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The corporation tax rate will be reduced from 20% to 19% in 2017, and to 18% in 2020. Draft legislation due this autumn will also introduce new quarterly payment dates for companies with annual taxable profits of £20m or more, or where a company is part of a group, this threshold will be divided by the number of companies in the group. Affected companies must pay corporation tax in the third, sixth, ninth and twelfth months of their accounting period starting on or after 1 April 2017.
TIIN—Corporation Tax—modernisation of the taxation of corporate debt and derivative contracts
The rules governing the taxation of corporate debt (known as loan relationships) and derivative contracts are updated by a new measure announced by the government at Summer Budget 2015. The measure affects companies which are subject to corporation tax, which issue or hold debt or which are party to derivative contracts.
TIIN: Controlled Foreign Companies—loss restriction
The government has announced a new measure which aims to stop losses and other surplus expenses from being set off against the controlled foreign companies (CFC) charge on the profits of CFCs. A CFC charge arises to a UK company in relation to profits from its CFCs which have been diverted from the UK. The measure applies to profits which arise on or after 8 July 2015.
TIIN—Corporation tax and income tax—Disposal of stock other than in trade, and corporate intangibles
The tax treatment of transfers between related or connected parties of trading stock and of intangible fixed assets is clarified. The measure will affect any businesses liable to corporation tax and income tax and will have effect for transfers of trading stock or intangible fixed assets made.
TIIN—Corporation tax—Restriction of relief for business goodwill amortisation
Corporation Tax relief for companies who write off the cost of purchased goodwill and certain customer related intangible assets is to be removed. New legislation to be introduced in Summer Finance Bill 2015 will amend the Corporation Tax Act 2009, Pt 8, applicable to all acquisitions made on or after 8 July 2015 unless made pursuant to an unconditional obligation entered into before that date. It also applies to all goodwill created on or after that date. Relief will still be available if the goodwill is sold.
Tax avoidance and tax planning, evasion and compliance overview
Legislation will be introduced to require financial intermediaries (including tax advisers) to notify their customers about the Common Reporting Standard, the penalties for evasion and the opportunities to disclose. Further legislation will modernise and strengthen HM Revenue & Customs' (HMRC) powers to recover tax and tax credit debts directly from debtors’ bank and building society accounts, including funds held in cash ISAs. This measure will be subject to safeguards including a face-to-face visit to every debtor before they are considered for debt recovery through this measure, as well as a county court appeal process.
TIIN—Annual investment allowance—permanent increase to £200,000
The permanent level of the annual investment allowance (AIA) is increased from £25,000 to £200,000 for all qualifying investment in plant and machinery made on or after 1 January 2016 by a new measure announced at Summer Budget 2015. A temporary increase was made to the AIA from April 2014 until 31 December 2015 after which it would have returned to £25,000. This change will make the increase permanent.
TIIN: Bank Corporation Tax surcharge
The government has announced that a surcharge of 8% is to be imposed on the profits of banking companies. The profits will be calculated on the same basis as for corporation tax, but with some reliefs added back. The surcharge will be levied on profits of banking companies in accounting periods beginning on or after 1 January 2016. Where a company's accounting period straddles 1 January 2016, the period will be split and the surcharge will apply to the profits of the notional period commencing on 1 January 2016.
Specific tax regime for performance-linked rewards for successful investment funds managers
The tax treatment of an award for individuals who manage investment funds successfully will be determined by a consultation aimed at tax practitioners, fund managers, representative bodies, administrators and other interested parties. The consultation is open until 30 September 2015.
Prospective reduction of corporation tax rates to 19% in 2017 and 18% in 2020—because at 20% the UK is already competitive in international terms.
Rupert Shiers, disputes partner, Hogan Lovells: HMRC plan to invite all large businesses to sign up to a new code of practice, apparently extending the bank code of conduct. There will be a consultation on new powers to impose fines on groups that carry out aggressive tax planning, and HMRC have been awarded significant extra resource to investigate corporate tax affairs, including criminal investigations.
Heather Self, partner, Pinsent Masons LLP: The Summer Budget 2015 was a meatier event for companies than might have been expected, with some significant changes.
The reduction in corporation tax to 19% from 2017, and 18% from 2020, will be a welcome surprise, but in cashflow terms it is more than outweighed by the bringing forward of Quarterly Instalment Payments by four months, for companies with profits over £20m.
It is not yet clear how a company can pay its final instalment in the month before the accounting period ends, although draft legislation is to be published in the Autumn.
Rupert Shiers: HMRC plan to generate £8bn by bringing corporation tax payment dates forward by four months, from April 2017.
Heather Self: There is a nasty surprise in the changes to the tax treatment of purchased goodwill. Since the intangible assets regime was introduced in 2002, goodwill has been eligible for tax depreciation—this will cease with effect from 8 July 2015.
It seems unreasonable to introduce such a measure with immediate effect, particularly as it will affect the economics of shares versus asset purchases for transactions already in progress.
There are some technical changes restricting the offset of losses against the controlled foreign companies charge, but no fundamental reform. Businesses will also welcome the lack of any proposals on interest relief, although these may still come through next year after the conclusion of the base erosion and profit shifting project.
Business will welcome certainty over the AIA, now fixed at £200,000, and the confirmation that there will be a renewed corporate tax roadmap published in 2016. The banking sector has also got certainty, but at a price—the combination of a reduced banking levy, but an 8% additional tax on profits will result in additional taxes payable of around £2bn over the forecast period.
Chris Lee, tax adviser and founder, Fiscability UK: Planned reduction in rates to 19% in 2017, and then 18% from 2020, is a pleasant surprise. Less welcome is the unexpected abolition of corporation tax relief for purchased goodwill and other intangible assets. As ever, and unsurprisingly, there are anti-avoidance measures—in this case on offset of losses against controlled foreign company profits and on manipulation of the rules for transfer of trading stock.
Rupert Shiers: The consultation on ‘aggressive tax planning’ should be closely watched—HMRC’s first attempt to define it is unlikely to meet with popular approval.
Heather Self: Even before the dust settles, commercial lawyers should look urgently at M&A transactions to re-assess whether the withdrawal of relief for goodwill makes a significant difference to the deal structure.
After the Summer holiday season, there will be a number of consultation documents to review, including the new corporate tax roadmap and the detailed implications of the changes to the timing of corporation tax payments for larger businesses.
Chris Lee: Advisers will be looking carefully at the rules on intangible assets to see what scope there is for continuing to claim relief, although they may be thwarted given the new rules will operate from Budget day. There are also changes on enterprise investment scheme and venture capital trusts, putting caps on total investment and limiting investment into older companies. These changes will only take effect from the date of Royal Assent to the Finance Act, a few months hence, so there are opportunities for taking advantage of the current rules in the meantime.
‘Every corporate business is set to benefit from a continued reduction in the corporation tax rate which will reduce to 18% by 2020, however, this could be offset by higher costs for employers such as meeting the living wage requirement and the apprenticeship levy.
‘There will also be a wholesale review of how dividends are taxed, the outcome of which seems likely to be that most recipients will be no worse off, and may be better off. However recipients of large dividends from private businesses and holders of large investment portfolios may well lose out.’
David Hill, head of treasury tax, Grant Thornton UK LLP: ‘The changes to the loan relationship and derivative contract rules highlighted in the measure have been developed over two years since the consultation document was originally issued. After the delay caused by the general election, it is good to see these changes being included in the Finance Bill.
The targeted anti-avoidance rule may create some uncertainty for taxpayers as it relies on a purpose test, and similarly, certain conditions for the debt relief provisions feel subjective. It will be interesting to see how these and the other changes take effect in practice, and whether they achieve the simplification of taxation of corporate debt and derivative contracts, as intended by the measure.’
Chas Roy-Chowdhury, head of taxation, Association of Chartered Accountants: ‘It was a very pleasing and important message to send to the global business community to continue to reduce corporation tax. Although a reduction to 18% by 2020 will be welcome Mr Osborne could have gone further by continuing the 1% per year reductions throughout this parliament. We are in a competitive global market and the more we can do to encourage all businesses to the UK, the better the long-term tax yields will be.’
Frank Haskew, head tax faculty. Institute of Chartered Accountants in England and Wales: ‘Significant progress has been made in the last parliament to tackle tax avoidance and the government has started to get on top of tax avoidance, especially through the introduction last year of accelerated payment and follower notices. We need to make sure that further measures are properly targeted so they do not increase costs and burdens on legitimate business activity and growth.’
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.
A full overview of the Summer Budget 2015 can be found on Lexis@PSL Corporate.
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