Fundamental changes to tax law that were derailed by the snap election left taxpayers in limbo, with confusion around which changes would apply and when. Government has now clarified some of the detail – find out what we know.
After much consultation and trailing, a number of fundamental changes in tax law were to be included in the 2017 Finance Bill, to take effect from 1 April 2017. However, with the unexpected general election, the (first) Finance Bill was quickly passed and these changes were left out as they had not yet been finalised.
Taxpayers were left in limbo. Would the changes come into law in the same way as originally intended? Would a new Government alter the proposed legislation? And, most importantly, from when would the changes now take effect?
To compound matters, taxpayers found themselves in the farcical position of needing to take account of the changes from April, without actually knowing what the law would be.
The fog lifts
Finally, in mid-July the Government clarified that the changes would take effect. There would be some amendments, but the fundamental principles will be as originally intended. Most importantly, the law would be backdated to take effect from 1 April 2017, as always intended. Revised draft legislation has been published.
The clarification is welcome news, but the position is still far from satisfactory. The legislation is still in draft form and the actual Finance Bill (no. 2 of 2017) will not be published until some time in September, after the summer recess.
So taxpayers know when the law will take effect, but exactly what the legislation will look like remains unclear (albeit the draft legislation gives a very good idea). We are looking at a gap of more than 5 months between the date the law takes effect and the date on which the final legislation is published.
Key tax law changes to be aware of
Here's a reminder of some of the key changes which we know to be taking effect.
1. Restrictions on deductibility of interest for corporation tax purposes
This change in law applies to corporate groups which incur net interest expense and other similar financing costs above £2 million per annum. The main rule limits the amount of net interest expense that a worldwide group can deduct against its taxable profits to 30% of its EBITDA. It is worth also noting that:
- The restriction only applies to interest paid by a group above £2 million per annum.
- A group will be able to make an election for its ‘group ratio’ to be substituted for the 30% figure. The group ratio is based on the net interest expense to EBITDA ratio for the worldwide group based on its consolidated accounts.
- There is an exemption for interest expenses incurred by qualifying companies on funds invested in long-term infrastructure projects for the public benefit.
2. Changes to uses of corporation tax losses
The changes of law on losses are fundamental, and include both relaxations and restrictions. In future there will be a lot more flexibility as to how losses are used. Under the old rules, losses which were carried forward from previous periods could only be used against profits in the same trade/income stream and such losses could not be surrendered to other group companies (group relief).
These restrictions are effectively being removed and in future it will be possible to use carried forward losses against any income stream and, further, it will be possible to surrender such carried forward losses to other group companies (group relief). This gives taxpayers a lot more flexibility and prevents historic losses being trapped in profitable companies.
However, a major new restriction has been introduced as well: only 50% of a company's taxable profits can be reduced by carried forward losses. Individual, standalone companies and corporate groups will be entitled to a £5 million "allowance", against which carried forward losses can be set before the restriction applies. These changes will be applied for company accounting periods that begin on or after 1 April 2017.
3. Relaxation of the conditions for Substantial Shareholdings Exemption (SSE)
SSE exempts a company from paying corporation tax on the disposal of shares in another corporate entity.
Previously, in order to qualify a company needed to hold a 10% interest in the company for any continuous 12 month period over a 2 year period. Furthermore, previously both the selling company and the target company needed to be trading companies. The changes relax these requirements considerably and bring the UK SSE more in line with the equivalent legislation in other European jurisdictions. The main changes are:
- The condition that the selling company must be trading will be removed. Therefore, going forward a holding (non-trading) company will now be able to dispose of a trading subsidiary and claim SSE.
- The target no longer needs to be trading immediately after completion. This is helpful as the selling company would not always have sight over what happened after completion of the sale.
- The company now needs only to hold the 10% interest in the company for any continuous 12 month period over a 6 year period (rather than 2).
- The normal conditions for qualifying for SSE are relaxed for certain qualifying institutional investors, such as investment funds, certain unit trusts and trustees of pension schemes.
The changes will be effective for share disposals occurring on or after 1 April 2017.
4. Reforms to the taxation of non-domiciliaries
The reforms to the taxation of non-domiciliaries (non-doms) – which are to be introduced with some minor adjustments to the previous version of the legislation – include:
- an extension of inheritance tax to non-doms who own UK residential property through companies and other structures,
- the introduction of a 15-year limit to the period in which a non-dom can claim the remittance basis of taxation,
- an extension of the concept of "deemed domicile" to income tax and capital gains tax, and,
- the introduction of rules that affect individuals born in the UK with a UK domicile of origin and who return to the UK after a long-term/indefinite period of absence from the UK.
The Finance Bill (No 2) will also contain a number of other measures as well as transitional rules and provisions that may provide planning opportunities for non-doms affected by the changes.
Many non-doms will already have taken steps prior to 6 April 2017 to mitigate the impact of the new rules. However, in certain cases, windows of opportunity for planning will remain open for some time so non-doms should take advice as soon as possible.
In the meantime, we await further clarification from the government, particularly in relation to practical issues that may arise as a result of the three-month hiatus between the changes being indefinitely dropped in April and the announcement of their reintroduction earlier this month.
5. Corporation tax rate
The corporation tax rate will be reduced from 20% to 19% from 1 April 2017. This continues the steady drop in corporation tax rates over several years (it was 28% in 2010), which forms part of the Government's project to make the UK as tax competitive as possible. A further drop to 17% is expected in April 2020.