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Corporate tax update

15 June 2016

Corporate tax update - read more

The main changes from the Finance Bill 2016

As this is my first article since the Budget, it takes a look at some of the main changes to be introduced to corporation tax in this year’s Finance Bill.

Reduction in the rate of corporation tax

In a major surprise, the Chancellor was able to announce that on top of the reductions already announced, the UK’s corporation tax rate will be falling by an additional 1% for the financial year beginning on 1 April 2020. Legislation in the Finance Bill 2016 will set the rate at 17%, replacing the rate set in the Finance (No. 2) Act 2015, which was 18%.

Royalties and withholding taxes

Legislation is to be introduced this year to broaden the scope and increase the number of circumstances in which withholding tax must be deducted from payments of royalties overseas from the UK and also to counter the use of so-called ‘contrived arrangements’ − involving double taxation treaties to obtain relief from withholding taxes on royalties.

These changes are aimed at preventing the use of artificial arrangements which manipulate the existing rules on payments of royalties from the UK to overseas jurisdictions and took effect for payments made on or after 17 March 2016.

The changes to widen the circumstances in which withholding tax must be deducted from payments of royalties will take effect for payments made on or after the date of Royal Assent to the Finance Bill 2016

Patent box changes

The UK’s existing ‘patent box’ regime, under which income from intellectual-property rights can attract a significantly lower rate of corporation tax than normal, is having to be revised significantly. This is from the direct result of considerable lobbying and pressure being brought to bear by other EU member states, particularly Germany.

Legislation is included in Finance Bill 2016 which will change the existing patent box rules so they comply with the new international framework for tax-favoured intellectual property regimes set out by the OECD in October 2015.

The main intention of these changes is to ensure that where a company’s profits do qualify for the reduced rate of corporation tax offered by the patent box regime, then those profits must be are determined only by reference to a company’s ‘direct engagement in R&D. This change will take effect from 1 July 2016.

Loans to participators

In another surprise move, the rate of tax which ‘close’ companies have to pay when they make loans to their shareholders (technically knowns as participators) is being increased sharply. Currently when a close company makes a loan to one of its shareholders it has to pay HMRC a 25% tax bill which can be reclaimed if and when the loan is repaid to the company.

In future, this rate of tax is to be increased to 32.5%. The new legislation will specifically link the rate of tax chargeable on loans or advances to the higher dividend rate of income tax and will apply to loans made or benefits conferred on or after 6 April 2016.

Entrepreneurs’ relief

Several changes are being made to the Capital Gains Tax (CGT) rules on entrepreneurs’ relief. This is largely as the result of realisation that the changes made over the last couple of years are either not working as they were intended to work or are defective in some degree.

Firstly, the legislation is to be changed to clarify that the relief will indeed be due, subject to certain specific conditions against gains arising on the disposal of a privately-held asset (i.e. an ‘associated disposal’), when the accompanying disposal of business assets is to a family member.

Another relaxation will be introduced to ensure that the relief can also be claimed in some cases where the disposal of business assets does not meet the existing 5% ‘minimum size’ condition.

Secondly, the existing legislation will be changed to allow claims to entrepreneurs’ relief in certain cases where the relief ceased to be due inadvertently as a result of changes in Finance Act 2015.

In particular, the relief will henceforward be due against gains arising on the goodwill of a business when that business is transferred to a company controlled by five or fewer persons or by its directors where the person making the disposal has less than 5% of the shares in the acquiring company. This change takes effect for disposals on or after 3 December 2014.

Thirdly, a new set of statutory rules are being introduced by the Finance Bill 2016 to bring in a 10% rate of CGT against gains accruing on the disposal of ordinary shares in an unlisted trading company held by individuals that were acquired for new consideration.

The qualifying gains will be subject to a separate lifetime limit of £10 million. This legislation will apply to qualifying shares bought on or after 17 March 2016 and held for a period of at least three years starting from 6 April 2016.

This was another surprise and was announced as an extension of entrepreneurs’ relief. Although when one looks at the legislation closely it is in effect a brand new relief, targeting longer-term investors in shares in close companies who would otherwise probably not qualify for entrepreneurs’ relief.

Business tax strategies

New rules are to be introduced which will require ‘large businesses’ to publish their tax strategies in relation to UK taxation. Clearly the Chancellor is responding to the recent media and public attention to the apparent tax avoidance activities of some larger companies and is seeking to encourage greater transparency among the large business community.

Tax relief for interest

Some new rules are to be introduced which will seek to limit the tax relief that companies can currently claim for the interest they pay against their borrowings. Although the full details are yet to be announced it looks very likely that this will result in the introduction of yet more complex and wide-reaching anti-avoidance rules. The changes are to take effect from 1 April 2017.

Changes to the Loss Relief Rules

It what many commentators have already welcomed as a long-overdue reform the legislation which currently governs the availability of relief for corporate losses carried forward from earlier periods is to be reviewed and revised.

The intention is to give companies ‘more flexibility by relaxing the way in which they can use losses arising on or after 1 April 2017 when they are carried forward’. The intended effect is that brought forward losses will be useable against profits from different types of income and other group companies.

This change will simplify corporation tax calculations considerably and will also potentially do away with the long-standing ludicrous situation where a company can have huge losses brought forward but end up paying corporation tax in a current year on a small amount of investment income because the loss cannot be set off against that ‘different source’.

On the other hand a new restriction is to be introduced for companies or groups with profits above £5 million so that their use of carried forward losses will be reduced to the extent that they will not be able to reduce their profits arising on or after 1 April 2017 by more than 50%.

Russell Cockburn is an independent tax consultant

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