HMRC and the Treasury have now published draft legislation for consultation prior to publication of the Finance Bill 2020 later this year. It can be found, divided into subject areas, here. We will be reporting on areas of particular interest over the coming weeks.
Most clauses flesh out the detail of measures announced in the Spring Budget, including:
- the extension of IR35 off-payroll working rules to the private sector,
- the introduction of a new Digital Services Tax; and
- restriction on carry forward of corporate capital losses,
but there were also new announcements, some with immediate or retrospective application such as the following which were in response to concerns about infringement of EU law.
Intra-EU/EEA group transfers: deferral of tax
UK resident companies (or UK branches of non-UK companies) which transfer assets to group companies resident in other EU/EEA states will now be able to defer payment of corporation tax if transfers to a UK member of the group would not have triggered a tax charge. The tax will be payable in six annual instalments, or earlier in specified circumstances such as insolvency, disposal of the asset or the transferee leaving the group. This will apply to corporation tax not only on capital gains but also on transfers of intangible assets, loan relationships and derivatives.
This is a defensive measure introduced, in response to a recent court decision, to prevent gains escaping UK tax altogether. While assets can generally be transferred between UK resident group members without triggering tax, tax is payable on transfers by a UK resident company to a non-UK resident group member. The First Tier Tribunal recently held that this distinction was a breach of EU law, as there was no provision for deferral of the tax payment, with the result that no UK tax was payable on the transfer. HMRC feared that, unless deferral was allowed, assets could be transferred outside the UK with no tax charge, either on the intra-group transfer or on eventual disposal outside the group.
The deferral provisions have retrospective effect and will apply to transactions occurring in accounting periods ending on or after 10 October 2018. HMRC has reserved the power to withdraw the deferral provisions as they may no longer be needed if HMRC successfully appeals against the FTT decision or the UK leaves the EU and ceases to be subject to EU law. The draft legislation, explanatory notes and policy paper can be found here.
Share loss relief and relief for loans to traders: UK business requirement removed
This is a further change required to ensure compliance with EU law. Share loss relief allows capital losses in respect of qualifying shares to be set against taxable income of both companies and individuals. It is particularly valuable to individuals who pay tax at higher rates on gains than on income. The relief applies, subject to conditions, to shares in EIS companies and other unquoted trading companies but was available only in respect of shares in companies which carried on business in the UK. The European Commission decided that this restriction infringed EU free movement of capital so it has been removed with effect from 24 January 2019, the date of publication of the infringement decision. Further details available here.
Loans to traders relief allows capital loss relief for those who make loans to traders which become wholly or partly irrecoverable. One of the conditions was that the borrower was resident in the UK. This restriction was also held to infringe EU law so has been removed with effect from 24 January. Further details available here.