UK Tax Update | December.04.2014
Yesterday George Osborne delivered his Autumn Statement. Traditionally, the purpose of this has been to update economic projections and department spending allocation, but increasingly it includes statements regarding taxation plans – and today’s statement was certainly no exception.
Against the backdrop of needing to address the UK’s structural deficit, the taxation measures were stated to be broadly neutral in their fiscal impact. However, with an election coming next year, the Chancellor was still able to announce some crowd-pleasing measures: an increase in personal income tax allowances and a significant change in the way stamp duty land tax is assessed on residential properties being the most eye-catching.
The brunt of this cost seems to be borne by the banks: not only will they suffer a restriction on the use of their carry-forward losses, but the policy costings section of the Autumn Statement document states the fines for manipulating foreign exchange rates as an additional £1.115bn benefit of the Autumn Statement tax policy decisions. The fiscal balancing act will also see additional anti-avoidance and tax-raising measures; notably, a new tax on multinationals.
We have highlighted below some key points in the Autumn Statement that we consider of particular interest. This does not cover all the announcements; inevitably, there is little detail on many of these measures at this stage. However, a draft Finance Bill containing proposed legislation for many of the measures announced today is expected on Wednesday 10th December.
If you would like to discuss any of these points either now, or once the Finance Bill has been published, please contact Ed Denny or Will Gay from the London Tax team.
This was always likely to be an area of focus, given the backdrop of the OECD’s initiative to address perceived artificial profit-shifting and the erosion of the tax base by multinationals. This context appears to have given the Government the confidence to take some pre-emptive measures in advance of the completion of the OECD’s work; for example, measures to require multinationals to report how much tax is paid on a country-by-country basis.
However, the most surprising move is a new tax on multinationals – the ‘diverted profits tax’ – to be introduced from April 2015. There is little detail at this stage, but this is likely to attract a lot of attention. It will comprise a new 25% tax on profits. The intention is for it to apply to all multinationals that conduct activities – e.g. sales – in the UK, but whose corresponding profits are instead recognised in other jurisdictions.
A significant new measure for banks, which is likely to affect deferred tax assets on bank balance sheets, will be introduced from April 2015.
It is a long-standing principle in UK corporation tax that trading losses can be carried forward indefinitely to offset profits arising from the same trade. This delays the payment of corporation tax.
For banks, certain losses (not limited to trading losses) can be carried forward as usual, but from April 2015 can only be set against 50% of the corresponding profits in any given tax period. This will reduce the value of a bank’s deferred tax assets that may be associated with the financial crisis and mis-selling scandals. At the least, we can expect banks to re-evaluate investor communications as they inevitably revise downward free cash flow projections.
Attack on “B share schemes”?
Buried in the detail is a stated intention to take action against schemes that allow shareholders to choose how to receive a “dividend”. The example cited is one in which a company issues a share that is bought back shortly afterwards. This would seem to be contemplating so-called “B share schemes”, under which shareholders are offered a choice between capital or income tax treatment on a return of value. This choice may no longer be available in certain circumstances – the return would simply be taxed as dividend income.
The Government intends to issue regulations in early 2015 which will prohibit companies from using ‘cancellation’ schemes of arrangement on public company takeovers. These schemes are popular as they avoid a charge to stamp duty when shares are transferred to the new owner. From early 2015, bidders and financial advisers will need to start factoring this additional cost back into offers.
Entrepreneur’s relief and Enterprise Investment Scheme changes
Entrepreneur’s relief (ER) provides for a reduced rate of capital gains tax in certain circumstances. Changes are being proposed in relation to ER and also in its interaction with tax-advantaged investments in companies that qualify under the enterprise investment scheme (EIS). Some of the changes appear favourable, some less so.
On the positive side, an entrepreneur will be able to make a disposal that benefits from ER, then hold over the gain then realised by reinvesting the proceeds into an EIS qualifying company without losing the entitlement to ER (in respect of the latent gain on the ER shares) when the EIS shares are subsequently sold (regardless of the normal ER qualifying conditions in relation to the EIS shares). Previously, ER has been lost on latent gains held over into EIS shares, so this change represents further encouragement for early-stage investment.
On the other hand, new anti-avoidance arrangements will target arrangements that take advantage of ER in certain circumstances which are deemed to be "contrived". Currently, an individual can transfer a business (including goodwill) to a related close company and generate a gain that is taxed at 10% by virtue of ER. In that transaction, the transferee company acquires an asset (goodwill), the cost of which can be amortised in a tax-deductible manner. This yields a tax saving on both sides of the transaction. The anti-avoidance measures will prevent ER from being claimed on the disposal of that asset, and will restrict the tax relief available to the transferee company following the acquisition. These changes apply from 3 December 2014 and are to the detriment of individuals seeking to crystallise gains at the favourable ER tax rates on incorporation of their business. The normal "incorporation exemptions" should not be affected.
In addition, to address state-aid concerns, the definition of qualifying companies for EIS purposes is to be revised so that companies that benefit from other governmental support will no longer be included. "Other governmental support" is not anticipated to include SEIS/VCT investment.