With the first wintry winds beginning to wind their way up Parliament Street, the Chancellor of the Exchequer went to the despatch box on December 3rd to give the final Autumn Statement before the General Election and set out a stall showcasing the Government's latest tax wares.
It is, as always, difficult to comment in any detail about what is proposed before draft legislation is published, and draft legislation will not generally (other than in respect, for example, of the reforms to the stamp duty land tax treatment of residential property, in relation to which a Bill was published today) see the light of day before 10 December 2014. However, on the basis that a little information may be better than none, we have set out below a brief summary of some of the most significant announcements made on December 3rd, albeit that the picture should become rather clearer when the draft Finance Bill is released for public scrutiny.
HM Revenue and Customs ("HMRC") is known to have been hoping that a significant amount of legislation, much of it not referred to by the Chancellor at all today (for example, including a significant reform of the loan relationship rules), will be on the statute book before the General Election. However, the position is expected to depend very much upon the outcome of political horse trading in March 2015 and there is likely, therefore, to be a rather greater amount of uncertainty in the coming months than would normally be the case.
Measures of general application to the corporate sector
New "diverted profits" tax
Fourth time lucky? Since the original controlled foreign company rules were introduced in the 1980s, HMRC has been seeking to bring into charge to UK tax corporate profits which have been diverted abroad. In 1998 this effort was bolstered by the introduction of a "modern" transfer pricing regime based on the then OECD guidelines, and the Finance Act this year included a very widely cast anti-avoidance rule to frustrate arrangements designed to transfer of corporate profits. A measure of the quantum of the perceived problem can be discerned from a recent survey of seven "tech" groups by the Financial Times which suggested that the groups concerned paid just £54m in UK corporate tax during 2012 notwithstanding having a combined UK turnover of £1.7 billion and overall sales to customers in the UK of around $15 billion.
Little information has, as yet, been published in relation to the new tax and much is likely to depend upon precisely how a "diverted profit" is defined. However, the setting of the rate of tax at 25% above what will be the rate of corporation tax (20%) from April 2015 may suggest that the Government hopes to influence behaviour by persuading companies to pay corporation tax in the UK (i.e. rather than just relying on payment of the new tax to increase the tax base). The new tax is estimated to raise £25 million in 2015, rising to £355 million in 2019-2020, subject to what is perhaps a little quaintly described as "uncertainties around the tax base and the size of the behavioural effect".
The demise of the 'B share scheme'
'B share schemes' have been used for many years to allow shareholders to opt to realise value from a shareholding in a company by making a capital gain, instead of by receiving taxable income. The Finance Bill 2015 is to include legislation designed to ensure that a shareholder will be taxed on a receipt from a 'B share scheme' as though that shareholder had received dividend income (rather than having made a capital disposal).
Stamp duty on schemes of arrangement
In a rather curious move, curious in part because it seems somewhat draconian to alter company law in order to seek to end a perceived avoidance of stamp duty or stamp duty reserve tax, company law is to be amended to prohibit the use of a share capital reduction in the context of a takeover involving a scheme of arrangement. This change is also curious because the courts have been astute to refuse to bless a scheme undertaken solely to avoid stamp duty; indeed, in Re Rylands v Whitecross Limited (1973, unreported) the court refused to sanction a scheme the sole purpose of which was to save duty on a pre-arranged sale which could have been achieved without the court's assistance. The necessary legislation is to be introduced in early 2015.
Debt finance… the path winds on-and-on…
The Government has followed through on the promise, made during the 2014 party conference season, to publish a consultation document on implementing the OECD's proposals with respect to hybrid mismatch arrangements. With effect for payments made on or after 1 January 2017, the existing tax arbitrage rules are to swept away and replaced by an entirely new code. The new code will operate rather differently from the existing rules ("mechanically" is term used in the consultation document) and, in particular, will not require that a purpose test be satisfied where debits arise in the United Kingdom. Although 2017 is a little way off, well advised groups are already giving consideration to the impact of these new rules and, in response to clearance applications it has already received, HMRC published supplementary guidance last month relating to the application of the CFC rules to attempts to circumvent the anticipated new legislation in respect of hybrid arrangements and instruments.
Withdrawal of the rules relating to late paid interest and deeply discounted securities
In a move which is likely to be particularly lamented by the private equity sector, the rules which defer relief in respect of late paid interest and deeply discounted securities are to be repealed with respect to any loan entered into on or after 3 December 2014 (and grandfathering will only apply in respect of interest and discount on loans entered into prior 3 December 2014 in relation to debits which accrue up to 31 December 2015). The justification given for this measure is twofold: in HMRC's view the ability to defer relief until a subsequent period when it would be possible to surrender that relief within a group "effectively sidesteps the intention behind group relief that relief should be available for in-year losses only and, secondly, is inconsistent with the purpose of rules which were introduced in 1996 to prevent (rather than facilitate) perceived avoidance.
Close company loans to participators
The Autumn Statement includes a helpful confirmation that the Government has completed its review of the tax charge which can apply in respect of a loan from a close company to a participator in that company - and does not intended to make any changes to these rules.
Peer-to-peer ("P2P") funding comes of age
In a recognition of the increasing amount of debt capital being made available through less traditional sources, from April 2016 individuals will be able to claim a relief for losses incurred from April 2015 from P2P lending against income from P2P lending. The Government is also to consult on the introduction of a withholding tax regime for P2P lending platforms - and, while this is expressed to be intended to help individuals by simplifying their self-assessment compliance, it strongly suggests that companies borrowing from P2P platforms may not be complying with their existing obligation to withhold tax in respect of yearly interest.
Banks and the financial sector
It has been a long time coming, indeed some sort of action was widely predicted in 2010 (albeit, perhaps deemed too risky given economic and credit conditions at that time), but the Chancellor has decided to pounce on the very considerable losses (trading losses, non-trading loan relationship deficits and management expenses and charitable donations or UK property business losses which are treated as management expenses) carried forward by some banking groups as a result of the financial crisis. From 1 April 2015, a company which carries on certain regulated activities will only be able to set off half of its profits against relevant losses. The new restriction will not apply in respect of losses which arise on or after 1 April 2015, nor in a move designed to help new entrants to the market (such as Metro Bank) will the new restriction apply to losses which arose in the first five years during which a company has carried out a relevant regulated activity. There are to be two targeted anti-avoidance rules - the first an anti-forestalling measure intended to prevent the use of losses being accelerated prior to 1 April 2015 and the second designed to prevent profits being moved with a group on or after 1 April 2015. This measure will apply to banks and building societies, but not friendly societies, credit unions, insurance companies, pension scheme managers, investment trusts, asset managers, commodity traders or spread betting companies. In its first year of operation alone, this new restriction is expected to generate £695 million for the Exchequer, thereby perhaps making up in part for the disappointing revenues generated by the Bank levy since its introduction in 2011.
HMRC has, at last, began to show its hand in relation to the structural implications of IFRS 9 which was finally promulgated over the summer after years of torrid negotiations between accounting standard setters. The Autumn Statement indicates that transitional adjustments arising from the treatment of prospective credit losses under IFRS 9 is to be spread over 10 years, irrespective of when a debt falls due.
While there was little "good" news for the banking sector in what the Chancellor had to say, banks (and insurance companies) and their shareholders, may draw a crumb of comfort from the Government's intention to exempt hybrid capital raised by banks (and insurance companies) from externally issued hybrid regulatory capital which is "downstreamed" through a group.
There are, perhaps not surprisingly, signs that HMRC is looking to deploy ideas developed, initially, in the banking sector more widely. While the Finance Act 2014 introduced, somewhat controversially, a power for HMRC to "name and shame" a bank which either refused to sign up for, or breaches, the Code of Practice on Taxation for Banks, the Autumn Statement includes a proposal to allow HMRC to publish "summary" information on schemes disclosed under the DOTAS rules and the promoters of those schemes.
Oil and gas sector
The supplementary charge is to be reduced by 2% to 30% on 1 January 2015 and the Government has announced an "aim to reduce the rate further in an affordable way".
A new cluster area allowance, which it is envisaged should be worth £95 million to the industry by 2019-2020, is to be introduced for qualifying expenditure incurred on or after 3 December 2014 to develop high pressure, high temperature projects and explore/appraise the surrounding area/"cluster". A cluster area, for these purposes, is an area as determined by the Secretary of State (following consultation with any licensee of an area which is included in a proposed cluster area) which is not a previously authorised oil field (or part of such a field) and is on the seawide side of the baselines from the which United Kingdom's territorial sea is measured.
R&D tax credits
From 1 April 2015, the rate of above-the-line R&D credit will be increased to 11% (from 10%), and the SME rate will increase to 230% (from 225%) - albeit that the costs of materials incorporated in products which are sold is to be excluded from the qualifying expenditure which may qualify for credits.
Non-doms - the cost of using the remittance basis is set to increase, again…
The £50,000 charge which must be paid by certain individuals who are not domiciled in the United Kingdom in order to benefit from the remittance basis is to be increased to £60,000 in the next Parliament and a new £90,000 charge is to be introduced for individuals who have been resident in the United Kingdom for 17 out of the preceding 20 years.
Tax evasion and avoidance
Attempts by the private equity houses to structure annual management fee arrangements in such a way as to be taxable as capital (rather than as income) are to be brought into charge to tax as income from April 2015 on the basis that they constitute the fruits of managing investments (rather than a return based on investment performance).
The barrage of measures aimed in recent years at the misuse of offshore arrangements continues unabated. The penal penalty regime applying to such arrangements is to be extended to include inheritance tax and also to apply to onshore tax avoidance where the proceeds of non-compliance are concealed offshore. A new penalty, at the rate of 50%, is to be introduced following Royal Assent to the Finance Bill 2015 for moving hidden funds to circumvent international arrangements intended to enhance tax transparency.
The accelerated payment rules, introduced by the Finance Act 2014, are to be amended to allow HMRC to issue an accelerated payment notice to a company which is involved in an avoidance arrangement has no tax itself to pay and could otherwise make a group relief claim to surrender an amount in dispute with HMRC. This measure is expected to bring forward some £425 million to 2015-2016 (unwinding by the end of 2018-2019).
Better targeting of tax reliefs?
Perhaps spurred, in part (and it would seem, not terribly energetically), by criticism last week from the National Audit Offices on the manner in which the benefit of some 400 tax reliefs have been tracked by HMRC, the Chancellor has announced a range of measures which seek to tweak or restrict particular relief. In particular:
- relief for "miscellaneous" losses under section 152 of the Income Tax Act 2007 is to be denied, saving the Exchequer a projected £5 million a year, where a loss arises as a result of arrangements which have as their main purpose, or one of their main purposes, obtaining loss relief under section 152.
- where a business is incorporated on or after 3 December 2014 relief for internally generated goodwill and certain customer related intangible assets is to be calculated and granted when a relevant asset is disposed of (rather than, as at present, when the goodwill or asset is acquired).
- where goodwill is disposed of, on or after 3 December 2014, to a close company by a related party, entrepeneurs' relief will not be available in respect of that goodwill. This measure is intended to save the Exchequer £5 million in the current tax year, rising to £155 million a year by 2019-2020.
- entrepeneurs' relief is to be extended so that, where a gain is eligible for relief but the proceeds arising from a disposal are invested in the enterprise investment scheme ("EIS") or social investment tax relief ("SITR") qualifying investments, entrepreneurs' relief can apply when a gain is realised on disposal of those investments. The benefit of tax advantaged venture capital schemes (e.g. EIS and VCT) and SITR is to be denied where government subsidies are available for the generation of renewable energy.
"Home sweet home"?
The infamous (and much criticised) 'slab' structure of stamp duty land tax is to be abolished, in respect of residential property, and replaced by a set of marginal rates from 2% (for £125,001 to £250,000 up to 12% (over £1.5 million).
According to HM Treasury's figures, it is only where the consideration for a property exceeds £937,500 that more SDLT will be payable than under "slab" regime. However, the burden on higher value properties will be considerably increased - a fact recognised by the ability which is to be introduced for a purchaser to opt for the slab system to apply where a contract has been exchanged before 4 December 2014 without having completed. Where the new rules apply the "linked transaction" rule will operate differently from before so that, when that rule applies, all the relevant transactions will be charged to SDLT as non-residential/mixed use land.
The rate of the ATED is to be increased by 50% more than the rate of inflation for residential properties worth more than £2 million on 1 April 2015.
The "feel good" factor?
With a General Election approaching the Chancellor found time to help "middle England" in two ways:
- The price of a family holiday abroad should fall with an exemption from air passenger duty being introduced, in respect of economy flights, on 1 April 2015 for each child under 12 (and from 1 April 2016 for each child under 16).
- More substantively, and in a way which is likely to have quite a significant impact on many planning to fund their retirement, the ISA status of investments passing on death occurring on or after 3 December 2014 to a spouse or civil partner are to be preserved by allowing the survivor the benefit (from April 2015) of an allowance equal to the value of the ISA investments previously held by the deceased.