The new Chancellor Philip Hammond has a reputation as being a safe pair of hands, so we weren't expecting fireworks from his first Autumn Statement. The emphasis was on productivity, housing, infrastructure and getting Britain "match-fit" for the post-Brexit era. With a new government, we had the inevitable announcement of new fiscal rules for the management of public finances.
On tax policy, the speculation over the future direction of the UK corporation tax rate following the Brexit referendum has now been settled – there will be no further cuts ahead of scheduled reductions of the rate to 19% in April 2017 and to 17% in April 2020, contrary to what the Chancellor's predecessor had indicated days before he was relieved of his duties.
The Chancellor reinforced the UK's leadership role in implementing the OECD's BEPS recommendations by confirming that major new restrictions on interest deductibility to 30% of taxable earnings in the UK will be introduced with effect from 1 April 2017, and he will have shocked the banking and insurance sectors by confirming that they will not be treated differently to any other sector.
On the domestic front, the Chancellor confirmed that the government will legislate to restrict the utilisation of carried forward tax losses against current year profits by 50% from April 2017, but it will liberalise the use of losses incurred after that date. There were also major announcements affecting employee taxation and owner-managers, many of which will be significant revenue-raisers, and which will affect a large number of businesses.
The Chancellor also announced that this would be his first and last Autumn Statement. Next year, the Budget will take place as normal in the Spring, and there will be a second Budget in the Autumn, replacing the Autumn Statement. In the following year, the annual Budget will take place in the Autumn, and there will be a Spring Statement, but no significant fiscal changes unless unexpected changes in the economy require it.
All in all, this was a relatively quiet event for large businesses with few unexpected announcements, which will come as a relief after the significant measures enacted following this year's Budget in March, but there is every reason to think that there is much more to come next year.
- BEPS Action 4: Following the consultation launched in May 2016, the Government has confirmed that it will introduce rules that limit the tax deductions that large groups can claim for their UK interest expenses from 1 April 2017. These rules will limit deductions where a group has net interest expenses of more than £2 million, net interest expenses exceed 30% of UK taxable earnings and the group’s net interest to earnings ratio in the UK exceeds that of the worldwide group. This measure is likely to have a significant impact on the cost of capital for large multinational businesses, especially when external funding is raised in the UK, consistent with the original estimated exchequer impact of approximately £1bn annually.
No further details of the legislation were announced and therefore key issues remain outstanding, including the impact on commercial arrangements such as hedging and cash pools. The Government has however today confirmed that it will widen the provisions proposed to protect investment in public benefit infrastructure and that banking and insurance groups will be subject to the rules in the same way as groups in other industry sectors.
- Corporation tax losses: The Government has confirmed its intention to introduce significant changes to the rules regarding the use of corporation tax losses from 1 April 2017. Although the changes will result in greater flexibility for groups to use carried forward losses within a company and against the taxable profits of other group members, this change is expected to only apply to losses arising post 1 April 2017 and therefore groups will need to keep track of losses arising pre and post 1 April 2017. More importantly, and in a move that is likely to raise significant revenue for the Government, the amount of profits which can be sheltered within a group with carried forward losses will be limited to 50%, subject to an annual £5 million allowance per group. This will result in many groups which have significant carried forward losses and which were not expecting to be tax paying for a number of years suddenly being in a tax paying position post 1 April 2017.
- Substantial Shareholdings Exemption: Since 2002, the UK has had a form of participation exemption – the substantial shareholdings exemption – which can apply to exempt capital gains arising from certain disposals of shares in trading companies by corporate shareholders. In May 2016, the Government launched a consultation to consider a range of possible reforms designed to make the SSE regime simpler, more coherent and more internationally competitive with similar participation exemption regimes in other European countries. Yesterday the Government confirmed that the exemption will indeed be changed from April 2017 with the aim of meeting these policy objectives. As well as a general simplification of the rules, it will no longer be necessary for a corporate shareholder to be a member of a trading group and the regime will be extended to apply on a more comprehensive basis to disposals of shares in companies owned by qualifying institutional investors. Taken together, these changes are likely to result in the exemption being available to a wider range of investors and taxpayers such as private equity and sovereign wealth funds, who may not previously have met the conditions. This is a welcome change and is part of the UK's continuing efforts to be recognised as one of the most attractive locations for investment and the establishment of holding companies.
- Anti-hybrid mismatch rules: The Government has announced that it intends to legislate to amend the anti-hybrid rules in the Finance Bill 2017, to make "minor changes" to ensure that the legislation works as intended. The changes are intended to have effect from 1 January 2017. The Government has indicated that the changes will concern financial sector timing claims and the rules on amortisation deductions.
Real Estate Tax
- The taxation of UK real estate has perhaps been subject to more change in the last 5 years than any other area of tax. In continuing this trend, the Government has announced a consultation next year on bringing non-UK resident companies that receive UK taxable income into the corporation tax regime. If this change is implemented, it would be a major change to the way non-UK resident corporate landlords are taxed and would bring them within the scope of UK corporation tax rather than being subject to UK income tax as is currently the case. It would also ensure that non-UK resident corporate landlords are subject to the same limitations in respect of interest expense deductibility as UK resident corporate landlords. This would also presumably equalise the rate of tax on rental income given that non-UK resident corporate landlords will be subject to a 19% corporation tax rate from April 2017 whereas a non-UK resident corporate landlord is currently subject to 20% income tax on net rental profits. It remains to be seen whether the Government will then seek to ensure gains arising to non-UK resident corporate landlords on a disposal of UK commercial property are subject to UK corporation tax to really level the playing field in the taxation of UK real estate.The taxation of UK real estate has perhaps been subject to more change in the last 5 years than any other area of tax. In continuing this trend, the Government has announced a consultation next year on bringing non-UK resident companies that receive UK taxable income into the corporation tax regime. If this change is implemented, it would be a major change to the way non-UK resident corporate landlords are taxed and would bring them within the scope of UK corporation tax rather than being subject to UK income tax as is currently the case. It would also ensure that non-UK resident corporate landlords are subject to the same limitations in respect of interest expense deductibility as UK resident corporate landlords. This would also presumably equalise the rate of tax on rental income given that non-UK resident corporate landlords will be subject to a 19% corporation tax rate from April 2017 whereas a non-UK resident corporate landlord is currently subject to 20% income tax on net rental profits. It remains to be seen whether the Government will then seek to ensure gains arising to non-UK resident corporate landlords on a disposal of UK commercial property are subject to UK corporation tax to really level the playing field in the taxation of UK real estate.
Oil & Gas
- Whilst there have been no announcements on significant changes to the UK oil and gas tax regime, the Chancellor confirmed the Government's commitment to ensure the UK oil and gas tax regime continues to support recovery from the UK continental shelf as the basin matures. The specific activities to be encouraged include exploration, cost effective asset stewardship and cost effective decommissioning.
- The Government has worked collaboratively with industry since the December 2014 reform of the fiscal regime, and whilst that collaborative approach failed to secure HMRC Oil & Gas resources in Aberdeen, it has led to discussions on measures of interest, including (i) a basin-wide investment allowance, (ii) tax incentives to encourage investment in the UK continental shelf throughout the field life cycle and (iii) simplification of the administration of Petroleum Revenue Tax so that the opt-out procedure is made much more straight forward (by election in writing and notification to HMRC). In addition, oil allowance and tax liability instalment reporting requirements are removed for the relevant PRT Forms. These changes are welcomed, as is the Government's commitment to promote certainty and simplicity in the tax system more generally.
- Patent Box: From 1 April 2017, where two or more companies carry out R&D under a cost-sharing agreement, there will be no adverse impact on the amount of their income qualifying for the reduced rate of tax under the patent box, provided that they incur expenses in proportion to their respective shares of income under the agreement. This will allow multinational companies more flexibility to structure their global R&D functions whilst satisfying the modified nexus rules.
- R&D: A focus on the UK R&D environment will be a welcome part of the UK's tax strategy for those considering such investment in the UK. This support will in part take the form of a new 'Industrial Strategy Challenge Fund' designed to set 'identifiable challenges for UK researchers to tackle'. What this means in practice remains to be seen. Also announced is a review of the R&D tax environment to 'make the UK an even more competitive place to do R&D.'
- Closure notice rules: The Government will legislate to reform the closure rules for HMRC enquiries to provide HMRC and customers "earlier certainty" on individual matters in large, high-risk and complex tax enquiries. It is unclear what these changes might be. At present, once HMRC has opened an enquiry into a company tax return there is no deadline for HMRC to close the enquiry, although taxpayers have the right to apply to the First-tier (Tax) Tribunal for a direction requiring HMRC to close the enquiry. Any rule that creates a long-stop date for enquiries in complex matters is likely to be positive in creating momentum in drawn out enquiries, but equally may push more cases to litigation where settlement cannot be achieved within the statutory timeframe.
- Countering avoidance: The government has announced that it intends to invest further in HMRC to increase activity on countering avoidance and taking cases forward for litigation, with an expected additional £450 million in scored revenue by 2021-22. This continues a trend of increasing resources within HMRC to tackle perceived tax avoidance.
- Penalties for "enablers" of tax avoidance: The Government confirmed that it will introduce sanctions and deterrents for those who "enable" tax avoidance. It is expected that penalties of this type will apply to professional advisers who promote and facilitate aggressive tax avoidance schemes, although the scope of the initial proposals was very broad, so it remains to be seen whether the Government will respond to representations for the regime to be more narrowly-focused.
- Reasonable care: It was confirmed that where non-independent advice is taken by a taxpayer, HMRC (when considering penalties for using arrangements within the scope of the new "enablers" rules) will not regard "reasonable care" as having been exercised.
- Penalties for VAT fraud: The Finance Bill 2017 will introduce a fixed 30% penalty for Kittel fraud where HMRC alleges that a company knew or should have known that they were trading in a supply chain tainted by VAT fraud. This reform comes from a consultation paper which also proposed that companies would have limited scope to mitigate the 30% penalty and that HMRC could name and shame company officers and seek to recover the penalties directly from them.
- VAT Disclosure Regime: There are currently two disclosure regimes to monitor avoidance schemes: the Disclosure of Tax Avoidance Schemes (DOTAS) for direct taxes; and the VAT Disclosure of Avoidance Schemes (VADR) for VAT. The proposal seeks to align the VADR with DOTAS, which has been by far more successful in allowing HMRC to identify and monitor avoidance schemes. The main changes will be to (a) require "promoters" of VAT schemes to disclose the schemes directly to HMRC and (b) to include general "hallmarks" in order to identify the schemes which need to be reported under the regime. The result of this reform will be that businesses considering financial products or structures which achieve VAT savings will need to consider carefully the published hallmarks and consider whether disclosure will be necessary. Disclosure, in turn, might increase the risk of audits from HMRC.
- Reporting of profits: As part of the 2016 Budget and following the Office of Tax Simplification review, a consultation to develop changes to partnership taxation was launched in August 2016. The consultation is relevant to all forms of partnerships, including foreign entities classified as partnerships for UK tax purposes. Its aim is to remove uncertainties by making the calculation and reporting of partnership profits easier.
- Funds partnerships: The proposals include requiring profit shares to be allocated based on the profit-sharing arrangements in the partnership agreement. Some proposals are relevant to partnerships operating in specific areas, such as funds. In particular, the Government proposes to amend the return and filing requirements for investment funds structured as partnerships whose only income is from investments and whose partners are non-UK resident persons. The consultation makes no specific proposals although a number of suggestions were made at the consultation stage. These include carving non-UK partners out from the existing rules provided they satisfy certain reporting requirements under other regulations. It is expected that the new rules will significantly simplify the compliance burden of most alternative asset funds, such as those structured as limited partnerships. The Government has now confirmed that it will publish draft legislation for technical consultation.
- Disguised remuneration: The disguised remuneration rules (see "Employee Benefits") will be extended to self-employed persons, so these could also affect partners.
- Employee shareholder status: Tax benefits for employee shareholder status will be abolished for arrangements entered into on or after 1 December 2016. Tax advantages will remain for those arrangements entered into before that time. From 1 December, employees will no longer be able to receive £2,000 worth of shares tax free and there will be no capital gains tax relief when those shares are subsequently sold. The abolition of these tax advantages is expected to raise an additional £10m annually. From an employment law perspective, this status will be closed at the earliest opportunity.
- Salary sacrifice: Tax benefits for all salary sacrifice arrangements will cease from April 2017, except for arrangements relating to pensions, childcare, Cycle to Work and ultra-low emission cars. Grandfathering of existing arrangements will apply until April 2018 (or April 2021 for arrangements for cars, accommodation and school fees). The removal of these benefits is expected to raise an additional £85m in 2017/18 from additional income tax and NICs, rising to £235m in the following year.
- Termination payments: As previously announced, termination payments above £30,000 will be subject to employer NICs from April 2018. Under the changes announced today, tax will only be applied to the equivalent of an employee's basic pay if their notice is not worked.
- NICs thresholds: From April 2017, the threshold at which employees and employers will start paying National Insurance will be aligned at £157 per week. The government expects this to raise an additional £170m in 2017/2018 and £145m annually thereafter.
- Benefits in kind: The Government intends to continue to review the taxation of salary and benefits, with a particular focus on how benefits in kind are valued and income tax relief for employee business expenses.
- Disguised remuneration rules: Employers that use disguised remuneration avoidance schemes will be denied corporate tax relief for their contributions into such structures unless payments or benefits are provided to employees which result in income tax and NICs being paid within a specified period. In addition, the scope of the rules is being extended to tackle the use of such schemes by self-employed individuals.
- Bank levy reform: It has been confirmed that the bank levy, which currently applies to balance sheet equity and liabilities in excess of £20 billion, will be made more territorial in scope and be restricted to UK balance sheet liabilities of UK headquartered banks, from 1 January 2021. There will also be an exemption for certain UK liabilities relating to the funding of non-UK companies and for all UK liabilities relating to non-UK branches. This is at least in part in recognition of the need to strike a balance between increasing the tax take from banks, and maintaining the UK's competitive edge, which has been thrown into sharp focus by Brexit.
- Bank losses: The 25% loss restriction for banks will continue as previously announced. This is unlikely to be a surprise.
- Limitation on interest relief: In confirming that the UK Government will introduce a 30% fixed ratio rule and the group ratio rule, it is stated "banking and insurance groups will be subject to the rules in the same way as groups in other industry sectors". This will not be welcome and may be a considerable surprise to many. In HMRC's May 2016 ConDoc on the issue, there was a lengthy discussion of the application of the rules to banks and insurance companies, suggesting that there might be some sort of carve-out for financial institutions with regulatory capital requirements. The need for such a carve-out was expressed in the ConDoc as the "need to recognise the integral role of interest within a banking group and the potential for a restriction on its tax deductibility to have unintended consequences or to create significant administrative burdens." Clearly the empathy with such concerns evaporated, leaving banks and insurance companies to grapple with the envisioned unintended consequences.
- IPT rate rise: The standard rate of Insurance Premium Tax (IPT) will increase from 10% to 12% from 1 June 2017. It seems that IPT, which is similar to a VAT on insurance premiums, is seen as a quick and easy way to raise revenue, as the rate will have doubled from 6% within a couple of years. The 2% rise is expected to raise close to an additional £1bn annually. The higher rate of 20%, which applies to insurance taken out alongside the purchase of cars or white goods (amongst other things), remains unchanged. The industry is likely to react negatively to this, as it is the third increase in a row, having moved from 6% to 9.5% in November 2015, and from 9.5% to 10% earlier this year. The impact on the insurance industry is indirect, as it is a tax paid by consumers, but it could have an adverse effect on demand or pricing.
- Insurance-linked securities: On a more positive note, the Chancellor proposes changes to the tax framework for insurance-linked securities. While the details have not yet been revealed, regulations have been promised for the Spring. The stated objective is to "maintain London's position as the most important global hub for reinsurance business", which can only create optimism for the impact of the details to come.