The Chancellor delivered his 2016 Budget yesterday. Below is a brief summary of the announcements which are relevant to corporates in the IPT sector.
Royalty withholding tax
Tax avoidance arrangements
The government announced measures to counteract the abuse of double taxation arrangements in order to avoid the obligation to deduct UK income tax from royalty payments made to connected persons. The new rules will apply to any payments of royalties made on or after 17 March 2017 under arrangements entered into at any time. The government is principally targeting multinationals which shift profits out of the UK to lower tax jurisdictions by means of the payment of royalties.
Under the new rules, where the payer and the payee are connected, the payer of certain royalty payments must withhold tax at 20%, thereby denying any tax treaty benefits, if the payment is part of an arrangement to avoid tax - ie there are arrangements in place which have the main purpose (or one of the main purposes) of obtaining a tax advantage and that tax advantage is contrary to the object and purpose of the double taxation treaties.
Broadening the categories of royalties subject to UK withholding tax
Changes are to be made to broaden the definition of royalties to which the duty to withhold UK income tax applies. Under the existing rules, the 20% withholding tax applies to payments in respect of certain copyright, a right in design, public lending right in respect of a book, royalties in respect of the use of patents and certain royalties which are annual payments. It has been proposed that a new definition of "relevant intellectual property" will be introduced which will cover any patent, trade mark, registered design, copyright, design right, performer's right or plant breeder's right, regardless of whether the payment is an annual payment or not.
This change is not expected to take effect until after the Finance Bill 2016 receives Royal Assent and the draft definition remains subject to further review by the UK Government.
Royalties connected with a UK permanent establishment
Currently, a non-UK resident will be subject to UK tax on royalty income only if such income is from a source in the UK.
Legislation will be introduced in the 2016 Finance Bill to provide that royalty payments by a non-UK resident to another non-UK resident will have a UK source when the payments are connected with a UK permanent establishment of the non-UK resident entity. The rationale behind this is that if a non-UK resident company trades in the UK through a permanent establishment, and if the activities of the UK permanent establishment give rise to, or are connected with, the obligation of the non-resident to pay a royalty, the royalty should be considered as having a UK source and therefore be subject to tax in the UK. Enforcement of the obligation in these circumstances may create problems.
Reduced corporation tax rates
The current rate of 20% is already in line for a reduction to 19% in 2017, and to 18% in 2020. It has now been announced that the rate from 2020 will be 17% (always assuming we don't have a change of government before then).
Corporation tax losses
At present trading losses can be surrendered within groups in the year in which they arose, or can be carried forward for future years only by the company in which they arose. It is proposed that trading losses should be able to be carried forward and surrendered to other group companies in future periods, and that there should be greater flexibility (for example it may become possible to offset trading losses against profits of a different trade, or profits that are not even trading profits). At the same time it is proposed that a group's ability to offset any profits in excess of £5m against carried forward losses will be limited to 50% of those excess profits. All these proposals will be the subject of further consultation and legislation introduced next year for April 2017.
With effect from next year, the amount of interest which a company can deduct for corporation tax purposes will effectively be capped at the higher of (A) 30% of UK EBITDA, or (B) the level of the worldwide group's net ratio of interest to earnings.
However, this will only apply to larger groups with more than £2m of net interest costs and there will be an exemption for "public benefit infrastructure" (although the expectation is that this will be restricted to public sector projects rather than the wider real estate sector).
Gambling tax changes
Free plays - as a future tax change, from Finance Act 2017, the use of free plays will be included for remote gaming duty , but the award of a free play as a prize will not reduce the profit. Changes will be made to the definition of gaming payments and prizes. Operators will need to compare and contrast the various types of incentives, bonuses and rewards they give their players and VIPs in good time to make any appropriate adjustment to their Ts and Cs.
Replacement of Horseracing Betting Levy - as recently announced, the Levy will be replaced from April 2017 with a new funding arrangement, which will be payable by both land-based and online operators wherever they are based. The amount payable will reflect the degree of mutual interest between betting and racing, similar to the approach adopted in the French parafiscal levy. The rate has not yet been decided. The Horseracing Betting Levy Board will be responsible for collection.
Gaming Duty Bands - as normal the gaming duty bands for casino operators have been increased in line with inflation for accounting periods commencing 1st April 2016.
Use and enjoyment VAT charge - there is no further news on whether and how the UK will be imposing VAT on use and enjoyment of advertising services in the UK by an operator based outside the EU.
Sporting Testimonials - for events held after 6 April 2017, where the testimonial is awarded after 25th November 2015, tax and NICs will be payable on the proceeds of non-contractual or non-customary testimonials, with an exempt band of £100k running for 12 months . Contractually and customarily awarded testimonials are treated as earnings and subject to tax anyway without any exempt amount. The independent testimonial committee will be responsible for deducting tax.