This update summarises tax announcements made in the UK Autumn Budget on Wednesday 22 November 2017 that are likely to be most relevant to our clients. It is not a comprehensive summary and does not cover (in particular) many measures primarily relevant to individuals, small businesses, or specific industries other than the oil and gas sector.While the headline grabbing measure was the abolition of stamp duty land tax for certain first time buyers, hidden within the Budget papers are a number of significant tax reforms for businesses. This is perhaps surprising, with Brexit looming and given the Chancellor’s stated desire for fewer changes.
Oil and Gas Tax
Transferable tax history
The big news for the oil and gas industry made it into the Chancellor’s speech. This is the introduction of a “transferable tax history” mechanism for oil and gas producers, which has been the subject of significant consultation with industry. It is described by the government as a “world first”.
The measure is intended to address a perceived barrier to UK North Sea deals for new entrants; namely, the inability to access full tax relief for the costs of decommissioning fields. Unlike companies which have been operating in the UK North Sea for decades and therefore often have a long history of paying tax (at high rates), new entrants will not have such “tax history”. This is problematic because decommissioning expenditure is relievable and in many cases will give rise to tax losses, which can be carried back to previous years, generating repayments of the tax that has been paid in those years. New entrants have no “tax history” and therefore, although decommissioning expenditure is in principle relievable, limited value can be obtained for that relief.
As this concept is unprecedented in UK corporation tax, and given sensitivities on it being used for tax avoidance, the mechanism will inevitably be complicated. The government has provided some key design principles by reference to which the measure will be legislated, which include the following:
- It will allow the transfer of historic profits which have been subject to ring fence corporation tax and supplementary charge.
- It will be optional and the amount transferred will be a matter of negotiation between the parties (subject to anti-avoidance safeguards).
- It will be applied on a “last in, first out” basis, meaning that tax history from more recent years will be transferred first.
- The buyer will track the profits and losses generated by the field that is transferred as a “shadow” calculation.
- The seller’s tax history will only become available to the buyer once it is “activated”, which will be when the transferred field has permanently ceased production and only to the extent that the total loss incurred on decommissioning the field is greater than its post-acquisition “tracked profits”.
Draft legislation and a technical consultation paper will be published in Spring 2018. Transferable tax history will be made available for deals on or after 1 November 2018.
PRT on retention of decommissioning
Back in 2016, the government clarified that companies can retain decommissioning obligations after the sale of an asset and access corporation tax relief for the associated costs, but had not addressed the petroleum revenue tax (“PRT”) position. The government has now announced that they will launch a consultation on the PRT position in Spring 2018.
Legislation will be introduced to clarify that tariffs derived from oil and gas infrastructure are within the higher taxed “ring fence”, regardless of whether the underlying field is within the PRT regime or not. The measure will have effect for accounting periods beginning on or after 1 January 2018.
The government will then also introduce long-awaited regulations (which were announced in March 2016) allowing a company’s tariff income to “activate” any Investment and Cluster Area Allowances. These had been delayed because of the definitional issue identified in relation to tariffs. A technical note will be published on 1 December 2017.
Another issue for the oil and gas sector that has been the subject of discussions with government is the treatment of tax losses following a change in ownership. It has been confirmed that HM Revenue & Customs will publish further guidance on this area.
Business Tax Measures
Competitiveness and rates
With Brexit on the horizon, the Chancellor was keen to affirm his commitment to maintaining the UK’s competitive tax regime for business. The phased reduction from the current corporation tax rate of 19 per cent to 17 per cent from April 2020 will go ahead as planned. There are no changes to the income tax or capital gains tax rates (which apply to individuals).
Abolition of indexation allowance
Indexation allowance on corporate chargeable gains (which is intended to eliminate the effect of inflation in the chargeable gains calculation) will be frozen. This measure aligns the manner in which capital gains made by individuals and non-incorporated businesses are calculated where no indexation allowance is available. This will apply for disposals on or after 1 January 2018.
Taxing non-resident gains on UK land
Following the introduction in 2016 of detailed legislation aimed at taxing non-resident companies trading in UK residential property, the government has announced additional wide-sweeping measures to bring all UK residential and commercial property within the charge to tax, regardless of the residence status of the person making the disposal.
This is a significant and unexpected announcement which will, for the first time, make non-residents subject to tax on capital gains from commercial property. The measure will cover not only direct disposals of UK land, but also indirect disposals (broadly, disposals of “property-rich” entities deriving 75 per cent or more of their value from UK land) where the non-resident or a related party holds, or has held within the previous five years, a 25 per cent or greater interest in the entity being disposed of. The consequences of these changes will no doubt be far-reaching.
The changes will be complemented by a targeted anti-avoidance rule and also an “anti-forestalling” rule which, effective from 22 November 2017, will counteract arrangements designed to circumvent the new rules by exploiting provisions in a tax treaty.
While the government has indicated that some aspects of the reforms are fixed, it is consulting with affected taxpayers to ensure the rules are effectively targeted. The new measures are anticipated to have effect from April 2019.
Corporation tax applying to non-residents
Separately, the government has confirmed (following its consultation published in March 2017) that it will legislate, effective 6 April 2020, to bring non-resident companies with a UK property business within the charge to corporation tax, rather than income tax and capital gains tax as at present.
Stamp taxes and capital markets: 1.5 per cent charge
On the capital markets side, concerns had been expressed that the government would use Brexit as an opportunity to reintroduce the 1.5 per cent stamp tax charges that applied to share issues into depositary receipt systems and clearance services, which had been held to be non-compliant with EU law. In the Budget it was announced that these 1.5 per cent charges will not be reintroduced following Brexit.
Other noteworthy measures include the following:
- An undertaking to review employment status, in both an employment law and tax context, in light of modern working practices (such as the “gig economy”);
- Increasing the R&D expenditure credit from 11 per cent to 12 per cent (from 1 January 2018);
- Doubling the investment limit in the Enterprise Investment Scheme from £1m to £2m (from 6 April 2018);
- Consultations on the intangible fixed asset regime and trusts (to commence in 2018);
- Amending the UK’s statutory powers to ensure that the government can give full effect to the BEPS Multilateral Instrument which it signed on 7 June 2017.
Anti-avoidance and Anti-evasion Measures
The Budget contained the usual plethora of anti-avoidance and anti-evasion measures.
The attack on tech companies in recent years continues. In his speech the Chancellor referred to multinational digital businesses who pay billions of pounds in royalties to jurisdictions where they are not taxed. The Budget announces an extension of withholding tax to cover royalties, and other similar payments, that are connected with sales to UK customers where such payments are made to low or no tax jurisdictions. This measure will apply irrespective of the payer’s location. A consultation paper will be published on 1 December 2017, with legislation being implemented in April 2019. There are indications that these measures will not be the last to affect tech companies, and a wider paper on the digital economy was also published.
Other measures included the following:
- Carried interest: Transitional provisions which were introduced at the time that the carried interest rules were changed in 2015 will be removed as they are no longer required. This is stated to be to ensure that asset managers receiving carried interest pay capital gains tax on their full economic gain. This applies with immediate effect;
- Double tax relief: A restriction will be introduced to the relief for foreign tax incurred by an overseas branch of a company, where the company has already received relief overseas for the losses of the branch against profits other than those of the branch (with immediate effect);
- Offshore structures disclosure: An undertaking to publish a response on the consultation on the requirement of designers of offshore structures to notify HMRC of those structures;
- Offshore affairs time limits: An extension in the time limit for HM Revenue & Customs making assessments to 12 years for non-deliberate offshore tax non-compliance (to follow a consultation in Spring 2018);
- Tax abuse of the insolvency regime: Tackling tax evasion and avoidance abuse in the insolvency regime, including through the use of “phoenixism”, where solvent companies are liquidated in order for the shareholders to gain a tax advantage. Legislation to counter abuse was introduced in 2016 and there are no further details as to what the new legislation will target. A discussion document will be published in 2018.
- VAT fraud: Amongst other VAT measures, a new VAT domestic reverse charge to tackle fraud in the construction industry will be introduced (from 1 October 2019).