled individuals

Certain non-domiciled UK resident individuals are to be brought within the deemed domicile provisions and treated as though domiciled in the UK for income tax and capital gains tax purposes from 6 April 2017 (clause 40).  This affects two classes of individuals – those born in the UK with a UK domicile of origin, and those who have been UK resident for at least 15 of the preceding 20 tax years.  They will be taxed on their worldwide income and gains as it arises, in the same way as those with UK domicile.  Certain valuable one-off transitional opportunities will allow UK resident non-doms (except returning non-doms) to arrange their affairs to best advantage.

For inheritance tax (IHT) purposes the deemed domicile rules are to be aligned more closely with those for income tax and capital gains tax.  From 6 April 2017, an individual is to be treated as UK domiciled for IHT if UK resident for at least 15 of the 20 tax years preceding the relevant year, unless non-resident in the relevant year and the previous three consecutive tax years (clause 41).  Furthermore, an individual born in the UK with a UK domicile of origin, who has acquired a domicile of choice elsewhere, will be treated as UK domiciled for IHT whenever they are UK resident and have been so resident in at least one out of the two previous tax years.  See an article here about the ICAS response to a consultation on these topics in 2015.

Business investment relief (BIR) was introduced in 2012 to encourage non-UK domiciled individuals to remit funds to the UK for qualifying investment purposes without otherwise creating a taxable remittance.  Clause 18 provides that the BIR rules will be revised from 6 April 2017 to make it easier and more attractive to potential investors to bring their money from overseas to invest in UK businesses.  While this is welcome, it is disappointing that BIR may still be withdrawn when a business is successful – for example, where it becomes listed.

Draft provisions still awaited

Some of the anticipated draft legislation has not yet appeared.  For example, additional clauses are expected on corporate interest relief and brought forward losses.  There are to be amendments to the current rules on the tax treatment of partnerships (see ICAS submission here).  Draft clauses are still awaited on changes to social investment tax relief and a consultation is to follow on bringing non-resident companies into corporation tax.

The legislation to give effect to the controversial Making Tax Digital proposals will be of widespread interest, particularly to small businesses and accountancy and tax practitioners. Draft provisions for this have not yet been published, but are expected in January.

An opportunity to respond

HMRC are inviting comments on the draft clauses, and the explanatory note on each clause includes contact details of an HMRC specialist with whom points may be raised by 1 February.  ICAS intends to respond to HMRC with concerns raised by members, so please email these to by 30 January.

And finally …

Taxpayers must get things right first time, but the tax authority is rarely held to account for its mistakes.  HMRC’s overview paper states: ‘Landfill Tax was replaced by Land and Buildings Transaction Tax in Scotland from April 2015.’  Scots reading this will realise, of course, that Landfill Tax was in fact replaced by Scottish Landfill Tax.  So now you know…

Article supplied by Taxing Words Ltd


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