Today’s Autumn Statement saw financial institutions hit by a surprise proposal to limit the proportion of their profits which can be reduced by the carry forward of past losses, which will mean tax is paid on those profits earlier than it would otherwise have been. Also unexpected was the decision to replace the unpopular "slab" basis of SDLT with a "slice" approach. We saw more detail on the BEPS-related proposals on hybrid mismatches and a "diverted profit tax" for multinationals.
RESTRICTION OF LOSS CARRY FORWARD FOR BANKS AND BUILDING SOCIETIES
The Government is proposing to introduce legislation in Finance Bill 2015 to restrict the carry forward by banks and building societies of certain losses accrued before 1 April 2015. The limit is intended, broadly, to prevent them from using those losses to offset more than 50% of their profits (computed in the absence of those losses). The effect of this change should be to bring profit from the banking sector into the charge to corporation tax at an earlier stage than it would otherwise have been.
The Government’s concern is that these entities will have accumulated significant losses during the financial crisis and it is therefore "unfair" for them to use those losses to eliminate tax on recovering profits.
The measure will apply to trading losses, non-trading loan relationship deficits and management expenses accrued before 1 April 2015 and the limitations will be operative for accounting periods commencing on or after that date. Reliefs accruing after 1 April 2015 will not be affected.
The rules are relatively detailed as they introduce entirely new provisions. Significant elements include anti-avoidance measures to prevent the accelerated use of losses prior to commencement of the rules and to prevent the artificial enhancement of profit in affected entities. There are also measures designed to ensure operation of the limitation in group situations. It is interesting to see that the rules contain their own definition of bank rather than adopting the definition used for the bank levy – whether there is any significance in this remains to be seen.
There is an exclusion for losses incurred in the first five years of the commencement of a banking business. This is consistent with the "fairness" aim of the legislation and is intended to ensure that expenses incurred on entering the banking sector are not subject to limitations.
Although there have been previous suggestions of limits on loss relief following the financial crisis, the measure is likely to come as a surprise to the financial sector and it is of course in addition to the bank levy. Some financial institutions may need to look again at the value of their deferred tax assets.
As trailed in October 2014, a consultation document headed "Tackling Aggressive tax Planning" was released today. This sets out the UK’s proposals to give effect to the recommendations of Action 2 (neutralisation of the effect of hybrid mismatch arrangements) of the OECD base erosion and profit shifting (BEPS) project.
The mismatch proposals are intended to address cross-border situations where either one party gets a tax deduction for a payment while the other party does not have a taxable receipt or where there is more than one tax deduction for the same expense. The aim is to ensure that an expense gives rise to a single tax deduction which is contingent on the corresponding receipt being included in the recipient’s taxable income.
The UK proposals follow the key recommendations of the OECD report and are intended to work even if equivalent rules are not universally adopted in other jurisdictions. The proposals seek to address mismatches involving both hybrid instruments and hybrid entities and they are intended to apply to domestic as well as cross border arrangements.
There is a primary rule which denies a tax deduction in the payer’s jurisdiction where there is a deduction but no inclusion or a double deduction. Alternatively, where there are no mismatch rules in the other jurisdiction or the primary rule does not apply, there is a secondary (defensive) rule that requires the payment to be included as ordinary income in the recipient jurisdiction.
The proposals apply to arrangements which involve related parties and to arrangements which are "structured arrangements" which are, broadly, arrangements where it is reasonable to assume that the hybrid mismatch is priced into the arrangement or the circumstances indicates that it is an intended feature.
In contrast to existing UK anti-hybrid legislation (the arbitrage rules and the group mismatch rules) there is no specific purpose test and there is also no need to determine whether either jurisdiction has lost any revenue. If the proposals are enacted it is expected that the arbitrage rules will be repealed.
The consultation document acknowledges that there are certain areas where agreement still needs to be reached – these include certain capital markets transactions such as repos and on-market stock lending.
The document also confirms that policy choices have been left to individual countries in relation to hybrid regulatory capital and the interaction of the hybrid rules with controlled foreign company provisions.
As regards hybrid regulatory capital securities, the document acknowledges that the UK is committed to ensuring that any mismatch rules do not adversely affect properly issued bank regulatory capital which is loss absorbing but treated as debt for tax purposes.
In relation to regulatory capital, the document confirms that mismatch rules should not generally impact UK banks issuing securities directly to third party investors. The concern is instead in relation to intra-group transactions which are often necessary where (for example) a bank must for regulatory purposes issue from a holding (or intermediate) company and then on-lend the capital under a similar instrument to another group company. The document acknowledges the issue and proposes two potential approaches. The first involves comparing the amount of hybrid capital issued externally with the amount issued intra-group and applying the mismatch rules to the excess only. The second involves allocating hybrid capital issued externally around a group's subsidiaries according to their risk weighted assets and applying the mismatch rules to the excess. Helpfully, the document acknowledges that similar issues may be relevant for insurers and that any proposals should accommodate them too.
It will be interesting to see the response to this consultation. If the proposals are adopted, they will mark a significant shift in UK anti-avoidance legislation as its focus has to date generally been on arrangements designed to give rise to advantages in relation to UK taxes only.
The consultation starts on 3 December 2014 and closes on 11 February 2015. The rules, if introduced, are intended to have effect from 1 January 2017. No grandfathering rules are contemplated.
LATE PAID INTEREST RULES REPEALED
A tax planning arrangement involving the "late paid" interest rules has been closed down. The late paid interest rules were introduced in 1996 to prevent timing asymmetries arising where a UK borrower claimed deductions for accrued (but unpaid) interest or discount and a connected non-UK lender was only taxed when that interest or discount was paid. In 2009 the scope of the rules was limited to loans from "tax havens"; there was a concern that a wider application was contrary to EU law.
The rules have been used for tax planning because deductions on a paid basis allow the borrower to choose the accounting period in which the deductions arise – which can be useful for the efficient use of losses against profits within a group. HMRC has announced that, to stop this planning, legislation will be introduced in Finance Bill 2015 to repeal these rules for loans advanced on or after 3 December 2014. The rules will continue to apply to existing loans until 31 December 2015, unless material changes are made to the loan in the interim.
The Government confirmed that it will legislate in Finance Bill 2015 to strengthen the disclosure of tax avoidance schemes (DOTAS) regime. This follows on from a consultation on strengthening DOTAS launched at the end of July 2014. The Government intends (among other things) to update existing DOTAS "hallmarks", introduce new hallmarks, and remove the benefit of grandfathering from DOTAS for certain types of avoidance scheme. Although not stated explicitly, the changes are likely to include the introduction of a new "financial products" hallmark. The consultation proposed a very wide financial products hallmark which could be expected to apply to a range of commercial transactions with tax-driven features, thus significantly widening the ambit of DOTAS. It remains to be seen whether HMRC will narrow the earlier proposals to any degree.
Additionally, it has been announced that the Government will include additional new powers in Finance Bill 2015 for it to publish summary information about promoters and schemes notified under the DOTAS regime, and will create a new DOTAS task force within HMRC to bolster the enforcement and administration of DOTAS.
Last year the Government introduced a new regime for "high-risk" tax promoters, intended to identify high-risk scheme promoters and subject them to onerous new rules including extensive reporting powers and high financial penalties for non-compliance. The Government has announced that it intends to make some technical changes to this legislation to ensure that it works as intended.
RETURNING CASH TO SHAREHOLDERS - B SHARE SCHEMES
Legislation will be introduced in Finance Bill 2015 to prevent companies returning excess cash to shareholders in capital form through the use of so-called "B share schemes", under which shareholders are given the choice whether to receive their return as income or capital. From 6 April 2015, returns received through the use of B share schemes will be taxed in the same way as dividends.
CANCELLATION SCHEMES OF ARRANGEMENT – STAMP DUTY
Many UK company takeovers are carried out using a scheme of arrangement under the Companies Act 2006. A scheme can take the form of a cancellation scheme, under which the existing shares in the target company are cancelled and new shares in the target company are issued to the acquirer, or a transfer scheme under which the existing shares in the target company are transferred to the acquirer. A cancellation scheme does not result in a charge to stamp duty, while a transfer scheme, which achieves the same end result, does.
The Government wishes to prevent cancellation schemes being used to avoid stamp duty in this way. Unusually, it seems that the intention is to introduce regulations and/or amendments to the Companies Act 2006 in order to prevent the use of such cancellation schemes in company takeovers, rather than simply introducing an amendment to the stamp duty treatment of cancellation schemes. Draft legislation is expected early next year.
WITHHOLDING TAX EXEMPTION FOR PRIVATE PLACEMENTS
The hoped for withholding tax exemption for interest on private placements will be introduced in Finance Bill 2015. There is little detail on the scope of this exemption, other than that it will apply to unlisted and long-term non-bank debt financing, and it is intended to unlock new finance for both businesses and infrastructure projects. It will be helpful that borrowers will not be required to apply for treaty relief for interest on private placements. On its face, this change could put non-UK bank lenders at a disadvantage to other non-UK lenders, although we would hope their positions will be aligned.
CONSORTIUM RELIEF – LINK COMPANIES
Legislation will be introduced in Finance Bill 2015, effect from 10 December 2014, to simplify the legislation on consortium relief so that all requirements relating to the location of the "link company" for consortium claims will be removed. Currently, claims or surrenders where one company is owned by a consortium and the other company is in the same group as a member of that consortium (the "link company") can only be made if the link company is UK tax resident, has a UK permanent establishment or is established in the European Economic Area.
The Government has made a number of announcements relating to research and development (R&D) tax credits. Legislation will be introduced in Finance Bill 2015, to increase the rate of the above the line credit from 10% to 11% and the rate applicable to allowable R&D costs under the Small and Medium-sized Enterprise Scheme from 225% to 230%, in both cases with effect from 1 April 2015. Legislation will also be introduced in Finance Bill 2015 which will restrict qualifying expenditure for R&D tax credits so that the cost of materials incorporated in products that are sold will not be eligible for relief. An advance assurance scheme for small businesses making their first claim for R&D tax credits will be introduced together with new guidance on R&D tax credits.
A separate consultation on the issues faced by small businesses when claiming R&D tax credits will be launched in January 2015.
OTS REVIEW OF UK TAX COMPETITIVENESS
The Government has accepted and will "further consider" 51 of the 58 recommendations made by the Office of Tax Simplification (OTS) in its report on the competitiveness of the UK tax administration. Given that some of those recommendations were quite ambitious, it will be interesting to see what is finally proposed. Some of the OTS’s key recommendations are: aligning taxable profits with accounting profits more closely; consider replacing capital allowances with accounts depreciation; testing whether corporate capital gains tax can be largely abolished; taxing businesses profits rather than streaming trading and investment results; reviewing the debt cap and transfer pricing rules to test their effectiveness and reduce the burdens that they impose; and (to the extent possible) harmonising and integrating income tax and national insurance contributions. There is no indication of which of these headline ideas make the grade for further consideration or when we will be given more detail on this. However, the Government has started work.
DIVERTED PROFITS TAX
As part of a number of measures announced to counteract BEPS, the Government will include legislation in Finance Bill 2015 to introduce a new diverted profits tax to counter the use of aggressive tax planning to avoid paying tax in the UK. The stated intention is to counter the use of artificial arrangements by UK and non-UK headed multinationals to divert profits overseas in order to avoid UK tax, by applying the new tax at a rate of 25% with effect from 1 April 2015. Little further detail is currently available, but the Chancellor of the Exchequer suggested that the targets of the tax would be some of the world’s biggest multinational companies, including those in the technology sector, which are using elaborate structures to avoid tax. The Chancellor indicated that he expects this measure to yield over £1 billion in the first five years following its introduction. The published material suggests that the tax will counter complex structures such as the "double Irish" structure. It will be interesting to see how the Government intends to achieve the policy objectives of this proposal once draft legislation is published.
Legislation will be introduced in Finance Bill 2015 to enable the UK to implement the OECD’s model for country-by-country reporting. These rules will require multinational enterprises to provide high level information to HMRC on their global allocation of profits and taxes paid, as well as indicators of economic activity, in each country to help HMRC (and tax authorities in other jurisdictions which adopt the standard) to identify and assess tax avoidance risks efficiently. The Government sees itself as leading the way on the international project to prevent BEPS, and the early adoption of this standard can be seen as a demonstration of the Government’s commitment to the project. Draft legislation is not yet available, although it is expected that the rules will broadly adopt the reporting standards set out in the Guidance on Transfer Pricing Documentation and Country-by-Country Reporting published by the OECD in September 2014.
SDLT RATES FOR RESIDENTIAL PROPERTY
One of the headline-grabbing announcements was the reform to the rates of stamp duty land tax (SDLT) payable on residential property, with a move to a "slice" rather than a "slab" basis of taxation. For purchases completing on or after 4 December 2014, new SDLT rates will be applicable and will apply to the portion of the property value which falls within each band, rather than tax being due at one rate on the entire value. No prior announcement was made, to prevent forestalling by purchasers and any resulting disruption of the housing market. The SDLT rates on purchases of commercial property remain at the existing rate (4% on properties over £500,000). There are transitional rules for those who have exchanged contracts before 4 December 2014. These changes will be included in a new Stamp Duty Land Tax Bill 2014.
The measures will result in an increase in the amount of SDLT payable on purchases of residential property above £1.125 million (and between £937,500 and £1 million) but should result in the same or (in most cases) less tax on purchases of residential property below £937,500. The Government has projected a reduction in the annual tax take of up to £850 million as result of these changes, stating that up to 98% of people will pay less SDLT under the new system. Taking a slicing approach brings the rest of the UK into line with the approach announced earlier this year for the new Scottish land and buildings transaction tax.
CGT FOR NON-UK RESIDENTS SELLING UK RESIDENTIAL PROPERTY
At last year’s Autumn Statement, the Government announced its intention to charge capital gains tax on non-UK residents selling UK residential property. On 27 November 2014, shortly before Autumn Statement 2014, the Government published a document setting out its response to the consultation on this proposal that ran earlier in 2014.
The response document confirms that the focus of the charge is private investors and that it is not intended to disrupt investment in the UK housing market by international institutional investors. The new rules will seek to achieve this by providing exclusions from the charge for entities that are widely-held or are ultimately controlled by institutional investors. The tests will look through a chain of holding companies to the ultimate investors, which reflects the way in which these investments are typically structured. The response document states that the rates of tax for non-residents will reflect the rates payable by UK residents, so 18% or 28% for individuals and trustees and 20% for corporates. The Government has also confirmed that the tax will be levied through a form of self-assessment as opposed to introducing a withholding obligation, as had originally been proposed. Legislation to effect this change will be included in Finance Bill 2015.
Oil and gas
REDUCTION IN RATE OF SUPPLEMENTARY CHARGE
The Government has announced an immediate reduction in the rate of supplementary charge for ring fence profits from 32% to 30%, taking effect on 1 January 2015. This will be legislated in Finance Bill 2015. To encourage additional investment and drive higher production, the Government will also aim to reduce the rate further, but only when this can be done in an affordable way.
EXTENSION OF RING FENCE EXPENDITURE SUPPLEMENT
To maintain the time value of oil extraction expenditure, ring fence expenditure supplement enhances the value of unused allowances or losses for oil companies which are unable to make immediate use of them. The ring fence expenditure supplement will now be extended from 6 to 10 accounting periods for offshore oil and gas activity (so aligning its treatment with that for onshore projects), and again legislation for this will be included in Finance Bill 2015.
NEW CLUSTER AREA ALLOWANCE
Following a consultation over the summer, the Government has announced it will include legislation in Finance Bill 2015 to introduce a new cluster area allowance to support investment in the development of high pressure, high temperature projects (HPHT), and to encourage expenditure and appraisal activity in the surrounding area (or cluster). HPHT projects are technically demanding, reflecting the decline in North Sea resources, and would not be commercially viable if companies suffered tax at the supplementary charge without relief. The allowance will therefore be set at 62.5% of qualifying capital expenditure incurred in relation to a cluster area on or after 3 December 2014, and will reduce the company’s ring fence profits subject to the supplementary charge.
REVIEW OF OIL AND GAS FISCAL REGIME
Further announcements following on from the review of the fiscal regime for the UK continental shelf are expected on 4 December 2014.
RAISE IN PERSONAL ALLOWANCE AND HIGHER RATE THRESHOLD
Legislation will be included in Finance Bill 2015 to provide that from April 2015, the income tax personal allowance will increase from £10,000 to £10,600 and the higher rate threshold will be increased from £41,865 to £42,385.
INCREASES IN REMITTANCE BASIS CHARGE FOR NON-DOMICILES
The annual charge payable by non-domiciled individuals, who are resident in the UK and who wish to be charged to tax on a remittance basis, will be increased from £50,000 to £60,000 for those individuals who have been UK resident for at least 12 of the immediately preceding 14 years.
A new annual remittance basis charge of £90,000 will be introduced for individuals who have been UK resident for at least 17 of the immediately preceding 20 years. The £30,000 annual remittance charge applicable to individuals who do not meet the 12 year residence test, but have been UK resident for at least seven of the immediately preceding nine years will remain unchanged. All of these changes will be included in Finance Bill 2015.
The Government will also consult on increasing the minimum period for which an individual can opt to claim the remittance basis of taxation to three years.