The government has today announced a number of changes to the UK corporate tax code.
Further reductions to main corporation tax rate
The main corporation tax rate is to be reduced from 20% to 19% in 2017, and then down to 18% by 2020. This is the lowest such rate in the G20 and evidences of the government’s continued commitment to supporting UK business and attracting businesses to the UK.
Reform of corporate debt
The government reiterated its commitment to the reform of the UK tax rules governing corporate debt and derivative contracts. The new legislation will clarify the relationship between tax and accounting, base taxable loan relationship profits on accounting profit and loss entries, introduce a new ‘corporate rescue’ rule to provide tax relief where loans are released or modified in cases of debtor companies in financial distress and impose new regime-wide anti-avoidance rules for both loan relationships and derivative contracts.
This will constitute a substantial change to this important area of corporate taxation. Fortunately, these changes have been deferred to January 2016 (originally planned for January 2015), giving useful further preparation time.
Removal of tax deductions for purchased goodwill
The government announced, with effect from today, the removal of tax relief for expenditure incurred on the purchase of goodwill.
This tax relief has historically been an important factor for a buyer when assessing whether a corporate transactions should be structured as an asset (as opposed to a share) purchase. Removing this tax differentiation between asset and share transactions is likely to influence M&A structuring going forward.
Acceleration of corporation tax instalment payments
Currently, large companies in the UK pay tax in instalments, but they do not have to start paying it until the seventh month of their accounting period. As a result, the largest companies in the UK pay tax later than most G7 countries and individuals. This lag creates a cost to the Exchequer. From April 2017, the government will bring forward payment dates for these companies so that they will be will be required to make corporation tax payments in the third, sixth, ninth and twelfth months of their accounting period.
Restriction on loss relief for CFC profits
From 8 July 2015, where profits are being diverted from the UK but then brought back in through the UK Controlled Foreign Company anti-avoidance legislation, it will no longer be possible for companies to offset losses and expenses against such profits. This change is clearly intended as another stick to prevent taxpayers from seeking to divert profit from the UK.
Annual investment allowance
The annual investment allowance is a form of capital allowance (broadly giving businesses a 100% upfront allowance on qualifying expenditure within an annual limit). The limit was due to revert from the current temporary limit of £500,000 to £25,000 from 1 January 2016. It will now drop to an increased permanent limit of £200,000.
Intra-group transfers of stock and intangibles
From 8 July 2015, anti-avoidance provisions will apply to ensure that market value consideration is imputed to transfers of stock (in certain circumstances) and intangibles between corporate group members.