In the immediate aftermath of the UK's vote to the leave the EU, it has become commonplace in Britain for the news to be viewed through a Brexit prism: what does it tell us about the UK's position in the world? How does it substantiate or discredit claims made during the referendum campaign? What does it tell us about the government's still nascent negotiating strategy and objectives?
Of course, some of that “Brexit spin” is pure nonsense, added to a story to make it seem more salient. But when it comes to impending tax, legal and regulatory changes that affect the financial services industry, it is now more important than ever to judge how they might help or hinder the UK in its quest to maintain London’s position as a centre of excellence. That is by no means the only criterion by which to judge them, but it is a vital question – and one that will inevitably be posed in the wake of the government’s "autumn statement", its set-piece package of tax and spending announcements which will be delivered on 23 November.
One big question for the new Chancellor will be how to handle the initiatives that were in progress before the referendum, and he has already made it clear that he is not wedded to his predecessor's policies. So the private equity industry might hope to hear some positive news on four ongoing consultations: the potential extension of the substantial shareholder exemption from corporation tax on chargeable gains, the proposed changes to corporation tax loss relief, changes to the interest deductibility regime in the light of the OECD's anti-tax avoidance measures (known as BEPS), and on changes to the rules applying to those resident in the UK but not domiciled there (so called “non-doms”). While reform of the substantial shareholder exemption may be useful to some funds and fund structures, and make the UK more attractive as a location for holding companies, that good work could be partially undone if proposed restrictions on the use of corporation tax losses and cuts to tax deductions for interest expense go ahead without modification or appropriate transitional relief. Add to that a desire to take more tax from non-doms and there is some risk to the UK’s competitiveness in this package of seemingly diverse measures.
But while these changes pose some near term threats, partnership tax practitioners have been studying some more recent proposals which could lead to helpful long term changes for private equity. The consultation document, “Partnership taxation: proposals to clarify tax treatment” says that the government wants to make life easier for compliant taxpayers, while cracking down on tax dodgers. That could be very good news: it could, for example, help many non-UK managers which use UK limited partnerships but otherwise have no UK business or investors; and there is an open invitation for the investment funds industry to suggest ways to improve the rules which apply to it. That is not to say that there are no potential issues with the partnership proposals, and HMRC’s call for respondents to identify unintended impacts should be taken at face value. Recent publicity surrounding the use of Scottish limited partnerships for money laundering purposes also makes it particularly important that the private equity industry makes its voice heard.
But, at least in this particular consultation, the government does seem to recognise the importance of striking the right balance between having an internationally competitive regime for limited partnership funds, while dealing with undesirable tax avoidance. More broadly, the government could take the opportunity of the forthcoming autumn statement to set the course for a more coherent and evidence-based tax policy, and to restore some certainty for businesses – in a post-Brexit world, such certainty is more important than ever.