Whilst one of the most eye-catching announcements on 11 March was the Bank of England’s drop in interest rates from 0.75% to 0.25%, the 2020 UK Budget included a limited number of finance tax related measures. A brief snapshot of these is set out below.

UK funds regime review

The Government has announced that it is launching a review of the UK funds regime, including a review of the VAT charged on fund management fees, and a consultation to explore the attractiveness of the UK as a location for the intermediate entities through which alternative funds hold fund assets.

The consultation will explore the merits of removing barriers that the UK tax system might be creating to the establishment of asset holding companies in fund structures in the UK, and the merits of removing such barriers. Issues identified in the consultation include the eligibility criteria for the securitisation tax regime in the UK (the £10 million issue threshold and the permitted activities and financial assets of the securitisation vehicle), particularly in the context of credit funds, withholding tax on corporate interest, and the scope of the UK hybrid mismatch rules.

Review of VAT on financial services

The Government will set up an industry working group to review how financial services are treated for VAT purposes. This is an interesting prospect in the context of the UK’s departure from the EU, given that the scope of the finance exemptions from VAT has long been seen as a fraught area and historic efforts to revise and modernise the regime at the EU level have not been successful.

Reform of LIBOR and impact on tax legislation

The interest rate benchmark, LIBOR, is expected to be discontinued at the end of 2021. Accordingly, the Government has announced that it will consult to ensure that, where tax legislation makes specific reference to “LIBOR”, it continues to operate effectively. The consultation will also enable the Government to ensure that it is aware of all the significant tax issues that arise from the reform of LIBOR and other benchmarks.

Consultation on aspects of the hybrid mismatch rules

The hybrid mismatch rules, introduced in 2017, are aimed at counteracting tax mismatches where the same item of expenditure is deductible in more than one jurisdiction or where expenditure is deductible but the corresponding income is not fully taxable. The Government has announced that it will publish a consultation on these rules to ensure that they work proportionately and as intended.

Surcharge on banking companies for transferred losses

The bank corporation tax surcharge is a charge of 8% on the profits of banking companies, payable in addition to corporation tax. Current rules prevent a banking company’s chargeable gains from being offset by losses transferred in from non-banking companies in prior periods. The Government will legislate in the Finance Bill 2020 to extend this restriction so that losses cannot be used to reduce in-year chargeable gains.

Insolvency – previously announced tax reforms to go ahead

As announced at Budget 2018, the Government will change the existing rules so that HMRC will become a preferred creditor in insolvencies, although only in respect of taxes collected and held by businesses from other taxpayers (such as VAT, PAYE and construction industry scheme deductions). Taxes owed by the businesses themselves (such as corporation tax and employer NICs) will remain unaffected. These changes will now commence from 1 December 2020 (previously 6 April 2020).