Autumn Budget 2017: Corporate and Business Tax
As far as radical measures are concerned, there was relatively little in the Chancellor’s announcements in relation to corporate and business taxation.
There was however the – now to be expected – plethora of targeted anti-avoidance measures, and some changes designed to increase the corporation tax base. The headline rate of corporation tax will be maintained at its current, historically low, level.
The government’s commitment to encourage companies to invest in research and development was reinforced by a modest increase in the rate of the RDEC credit, and an enhanced advance assurance system.
The “Technological Revolution” that the Chancellor is seeking to encourage will clearly present other challenges as the Government seeks to establish how the digital business models of multinational groups operate in practice and whether further measures are required to ensure that profits are aligned with value creation.
Research and development
The rate of R&D expenditure credit which is claimable by large companies is to be increased from 11% to 12%. This will, in practice, provide tax relief of £9.72 per £100 of qualifying expenditure (a modest increase from £8.91). Additionally, a new advanced clearance service is to be piloted, which will provide assurance of qualifying status for R&D projects for three years.
Any measures to increase cashflow incentives that encourage innovation are to be welcomed and will underpin the government’s stated objectives concerning the ‘technological revolution’. It remains to be seen whether a proposed awareness campaign will give rise to more claims. However, any procedure for advanced clearance will certainly provide an incentive to companies that may otherwise have been deterred by the prospect of an HMRC enquiry into their claim.
Corporate chargeable gains
The Finance Bill will include a number of measures targeting corporation tax on chargeable gains.
- Removal of capital gains indexation allowance from 1 January 2018
Unlike individuals and Trustees, a company that disposes of a capital asset giving rise to a chargeable gain is entitled to claim indexation allowance based on the increase in the RPI from the date of acquisition to the date of disposal. For disposals from 1 January 2018 the allowance will be based on the RPI for December 2017, with no future increases being taken into account
- Depreciatory transactions within a group
A depreciatory transaction is one which takes value out of the shares in the company concerned. In a group situation this might be done by transferring assets from one company to another for no or little cost. Where the devalued shares are later disposed of, perhaps by liquidating the company, a loss arises, and currently the loss is reduced for capital gains purposes by the amount of any depreciatory transactions in the preceding 6 years.Groups of companies have exploited this rule by stripping out subsidiaries by way of a depreciatory transaction, and retaining the, now dormant, subsidiary for 6 years before liquidating it. The proposed change, which applies to disposals from Budget Day, simply removes the 6 year time limit, so that all prior depreciatory transactions must be taken into account in computing losses.
- Capital gains assets transferred to non-resident company – reorganisations of share capital
This change corrects an anomaly whereby a UK company which has transferred the assets of a foreign branch to an overseas subsidiary in exchange for shares, and has under existing legislation postponed the charge to tax on disposal of those assets, could be faced with a charge to tax where the overseas company is involved in a subsequent share reconstruction. This change is being introduced as a result of a specific request on behalf of affected businesses.
The most significant of the proposed changes is the abolition of indexation allowance from 1 January 2018. The estimated exchequer impact is up to £525m in 2022/23, so by no means insignificant.
Changes to Partnership Taxation
Various changes are to be introduced with the aim of providing clarity over aspects of the taxation of partnerships (including limited partnerships and limited liability partnerships).
Most significantly, taxable profits will, in the future, need to be split between partners in the same proportions as accounting profits. In addition, it will be made clear that the allocation of partnership profits shown on the partnership return is the allocation that applies for tax purposes for the partners, but there will be a structured mechanism for the resolution of disputes between partners over the allocation of taxable partnership profits and losses.
The changes will also provide a relaxation in the information to be shown on the partnership return for investment partnerships that report under the Common Reporting Standard (CRS) and who have non-UK resident partners who are not liable for tax in the UK.
The original proposals put out for consultation were in several respects practically unworkable, and it is pleasing that HMRC has taken on board many of the responses submitted. There remains, however, a case for the wholesale review and simplification of the arcane way in which the tax system operates for partnerships and their partners.
A condition of entrepreneurs’ relief is that the investor must own at least 5% of the ordinary shares, which give at least 5% of the votes, in a trading company. This condition must be satisfied for at least 12 months prior to the disposal.
Difficulties can arise where someone who satisfies this test has their shareholding reduced below 5% because the company raises further funds and issues new shares. This might lead such an investor to dispose of the shares before the investment so as to claim entrepreneurs’ relief whilst it is available.
The government is to consult on changes which would preserve entrepreneurs’ relief in situations where a 5% plus shareholder is diluted below that level.
Some investors find their entitlement to entrepreneurs’ relief removed through events outside their control, and so a sensible change to the law on this point would be welcome.
It was announced that this relief, which can apply where a company transfers certain types of assets to its shareholders to continue the business in an unincorporated form, will not be extended beyond 31 March 2018.
This relief was never as generous as it could have been, and was not widely taken up. It will not be sorely missed.
EIS and Venture Capital Trusts – encouraging investments in knowledge-intensive companies
In a further response to the ‘Patient Capital Review’ there are to be changes to these reliefs for knowledge intensive companies. With effect from 6 April 2018:
- The limit on the amount an individual may invest under the EIS in a tax year will increase to £2 million from the current limit of £1 million, provided any amount over £1 million is invested in one or more knowledge-intensive companies.
- The annual investment limit for knowledge-intensive companies receiving investments under the EIS and from VCTs will increase to £10 million from the current limit of £5 million. The lifetime limit will remain the same at £20 million.
If these changes achieve their stated objective then there will be a positive outcome for knowledge intensive companies looking to raise capital.
New EIS capital preservation condition
The government will legislate to ensure that Venture Capital Schemes (VCTs, EIS and SEIS) are targeted at “growth investments”. Detailed guidance will be published and HMRC will refuse to give advance assurance from the date of publication where it appears that a company is intending to carry out “capital preservation” activities.
A principles-based test will be introduced to determine if, at the time of the investment, a company is a genuine entrepreneurial company. It will require a conclusion to be reached as to whether the company has objectives to grow and develop, and whether there is significant risk of loss of capital where the amount of the loss could be greater than the net return to the investor. There will be a list of the types of factors that may be taken into consideration when arriving at the conclusion.
Care will be required to determine whether the new condition is met before an investment is made. The HMRC Press Notice states that the “condition depends on taking a ‘reasonable’ view….”, and it is slightly concerning that part of this test will involve an element of judgement.
Encouraging more high-growth investment through Venture Capital Trusts
A number of changes are proposed to help ensure that tax-advantaged VCTs continue to focus on long-term investment in higher risk companies that intend to grow and develop:
- From the date of Royal Assent to the Finance Bill, VCTs will no longer be able to offer secured loans to investee companies, and any returns on loan capital above 10% must represent no more than a commercial return on the principal.
- VCTs will be required to invest 30% of funds raised in an accounting period beginning on or after 6 April 2018 in qualifying holdings within 12 months after the end of the accounting period.
- From 6 April 2019, the period for reinvestment of gains on disposal of qualifying holdings investments will increase from 6 to 12 months, and the proportion of VCT funds that must be held in qualifying holdings will increase from 70% to 80%
Although these changes are technical, the refocusing of VCTs on investment in higher risk companies is commendable, although time will tell as to whether these changes achieve the intended outcome.
VCTs and commercial mergers
This change will restrict the application of a particular anti-avoidance provision which can prevent commercial mergers of VCTs.
The anti-avoidance rule restricts income tax relief where a VCT buys back shares from an investor and the investor subscribes for new shares in the same VCT within a 6 month period. It also restricts income tax relief for investors who sell shares in a VCT and subscribe for new shares in another VCT within a 6 month period, where those VCTs merge.
The change will ensure that income tax relief may no longer be withdrawn where the relevant VCTs merge more than 2 years after the latest subscription for shares, or do so where it is not one of the main purposes of the merger to obtain a tax advantage.
Any change that deals with unfair anomalies which restrict or remove reliefs in commercial situations has to be welcomed.
Other proposals for venture capital schemes
There will be further consideration of whether the advance assurance process for venture capital schemes can be simplified and streamlined, and in addition the government will consult in 2018 on the introduction of a new knowledge-intensive EIS fund structure in which there would be flexibility to deploy capital raised over a longer period.
Withholding taxes on interest and royalty payments
As previously announced, the requirement to deduct income tax on payments of UK source interest is to be removed for debt that is traded on a Multilateral Trading Facility (MLT) operated by an EEA-regulated recognised stock exchange.
This extension of relief for interest payments (which will include payments to non-UK resident lenders) appears to be inconsistent with the government’s intention to expand the circumstances in which royalty payments to businesses outside the UK should be subject to income tax. It is clear from the Chancellor’s speech that the target of this latter measure will be digital businesses operating offshore.
The extension of the interest withholding tax exemption to debt instruments traded on an MLT is welcomed and provides comfort that the already generous exemption afforded to listed debt (the Quoted Eurobond exemption) will continue. Given the complexity of existing legislation in relation to the payment of royalties it remains to be seen what additional measures could be introduced that would have the intended impact on the large digital companies which are perceived to avoid tax by shifting profits from UK sales via the payment of royalties offshore.
The Chancellor announced a number of changes to the capital allowances regime, principally extensions to existing enhanced and accelerated allowances.
- Annual update to Energy Technology list
The capital allowances regime offers a 100% First Year Allowance (FYA) on capital expenditure on the provision of plant or machinery within prescribed technologies focused principally on environmental and energy efficiencies. The change updates and amends the list of technologies and products.
- Changes to First Year Tax Credits (FYTC)
Companies investing in the above technologies, but which are loss making, are able to surrender their losses attributable to FYAs. The current rate of claim is the headline rate of corporation tax, 19%. The scheme was due to come to an end on 31 March 2018, but it will be extended from 1 April 2018 for 5 years, but with the rate of repayable credit being reduced to 2/3 of the headline corporation tax rate.
- Extension of FYA for zero-emission goods vehicles and gas refuelling equipment
This scheme was also due to come to an end on 31 March 2018, but is to be extended for a further three years to 31 March 2021.
These provisions are intended to encourage businesses to invest in “clean technologies”. The extensions are to be welcomed, although the “negligible” exchequer impact assessments suggest that behaviours are not changing as rapidly as the government would like.