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This analysis is part of the Lexis®PSL Tax team’s summary of the Autumn Budget 2017. Some of the links require a LexisPSL subscription. If you are not a subscriber, you can take a free trial here.
Corporate capital gains indexation allowance
The government has announced that indexation allowance (see Practice Note: How is a capital gain calculated? — Indexation allowance for companies), which has been available to reduce the chargeable gains of companies on account of inflation, will be frozen from 1 January 2018. Any disposal on or after that date will be entitled only to the indexation allowance that would be due based on the RPI for December 2017.
The removal of this relief is designed to bring the UK into line with other major economies and broaden the tax base. Legislation will be included in FB 2018.
See: Autumn Budget 2017 (para 3.31), OOTLAR (para 1.31) and TIIN: Corporation Tax: removal of capital gains indexation allowance from 1 January 2018.
Increasing the rate of the R&D expenditure credit
FB 2018 will include legislation increasing the rate of the R&D expenditure credit (see Practice Note: R&D expenditure credit) from 11% to 12%. The increase will take effect in respect of expenditure incurred on or after 1 January 2018.
See: Autumn Budget 2017 (paras 3.26 and 4.18), OOTLAR (para 1.26) and TIIN: Corporation Tax: increasing the rate of Research and Development expenditure credit.
Capital gains depreciatory transactions
The government has announced that FB 2018 will contain provisions removing the six-year time limit that currently limits the scope of the depreciatory transaction rules (see Practice Note: Depreciatory transactions and dividend stripping).
Currently, where a company claims a capital loss on the disposal of shares or securities in a subsidiary, it is required to adjust its calculation for any depreciatory transactions that materially reduced the value of those shares or securities within the six years prior to the disposal. The change will remove the time limit on the look-back so that any depreciatory transactions taking place on or after 31 March 1982 would need to be taken into account. The aim is to ensure that any losses claimed by a group are in line with the genuine economic loss suffered and to prevent groups circumventing the depreciatory transactions rules by simply holding on to a subsidiary for six years.
The removal of the time limit applies to disposals made on or after 22 November 2017, although an earlier commencement date will apply where a negligible value claim is made on or after 22 November 2017 and, pursuant to that claim, a disposal is treated as taking place prior to that date.
See: Autumn Budget 2017 (para 3.74), OOTLAR (para 1.30) and TIIN, draft legislation and explanatory notes: Corporation Tax: capital gains depreciatory transactions within a group.
Intangible fixed assets: related party step-up schemes
FB 2018 will include legislation ensuring that the market value rule (see Practice Note: Intangible fixed assets transactions between related parties — Market value) applies to related party licence arrangements in respect of intangible fixed assets. This measure is aimed at preventing ‘step-up’ avoidance schemes, which work by creating a increase in the transaction value between the amount recognised by the licensor and the licensee. Legislation was included in Finance (No. 2) Act 2015 to counter step-up avoidance schemes involving a transfer of intangible fixed assets and this measure extends those provisions to the grant of a licence between related parties.
FB 2018 will also include related legislation confirming that all disposals involving non-cash consideration are taxed in line with those involving cash consideration. The revisions ensure that the market value of the non-cash consideration is recognised for accounting purposes. This measure applies to all disposals and not just licensing arrangements.
The measures have immediate effect, applying to transactions occurring on or after 22 November 2017.
See: Autumn Budget 2017 (para 3.73), OOTLAR (para 1.23) and TIIN, draft legislation and explanatory notes: Corporation Tax: intangible fixed assets - related party step-up schemes.
Entrepreneurs’ relief after dilution of holdings
Entrepreneurs' relief is a CGT relief designed to encourage individuals to set up and expand their own businesses. Where the conditions are satisfied, the relief reduces the rate of CGT on the sale of certain business assets to 10% (see Practice Note: CGT—entrepreneurs' relief).
The government has announced that it will consult on how to enable individuals to access entrepreneurs’ relief where their company holding is reduced below the 5% qualifying level following a new share issue that is undertaken to raise funds from external investment. The stated aim of extending the relief in these circumstances is to encourage entrepreneurs to remain involved in their business even after obtaining external funding and the consultation will take place in spring 2018.
It seems plausible that this consultation comes off the back of the perceived injustice of the recent decision of the Upper Tribunal in McQuillan. In that case the taxpayers were denied entrepreneurs’ relief because their shareholdings had been diluted as a result of the existence of other shares that had started out as a loan, but as a pre-condition of obtaining a government grant had been converted, whilst retaining their original economic substance. For more on this case, see News Analysis: Shares with no dividend rights were not ordinary share capital (McQuillan v HMRC)).
See: OOTLAR (para 2.36).
The government has announced that it will not be extending disincorporation relief beyond its 31 March 2018 expiry date. This date is already enacted, so no legislation is required as a result of this announcement.
Finance Act 2013, ss 58–61 provides that, with effect for disincorporations between 1 April 2013 and 31 March 2018 inclusive, joint claims may be made by a company and its shareholders to allow goodwill or interests in land not held as trading stock to be transferred at a reduced value so that no corporation tax will be payable by the company on the transfer. Relief is restricted to cases where the market value of the assets does not exceed £100,000.
Disincorporation relief was introduced following research by the Office of Tax Simplification (OTS) into small businesses that may feel trapped in a more onerous tax regime for companies and that may welcome moving to a simpler business form. The OTS drew attention, in a focus paper published on 26 July 2017, to the low take-up of the relief, with only 50 claims having been made up to March 2016. The OTS reported that there is still an appetite for small businesses to disincorporate, and suggested ways that the relief could be improved to increase take-up.
There is no explanation for the Autumn Budget 2017 announcement that the relief will be allowed to expire, although it seems safe to assume that the decision is connected with the very low number of claims.
See: OOTLAR (para 2.23)
Increasing certainty and awareness of R&D tax credits
To increase certainty for large businesses making R&D expenditure credit claims, the government has announced it will pilot a new advanced clearance service providing pre-filing agreements for three years. This will be accompanied by a government campaign to increase awareness of eligibility for R&D tax credits among SMEs.
See: Autumn Budget 2017 (para 4.18) and OOTLAR (para 2.24).
CGT: taxation of carried interest
FB 2018 will include legislation to remove, with immediate effect, the transitional commencement provisions which apply to carried interest arising in connection with asset disposals before certain dates in 2015. The commencement provisions relate to carried interest arising to an investment manager in connection with a disposal of partnership assets before 8 July 2015 and the application of provisions in the disguised investment management fee rules which determine the time at which amounts of carried interest arise to a manager. The transitional rules will not apply to carried interest arising on or after 22 November 2017.
See: Autumn Budget 2017 (para 3.75), OOTLAR (para 1.29), and TIIN, draft legislation and explanatory notes: Capital Gains Tax: carried interest.
LexisPSL subscribers can access all analysis and insight on the Autumn Budget 2017. If you are not a subscriber, you can take a free trial here.
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