Earlier today the UK government delivered its last budget before the UK general election in May. Many of the measures were, as one might expect so close to an election, focused on personal rather than corporate taxation. However, below is a summary of some of the business related announcements:
Diverted Profits Tax (DPT)
The government confirmed that it will press ahead with the diverted profits tax, which will come into force from 1 April 2015. It seems that the government has taken on board some of the feedback from the recent consultation and the open day on 8 January in announcing that the draft legislation has been revised to:
- Narrow the notification requirement
- Clarify the rules for giving credit for tax paid
- Amend the operation of the conditions under which the charge can arise
- Clarify specific exclusions, and
- Clarify the application of the charge to companies subject to the oil and gas regime.
The extent to which the feedback has found its way into the legislation will be seen next week, with the revised legislation expected to be published on 24 March and to be made law by 30 March!
Base erosion and profit shifting (BEPS) - 'Country by country' (CbC) reporting
The Government confirmed that it will introduce legislation in the 2015 Finance Bill to give the UK the power to implement the OECD proposals to require standard information from multi-national enterprises (MNEs) in respect of their activities in different countries. This is "Action 13" of the 15-point OECD BEPS Action Plan and is aimed at delivering the transparency needed by Governments to examine the allocation of profit through transfer pricing. The OECD CbC Report set out guidelines for requirements for MNEs to provide: (1) a "Country by Country" report available to the tax authorities in every country in which they operate and which would set out information on the global allocation of income, taxes paid and certain indicators of local economic activity (such reports to be finalised within one year of the end of the accounting period of the ultimate parent) (2) a "Master File" containing a high level overview of the group's operations and transfer pricing policies, which would also be available to each relevant tax administration and (3) a "Local File" delivered to each local tax administration and which would provide more detail on specific inter-company transactions.
Oil and gas
A number of measures have been announced to support the oil and gas industry following the recent dramatic fall in international prices. Following on from the 2% cut in the Supplementary Charge announced in the Autumn Statement there will be a further cut in the rate from 30% to 20% effective from 1 January 2015. The rate of petroleum revenue tax will be reduced from 50% to 35% with effect for chargeable periods ending after 31 December 2015. A new "UK Continental Shelf Investment Allowance" will be introduced to support investment, replacing the existing offshore field allowances. The allowance will exempt from the Supplementary Charge an amount of the company's profits equal to 62.5% of the investment expenditure in a new field from 1 April 2015 onwards. This adds to the high pressure/ high temperature cluster allowances that was announced in the Autumn Statement and will exempt from the Supplementary Charge profits equal to 62.5% of the investment expenditure that a company incurs in relation to a cluster from 3 December 2014 onwards.
- An increase in the Bank Levy rate was announced today from 0.156% to 0.21% (for short-term chargeable liabilities) and from 0.078% to 0.105%(for chargeable equity and long-term chargeable liabilities) to take effect from 1 April 2015.
- Banks' customer compensation expenses (eg in respect of mis-sold Payment Protection Insurance Claims) will no longer be deductible for corporation tax purposes.
- Businesses will no longer be allowed to take account of foreign branches when calculating how much VAT on overhead costs they can reclaim in the UK. This change is prompted as a result of the Credit Lyonnais case in which the European Court of Justice decided that the VAT Directive could not be interpreted to allow a business to take into account the turnover of its foreign branches when calculating how much input tax it can deduct in the Member State where it has its principal establishment.
Going forward, the deduction of input tax on overheads used to support activities made by the foreign branches of a business will be calculated by reference to supplies made by the UK establishment of the business. This measure will affect partly exempt businesses (in particular, banks and insurance companies) and they will have to implement the change from the beginning of their next partial exemption tax year falling on or after 1 August 2015
Withholding tax and private placements
At the Autumn Statement, it was announced that there would be an exemption from UK withholding tax on interest paid on 'qualifying private placements'. The measure has been welcomed subject to criticisms of the restrictions on the exemption. It seems that one of the criticisms (a condition relating to the minimum term of the security) has been dealt with but we will have to wait until the Finance Bill is published next week to see whether the other stakeholder comments have been taken on board.
Executive Remuneration and entrepreneurs' relief
- No changes were made to the very tax-advantageous 'employee shareholder shares' although this may be a short-lived reprieve given the impending general election. These are shares which can to awarded to executives in return for them giving up certain employment rights. Provided conditions are met, the grant of up to £2,000 worth of shares will not generally give rise to liability for income tax or national insurance contributions and there is a capital gains tax exemption on the disposal of the shares provided they were worth no more than £50,000 on acquisition.
- The government has announced however that it is clamping down, with effect from today, on structures (commonly used by private equity backed groups) devised to allow management to access entrepreneurs' relief (which affords a 10% rate of tax on capital gains) by using a management company; shares held by an executive will qualify for entrepreneurs' relief (ER) if the individual holds at least 5% of the voting rights and nominal share capital in a trading company/holding company of a trading group. The new rule removes relief for shares held in 'manco' structures, in which a new company acquires a small percentage of the main trading company's shares.
Research and development tax credits
- R&D tax credits give companies an additional corporation tax deduction for expenditure on 'qualifying costs' attributable to R&D. As previously announced, the rate of the additional deduction for small and medium sized enterprises will rise to 230% from 225. 'Large companies' may, instead of claiming an enhanced deduction, claim a repayable 'above the line' credit. As previously announced, the amount of this credit will increase form 10% to 11%. These changes will take effect from 1 April 2015.
- As also previously announced, there will be a new restriction on qualifying expenditure for R&D tax credits so that the costs of materials incorporated in products that are sold are not eligible, with effect from 1 April 2015.
- Corporation tax loss refreshing
UK companies can generally only use carry-forward tax losses against profits of the same type of business that generated the loss. From today, a new targeted anti-avoidance provision counteracts arrangements that seek to bypass this restriction by pushing profits into a loss-making business and creating new (or 'refreshed') losses elsewhere in the same company or group.
- General Anti-Abuse Rule (GAAR)
As previously indicated in a consultation document, the government has announced that it will introduce tax-geared penalties for cases which fall foul of the GAAR
Venture capital schemes
The government has announced that it will make changes to the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs). The changes announced, subject to state aid approval, are:
- A new requirement that all investments are made with the intention to grow and develop a business
- A new requirement that all investors are 'independent' from the company at the time of the first share issue
- A new requirement that companies must be less than 12 years old when receiving their first EIS or VCT investment, except where the investment will lead to a substantial change in the company's activity
- A cap on total investment received under the tax-advantaged venture capital schemes of £15 million, increasing to £20 million for 'knowledge intensive' companies
- An increase in the employee limit for 'knowledge-intensive' companies to 499 employees from the current limit of 249 employees