A predictably political Budget contained very few new business tax announcements. However, the Budget documents do reveal which of the draft measures published in December will make it into the pre-election Finance Bill, which is due to be published on 24 March. These measures will, therefore, almost certainly be law by the end of the month and regardless of who occupies 11 Downing Street after 7 May.
Diverted profits tax
The Chancellor confirmed the government’s intention to press ahead with the controversial “diverted profits tax”. Dubbed the “Google tax”, it is primarily aimed at two types of structures used by multinational companies doing business in the UK:
- those that enable them to book most of the profits from their UK sales offshore so they are not subject to UK tax by, for example, marketing in the UK but finalising all sales offshore; and
- those that use group arrangements to strip profits out of the UK. For example, paying tax deductible IP royalties to a low tax jurisdiction.
The rate of the new tax is 25%, higher than the UK’s normal corporation tax rate of 20%. It is designed to be behaviour changing as much as revenue raising.
The government has designed the diverted profits tax as an entirely new tax so it can argue it is not covered by double tax treaties. However, many tax experts are challenging this.
The scope of the new tax is very broad and will catch more than the obvious targets. One of the big concerns about the original draft was the scope of the notification requirements, which would have required many businesses to notify their arrangements to the UK tax authorities even if they were not ultimately subject to the tax. The legislation has now been revised to narrow notification requirement. Details of this will be revealed on 24 March. However, many non-UK business doing business with the UK will still need to consider the implications of this new tax.
The Budget documents confirm that the tax will apply to profits arising on or after 1 April 2015.
Corporation tax anti-avoidance
Another new measure effective immediately will restrict further use of losses in a company where profits are “artificially” injected into the company to use the reliefs or in some way “refresh” the losses for use in an associated company. The rule will apply to trading losses, non-trading loan relationship deficits and management expenses and will apply in respect of profits arising on or after 18 March.
And as announced in the Autumn Statement, corporation tax relief for goodwill will be restricted in respect of goodwill that a company acquires from a related individual or partnership. The measure has effect from 3 December 2014.
Legislation will be included that gives the UK the power to implement the OECD’s model for country-by-country reporting. Once in force, these new rules will require multinationals to provide high level information to HMRC on their global allocation of profits and taxes paid, as well as indicators of economic activity in each country. However, at this stage the legislation will only be enabling, with the precise scope and details of the information that must be reported to be set out in later regulations.
Two new changes to entrepreneurs’ relief were announced. These both have immediate effect.
One measure will prevent entrepreneurs’ relief being claimed by taxpayers who do not have a direct 5% interest in a trading company or trading group. This is designed to counteract structures where taxpayers took a 5%+ interest in an SPV which only had a small economic interest in a trading company/group.
The second change is designed to prevent individuals benefitting from entrepreneurs’ relief when they sell personal assets used in a business but do not dispose of a 5% or more share of that business at the same time.
Changes to entrepreneurs’ relief announced in last year’s Autumn Statement will also be included. One of these prevents entrepreneurs’ relief being claimed in respect of goodwill when it is transferred to a related company. The other preserves entrepreneurs’ relief for gains that are deferred into EIS shares. These measures have effect from 3 December 2014.
Disguised investment management fees
As originally announced in the Autumn Statement, the government has confirmed that with effect from 6 April, income tax will be charged on sums arising where fund managers enter into arrangements involving partnerships and other tax transparent vehicles that give rise to “disguised fees”. Existing funds could be affected.
The original proposals were far-reaching. Although it is intended that carried interest linked to performance, or returns from investments by partners, should not be affected, the exceptions in the original draft of the legislation were drafted very narrowly and would have caught many commonly used profit sharing arrangements.
We made strong representations to HMRC that the original drafting was inadequate and we expect that the legislation will be improved. Details will be available when the Finance Bill is published on 24 March.
Capital gains tax on non-residents
The government has confirmed that from 6 April 2015 certain non-UK residents who dispose of UK residential property will be subject to capital gains.
Non-UK companies that are taxed under these new rules will be taxed at 20%, subject to indexation. Widely held companies and funds will be exempt.
However, the ATED-related CGT charge will remain so some non-UK companies will continue to be taxed under those rules at 28%.
Non-UK resident individuals will be taxed at 18% or 28% depending upon what other UK income and gains they have.
Only gains accruing post-April 2015 will be taxed. Non-residents who already own UK residential property will be able to “rebase” to the April 2015 market value or time apportion the gain.
Other measures to be enacted before the general election
Other measures that will make it into Finance Bill 2015 include:
- extension of SDLT multiple dwellings relief to sale and leaseback arrangements involving superior interests in residential property (e.g. shared ownership);
- increase in ATED by 50% above inflation for residential properties worth more than £2m;
- (subject to state aid clearance), new requirements and limitations in the venture capital trust regime;
- changes to R&D tax credits;
- a withholding tax exemption for private placements;
- bank levy increase;
- restrictions on the use of carried forward losses by banks;
- repeal of the late paid interest rules;
- changes to the disclosure of tax avoidance schemes (DOTAS) regime; and
- a significant new package of measures to help the North Sea oil and gas industry.
Key measures that will not be implemented before the election
One of the most eye-catching announcements of interest to the residential property and fund industries was the new Help to Buy ISA. This scheme will provide a government bonus to those who use their savings to purchase their first home. For every £200 a first time buyer saves, the government will provide a £50 bonus up to a maximum of £3,000 on £12,000 of savings. The bonus will be available on homes up to £450,000 in London and £250,000 outside London. The government intends that the scheme will be available from autumn 2015 and will work with the funds industry to finalise the operational details before then.
The commercial property industry will already be aware of the business rates consultation launched in the run up to the Budget. This review of business rates reflects the fact that a system that has its origins in the 17th century is no longer suitable for the 21st century. That said, the review is intended to be revenue neutral and the government has stated its preference for business rates to remain a tax based on property values collected by local authorities.