Previously announced tax reforms are full steam ahead
The Government has recommitted to the following reforms previously trailed in the March 2016 Budget:
- Reductions in the corporation tax rate (falling to 17% by 2020).
- Interest deductibility restrictions from April 2017 - a cap on deductions at the higher of (A) 30% of UK EBITDA, or (B) the worldwide group's net ratio of interest to earnings (subject to a group-wide de minimis of £2 million net interest costs). People had been hoping that the changes would be softened and delayed given the EU has announced a more generous version of the same rules for 2019 (two years later) but the Government has decided to proceed as planned.
- Restrictions on the use of carried-forward losses to 50% of profits from April 2017, subject to £5 million of profits for each company or group that can be relieved in full. Greater flexibility over the types of profit that can be relieved by losses incurred after that date will also be introduced.
- Business rates reforms (including changing the indexation measure to CPI, doubling small business rates relief from 50% to 100% and increasing the threshold for small business rates relief to a rateable value of £12,000).
New tax reforms
The Government also announced the following new initiatives:
- Non-resident corporates: Such companies with UK source income currently pay income tax at 20%. The Government plans to consult at Budget 2017 on bringing them within the corporation tax regime instead. This will mean lower rates but will allow the government to apply the interest cap deductibility and loss relief rules noted above.
- Improved substantial shareholdings exemption (SSE): The government wants to simplify the SSE - the exemption from corporation tax on disposals of trading companies - with effect from April 2017. This will involve removing the investing requirement - that the seller is a trading company or member of trading group before and after disposal - and provide a more comprehensive exemption for companies owned by qualifying institutional investors.
- Tax benefits of employee shareholder status (ESS) removed: in the March 2016 Budget, the Government introduced a lifetime cap of £100,000 on gains eligible for exemption from capital gains tax under ESS arrangements. Now the Government has gone further due to perceived abuse of these rules. For new arrangements entered into on or after 1 December 2016 (i.e. grandfathering existing ESS arrangements), the tax advantages awarded under ESS will be abolished and, from the next legislative opportunity, the ESS status itself will be made unavailable to arrangements.