Earlier today the Chancellor of the Exchequer delivered the UK 2014 Autumn Statement. Below we summarise some of the main announcements:
Taxation of multi-nationals
Diverted profits tax (aka the "Google tax")
With effect from April 2015, the UK will introduce a 25% "diverted profits tax" on multi-nationals that artificially move profits from the UK to lower-taxed jurisdictions. Whilst the Chancellor didn't name any names, it is likely that large international tech companies are the target of this announcement. Many of those companies have been criticised recently for the amount of UK corporation tax they pay. That said, it is unclear how this new tax will work as the government hasn't yet provided any meaningful detail.
BEPS - Hybrid mis-matches and country-by-country reporting
The Chancellor affirmed the government's on-going support for the OECD project on base erosion and profit shifting (BEPS).
In line with recent announcements, the government will consult on the implementation of the rules tackling hybrid mis-matches. These rules are expected to take effect in the UK from January 2017, after the OECD has issued its final guidance.
The Chancellor also confirmed that the government will implement country-by-country reporting for multi-nationals, which will require them to provide information to HMRC on their global allocation of profits and taxes, and on certain indicators of economic activity by territory. The rules should be introduced in 2016 and reporting will commence in 2017.
Banks in the UK have accumulated significant losses during the global financial crisis and due to mis-selling scandals. The government considers it inequitable for the banks to utilise all of these losses to shelter tax on future profits. Accordingly, from April 2015, no more than 50% of a bank's annual profits will be able to be offset by carry-forward losses. This cap will only apply to carry-forward losses arising before April 2015.
Stamp duty - Company takeovers
UK company takeovers are often carried out by "cancellation" schemes of arrangement where a target's existing shares are cancelled and new shares are issued to the acquirer. No UK stamp duty arises as no transfer of existing shares occurs. The government intends to amend the companies legislation early in 2015 to prevent cancellation schemes being used in this way, thereby denying any stamp duty saving on a takeover.
"B" share schemes
A "B share scheme" is a method by which UK companies return excess capital to shareholders in a form that shareholders elect - either as income (ie a dividend) or as capital for the purchase or redemption of shares.
With effect from 6 April 2015, all returns to shareholders via a B share scheme will be taxed in the same way as a dividend, regardless of the legal form of such returns.
Disposals of goodwill to related companies
Two related measures were announced, both of which take effect today. These measures are designed to prevent individuals extracting funds from a business at low rates of tax.
- Entrepreneurs' relief gives a favourable 10% rate of capital gains tax to disposals by individuals and trustees of certain types of "business asset". Business assets will no longer include goodwill disposed of by an individual to a closely-held company related to the individual.
- The UK intangible fixed asset rules grant companies relief for goodwill and other intangibles, generally as the cost of those assets is amortised in accordance with GAAP (or at a fixed rate of 4% following an election). Such relief will now be restricted for companies which acquire goodwill from related individuals.
Late paid interest
The late paid interest rules deny companies tax relief for interest on related-party debt until the interest is paid (rather than when the interest accrues) if it remains unpaid for 12 months. They have limited scope as they only apply where the creditor is resident in a tax haven. Some companies also use the rules to defer the recognition of interest relief to a point in time where it has the greatest advantage - eg where excess interest relief can be surrendered to other group companies.
For loans entered into from today, much of the late paid interest rules will be repealed - thereby simplifying the legislation and preventing companies manipulating the recognition of interest relief. Existing loans will remain subject to the "old" rules until 1 January 2016, unless material changes are made to the loans before that date (in which case the repeal will be effective from the date of the material change).
Other interest and finance measures
- The government has affirmed its commitment to modernising the UK rules which tax corporate debt and derivatives (the loan relationships and derivative contracts rules), with a view to greater consistency between accounting profits and taxation. These changes should be introduced in Finance Bill 2015.
- The government will include in Finance Bill 2015 a new exemption from UK interest withholding tax (currently levied at 20%) on interest on qualifying private debt placements to help unlock new finance for businesses and infrastructure projects.
Research and development
From April 2015, the government will increase the small and medium enterprise R&D tax credit rate to 230% (from 225%) and the large company "above the line" credit to 11% (from 10%). These increases are largely a consequence of the reduction of the main UK corporation tax rate to 20%, also taking effect in April 2015.
Real estate tax
Stamp Duty Land Tax (SDLT) on residential property
The rates and calculation of SDLT on purchases of residential property are changing (with effect from midnight on 3 December 2014) so that the rates will apply to the portion of the price within each band, i.e. it will be a progressive structure rather than a 'slab' system as it has been up until now.
The new rates and thresholds apply so that each portion of the transaction value will be taxed as follows:
- value up to £125,000 - 0%
- portion between £125,001 and £250,000 - 2%
- portion between £250,001 and £925,000 - 5%
- portion between £925,001 and £1,500,000 - 12%
The effect is that any house sold at a price of £937,500 will have exactly the same SDLT liability as previously. Lower priced houses will have a reduced SDLT charge but higher priced houses will face a greater charge. For high value houses the additional SDLT may be material and may, notwithstanding the annual tax on enveloped dwellings introduced last year, encourage enveloping in corporate wrappers to save stamp tax costs (a sale of shares in a company attracts stamp tax at 0.5%) and potentially inheritance tax.
The current SDLT rates can continue to be applied if a contract for sale is exchanged on 3 December or earlier. This is the case even if completion occurs at a later time. The rates and calculation of SDLT on commercial and mixed use property are not affected.
SDLT Seeding relief for certain funds
The government has said that it will introduce SDLT seeding relief for investors transferring portfolios in to property authorised investment funds and co-ownership authorised contractual schemes.
Capital gains tax charge for non-residents disposing of UK residential property
Before the Autumn Statement, the government released its proposals for a capital gains tax charge on non-UK residents disposing of UK residential property on which the government has been consulting since March 2014. We have written a separate client alert on those proposals which we will circulate shortly.
Employment and share schemes taxation
- Following announcements in the Budget in March 2014, the government published two consultation papers on proposals to:
- create a concept of a "marketable security", with the aim of allowing individuals who receive shares by virtue of their employment at a discount to market value to elect to defer paying the tax on the discount until the shares become "marketable", and
- to create a new "employee shareholding vehicle" which would be able to hold shares in a company for the benefit of employees in a similar way that "employee benefit trusts" currently do so, but which would benefit from relaxations to some of the complex tax rules which apply to employee benefit trusts.
- Following the consultation process, the government has today announced that it will not now proceed with either of these two proposals. We are aware that there were some aspects of the proposals which caused concern for companies, but it is disappointing that the Government has chosen to abandon the proposals altogether rather than refine them in line with suggestions made during the consultation process.
- In what will be a welcome boost for many UK businesses, from April 2016 the government will abolish employer NICs (currently levied at 13.8%) up to the upper earnings limit for apprentices aged under 25.
Increase in remittance basis charge
UK residents who are not domiciled in the UK and who choose to pay tax on the remittance basis will have to pay increased charges from April 2015 as follows:
- £60,000 (increased from £50,000) for those who have been UK residents for 12 out of the past 14 tax years, and
- £90,000 (a new charge) for individuals who have been UK non-domiciled and resident for 17 out of 20 years.