Spring Budget 2017 and Finance Act 2017

The UK Chancellor, Philip Hammond, delivered his Spring Budget on 8 March 2017. Our overview of the key tax announcements is available here.

The UK’s Finance Bill was published on 20 March 2017. Following the announcement that there would be a general election in the UK on 8 June 2017, Parliament was dissolved on 3 May 2017. In order to ensure that certain key measures did not cease to have effect when Parliament was dissolved, the Government agreed with the opposition that 72 out of 135 clauses and 18 out of 29 schedules would be deleted from the Bill. The substantially reduced Bill received Royal Assent on 27 April 2017, becoming the Finance Act 2017.

The measures that were deleted from the Bill included the following:

  • the introduction of the corporate interest restriction: these measures would limit the tax deductions that a company can claim for their interest expenses and had provisional effect from 1 April 2017. The aim of the proposed changes is to restrict each group’s net deductions for interest to 30% of the earnings before interest, tax, depreciation and amortisation (“EBITDA”) that are taxable in the UK, subject to an optional group ratio rule, which may permit greater deductions in some cases. All groups would be able to deduct up to £2 million of net interest expense per annum before the restrictions apply;
  • changes to the corporation tax loss relief rules: these provisions would restrict the amount of profit that could be offset by carried forward losses (for UK corporation tax purposes) to 50% and had provisional effect from April 2017. There would also be greater flexibility on the types of profit that could be relieved by losses incurred after the date on which the changes take effect. A £5 million allowance would be available for each standalone company or group;
  • changes to the tax treatment of individuals who are not domiciled in the UK: these changes had provisional effect from April 2017 and provided for the following:
    • a change in the time at which an individual is deemed to be domiciled in the UK, from when they are resident in the UK in 17 out of the last 20 tax years to when they are resident in the UK in 15 out of the last 20 tax years;
    • the abolition of permanent non-domiciled status; and
    • bringing all UK residential property within the scope of UK inheritance tax, even when it is held by a non-domiciled individual through an offshore structure;
  • changes to the substantial shareholdings exemption: the aim of the changes is to:
    • simplify the rules;
    • remove the requirement for the disposing company to have been a trading company (or member of a trading group); and
    • provide a more comprehensive exemption for companies owned by qualifying institutional investors

These provisions also had provisional effect from April 2017;

  • changes to the venture capital reliefs: these measures would make the following changes:
    • the Enterprise Investment Scheme (“EIS”) and Seed Enterprise Investment Scheme (“SEIS”) rules for share conversion rights would be clarified. This was proposed to be for shares issued on or after 5 December 2016;
    • additional flexibility would be introduced for follow-on investments made by Venture Capital Trusts in companies with certain group structures, to align with EIS provisions. This change had provisional effect for investments made on or after 6 April 2017; and
    • a power would be introduced to enable VCT regulations to be made in relation to certain share for share exchanges to provide greater certainty to VCTs; and
  • changes to the taxation of termination payments: the proposed changes would mean that, from April 2018, termination payments exceeding £30,000, which are already subject to income tax, will also be subject to employer national insurance contributions, but will not be subject to employee national insurance contributions. Termination payments up to £30,000 will still be exempt from income tax and employee and employer national insurance.

Whilst we expect the majority of the deleted provisions to be reintroduced following the general election, it is unclear whether such measures will still take effect from the dates originally proposed and whether changes will be made by the new government. We will be covering these measures in more detail in a future issue of our International Tax Update, once it is clear when they will take effect and whether the new government proposes to make any changes to the provisions.

Our recommendation

If you would like more information on how any of the changes affect you or your business or how they may apply in specific circumstances, please contact a member of the team.

Extension of the double tax treaty passport scheme – updated terms & conditions and guidance

HM Revenue & Customs (“HMRC”) has published revised terms and conditions of, and guidance on, its double tax treaty passport scheme. The DTTP scheme is an administrative simplification designed to assist certain foreign lenders in accessing reduced withholding tax rates on interest that are available within the UK’s tax treaties with other territories. The scheme is generally available to UK borrowers who are required to withhold income tax at the basic rate on certain loan interest payments to overseas lenders. Click here to read our analysis of the changes.

EMI update: change in HMRC guidance on EMI option agreements

HMRC has recently changed its guidance in relation to tax-favoured Enterprise Management Incentive Options (“EMI options”). Details of restrictions over shares should now be set out in EMI option agreements as a result of that change in guidance. Options issued before 17 August 2016 are unaffected by the change. If you would like further details on the changes, please click here for our update.

VAT recovery for holding companies

On 20 April 2017, HMRC updated their guidance on the often contentious issue of input VAT recovery by holding companies (see here) This follows the CJEU decision in the joint cases of Larentia + Minerva and Marenave Schiffart (C-108/14 and C-109/14). Click here for our analysis of the changes.

Online reporting for UK employee share plans by 6 July 2017

The deadline for online reporting for UK employee share plans is 6 July 2017. The following actions need to be taken by the deadline:

  • complete end of year reporting for share plans; and
  • self-certify new tax-favoured share plans.

A failure to comply will result in automatic penalties and the withdrawal of tax-favoured treatment for some employee share options. Click here for further details on the requirements.