Set out below is a high-level summary of some of the significant changes announced in the Budget on 23rd March 2011.
Controlled Foreign Companies Reform
A package of interim improvements to the controlled foreign companies (CFCs) rules are to be made in the Finance Bill 2011 which will have effect for accounting periods beginning on or after 1 January 2011.
The law will be changed by Finance Bill 2011 to:
- introduce an exemption for certain intra group trading transactions where there is little connection with the UK and therefore it is unlikely that UK profits have been artificially diverted;
- introduce an exemption for CFCs with a main business of intellectual property (IP) exploitation where the IP and the CFC have minimal connection with the UK;
- introduce a statutory exemption which runs for three years for foreign subsidiaries that, as a consequence of a reorganisation or change to UK ownership, come within the scope of the CFC regime, including those that are not currently CFCs but have previously been so, making the exemption available to previously UK-headed groups if they return to the UK;
- introduce an alternative to the current de minimis exemption, which will increase the limit to £200,000 profits per annum, and replace the need to calculate chargeable tax profits with an accounts based measure; and
- extend the transitional rules for superior and non-local holding companies until July 2012.
The full CFC reforms will be introduced in Finance Bill 2012. The aim of this measure is to make the CFC regime more competitive while providing adequate protection of the UK corporation tax base. The new regime will introduce a mainly entity based system that will operate in a targeted and more territorial way by bringing within a CFC charge only the proportion of overseas profits that have been artificially diverted from the UK. The new rules will include a finance company partial exemption that, in broad terms, results in an effective UK tax rate of one-quarter of the main rate on profits derived from overseas group financing arrangements. A consultation document describing the new regime is expected in May 2011.
Taxation of Foreign Branches
Legislation will be introduced in Finance Bill 2011 to provide an opt-in irrevocable exemption from corporation tax on the profits of foreign branches of UK companies. Where a treaty with a non-discrimination article is in place, the exempt income will be the UK measure of the profits of the permanent establishment that are taxable by the other state in accordance with the relevant treaty. Otherwise the measure will be based on the OECD Model Tax Convention. Exempt profits will include any capital gains attributable to the foreign branch and taxable under the treaty. No relief will be available for foreign branch losses. Certain restrictions will prevent abuse whereby profits that would otherwise remain within the charge to corporation tax are diverted to an exempt foreign branch. There will also be a transitional rule to ensure that any outstanding loss relief which has been claimed in the last six years is recaptured (except in the case of very large losses, which will remain in the scope of the transitional rule indefinitely). Draft legislation deals with allowing certain life insurance companies to benefit from exemption, ensuring that the transitional rule is workable for business and ensuring that the anti-diversion rules are more targeted and proportionate.
The Government is to introduce a reduced 10% rate of corporation tax rate for profits arising from patents, effective from 1 April 2013. A consultation document is expected in May 2011.
Consultation on Devolving Corporate Taxation to Northern Ireland
With the relatively low Irish Corporation Tax Rate in mind, the Government is working with the Northern Ireland Executive to rebalance the Northern Ireland economy and will shortly publish a consultation paper which will include looking at mechanisms for devolving the power to set the rate of corporation tax that applies to Northern Ireland to the Northern Ireland Executive.
Tax Treaties Anti-Avoidance
The Government intends to introduce an anti-avoidance measure in Finance Bill 2012 that would ensure that relief or exemption from UK tax is not given where a claim is made under the UK’s double taxation treaties and where arrangements have been made in relation to the claim to avoid UK tax. It is aimed at UK residents (individuals, trustees and companies) who use tax avoidance scheme and overseas residents (often based in countries with which the UK does not have a tax treaty) who enter into arrangements to obtain benefits under the UK’s double taxation treaties where they are not properly due. Such an approach would be in accordance with generally accepted international principles as set out by the OECD in the Commentary to its Model Tax Convention. The Government will be consulting on this measure and it will invite representations on the draft clauses when they are published in the autumn.
Transposing the Mutual Assistance Recovery Directive
Legislation will be introduced in Finance Bill 2011 to enable the UK to implement the Mutual
Assistance Recovery Directive which comes into effect on 1 January 2012. Under this Directive, EU Member States can provide each other with assistance in the recovery of tax debts and duties, which includes service of documents and exchanging information in connection with the recovery of claims. This legislation will replace and repeal the existing legislation implementing the current Mutual Assistance Directive which was originally introduced in 1976 and consolidated in 2008 following a number of revisions.
Review of Non-Domicile Taxation
The Government is to implement the following changes from April 2012 and has given an assurance that no further changes to the Non-Domiciliary Rules will be made during the course of this Parliament. The Government will be consulting on the detail of this measure and will issue a consultation document in June. The Government proposes the following reforms:
- to remove the tax charge when non-domiciles remit foreign income or capital gains to the UK for the purpose of commercial investment in UK businesses;
- to simplify some aspects of the current tax rules for non-domiciles to remove undue administrative burdens; and
- to increase the existing £30,000 annual charge to £50,000 for non-domiciles who have been UK resident for 12 or more years and who wish to retain access to the beneficial tax regime (the remittance basis). The £30,000 charge will be retained for those who have been resident for at least seven of the past nine years and fewer than 12 years.
Statutory Residence Test for Individuals
The Government will be consulting on the introduction of a statutory definition of residence to provide greater certainty for taxpayers as it takes the view that the current rules that determine tax residence for individuals are unclear and complicated. The Government will issue a consultation document in June and intends to implement the measure from April 2012.
Subsistence Allowances Paid to Experts Seconded to EU Bodies Located in the UK
The relevant legislation treat expenses payments or reimbursements made to an employee by reason of the employment as earnings from the employment for income tax purposes. Currently, this legislation also applies to subsistence allowances paid to experts seconded to EU bodies located in the UK. Legislation will be introduced in Finance Bill 2011 which will provide an employment income exemption where the EU body makes payments in respect of subsistence allowances to experts seconded by their employers because of their expertise in matters relating to the subject matter of the functions of the body. It will also contain provisions for an order-making power to amend this legislation to extend the exemption to any new EU bodies that may be located in the UK in the future. This measure will have effect on allowances paid in respect of periods beginning on or after 1 January 2011.
Insurance Companies - Solvency II and the Taxation of Insurance Companies
A Technical Note Solvency II and the Taxation of Insurance Companies has been published to announce the outline of a new life insurance tax regime which will have an effect from 1 January 2013. The new regime will deal with essential adjustments arising from Solvency II and at the same time deliver significant changes to create a simpler and more stable tax basis better aligned with the taxation of insurance companies generally. The Government will issue a consultation document in April and there will be further detailed discussions with interested parties with a view to introducing legislation in Finance Bill 2012.
Banks - Bank Levy
The Bank Levy rates will be increased from 1 January 2012 onwards from those included in the draft legislation published on 9 December 2010 to offset the benefit of the further decrease in corporation tax (on which see below). The Bank Levy rates for 2012 onwards will now be 0.078% for short-term chargeable liabilities and 0.039% for long-term chargeable equity and liabilities.
The Government announced on 8 February 2011 an increase in the effective rate of the Levy for the year 2011. The rates were increased so that the Levy will raise the target yield of £2.5billion for the first year. Therefore, the rates for the calendar year 2011 will be:
- 1 January 2011 – 28 February 2011 0.05% for short-term chargeable liabilities and 0.025% for long-term chargeable equity and liabilities;
- 1 March 2011 – 30 April 2011 0.1% for short-term chargeable liabilities and 0.05% for long-term chargeable equity and liabilities; and
- 1 May 2011 – 31 December 2011 0.075% for short-term chargeable liabilities and 0.0375% for long-term chargeable equity and liabilities.
Oil and Gas Taxes
Legislation, effective from 24 March 2011, will be introduced in Finance Bill 2011 to increase the rate of the supplementary charge levied on profits from UK oil and gas production from 20% to 32%. If in future years the oil price falls below a set trigger price on a sustained basis, the Government will reduce the supplementary charge back towards 20% on a staged and affordable basis while prices remain low. The Government believes that a trigger price of US $75 per barrel would be appropriate, and will set a final level and mechanism after seeking the views of oil and gas companies and motoring groups.
Intangible Fixed Assets
Legislation, effective from 23 March 2011, will be introduced in Finance Bill 2011 which will ensure that the scope of the corporate intangible fixed asset rules excludes all goodwill and any intangible asset which relates to, derives from, or is connected with an oil licence or an interest in an oil licence. The legislation is needed because some companies have interpreted accountancy practice in such a way that goodwill is recognised on the acquisition of an oil licence or an interest in an oil licence. This interpretation may bring this goodwill within the scope of the intangible fixed asset regime which conflicts with what was intended when the legislation was introduced.
General Corporate and Business
The Government has announced the creation of 21 new Enterprise Zones. The Government will offer up to 100% business rate discount for five years to businesses located in Enterprise Zones. The Government will also consider, in a limited number of cases, the scope for introducing enhanced capital allowances to support Enterprise Zones in those assisted areas where there is a strong focus on high value manufacturing. The locations of all 21 Enterprise Zones have not been finalised.
Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCT)
Subject to State aid approval, legislation will be introduced in Finance Bill 2011 to increase the rate of income tax relief given under EIS from 20% to 30% of the amount subscribed for shares.
The Government has also proposed the increase, in Finance Bill 2012, of the relevant thresholds that apply to both EIS and VCT as follows:
- the employee limit to fewer than 250 employees (currently 50 employees);
- the size threshold to gross assets of no more than £15million before investment (currently £7million);
- the maximum annual amount that can be invested in an individual company to £10million (currently £2million); and
- the annual amount that an individual can invest under the EIS to £1million (currently £500,000).
These changes will, subject to State aid approval, apply to shares in investee companies that are issued on or after 6 April 2012.
Research and Development Tax Credits for Small or Medium Sized Enterprises
Subject to State aid approval, legislation will be introduced in Finance Bill 2011 to increase the rate of the additional deduction for expenditure on research and development for companies that are small or medium sized enterprises from 75% to 100% from 1 April 2011 (giving a total deduction of 200%). Legislation will be introduced in Finance Bill 2012 to increase the deduction by a further 25% (giving a total deduction of 225% from 1 April 2012).
Enhanced Capital Allowances Scheme for Energy Saving Technologies
Currently capital expenditure by businesses on plant and machinery qualifies for tax relief by way of capital allowances, usually given at a rate of 20% a year on a reducing balance basis. The enhanced capital allowance scheme provides for 100% first year allowances for expenditure on certain energy-saving technologies. The energy-saving enhanced capital allowance scheme will, subject to State aid approval, be updated during summer 2011. The main change includes the addition of a new technology-efficient hand dryers. Also the qualifying criteria for automatic metering and targeting equipment will be simplified.
Capital Allowances: Short Life Assets
Legislation will be introduced in Finance Bill 2011 to enable businesses incurring expenditure on an item of plant or machinery from April 2011 onwards to make a short life asset election in respect of that item if they expect to sell or scrap it within an eight-year cut-off period. This is an extension from the current four year period. This will ensure that the capital allowances on the disposed of asset are brought into line with economic depreciation during the period of ownership.
Film Tax Relief: State Aid Renotification
Film tax relief is a special relief for expenditure on the production of British films. It is approved by the European Commission until 2012. The Government is to take steps to ensure its availability beyond that date.
Review of IR35
The Government has considered a number of options when reviewing the rules relating to the income tax and national insurance contribution treatment rules that apply when an individual is providing services through an intermediary company (these rules are generally referred to as “IR35”). The Government has decided that it cannot put substantial tax revenue at risk and has therefore decided to retain IR35 and to achieve simplification by making improvements to the way in which it is administered. These improvements will:
- provide greater pre-transaction certainty, including a dedicated Helpline staffed by specialists;
- provide greater clarity by publishing guidance on those types of cases HMRC view as outside the scope of IR35;
- restrict reviews to high risk cases carried out only by specialists teams; and
- promote more effective engagement with interested parties through an IR35 Forum to monitor HMRC’s new approach.
Corporation Tax Rates and VAT Thresholds
Legislation will be introduced in the Finance Bill 2011 to reduce the main rate of corporation tax from 28% to 26% from 1 April 2011 and to 25% from 1 April 2012. There will be further 1% reductions in the main corporation tax rate in each of the next two years to bring the rate down to 23% by 1 April 2014. (This is an acceleration of the reductions proposed in the June 2010 Budget which announced that the main rate of corporation tax would be reduced by 1% to 27% from 1 April 2011 down to 24% by 1 April 2014.) Companies with profits below £300,000 will pay corporate tax at a rate of 20% on and after 1 April 2011 as previously announced. Companies with profits between £300,000 and £1.5million will pay corporation tax at an effective rate which is between the two rates applying at the material time.
From 1 April 2011 the VAT registration threshold will be £73,000 and the de-registration threshold will be £71,000. The registration and de-registration thresholds for acquisitions from other European Member States will be £73,000 from 1 April 2011.
REAL ESTATE ASPECTS
Real Estate Investment Trusts (REITs)
The Government will commence an informal consultation with the industry and the representative body on the REITs legislation shortly after the Budget. Subject to the responses the Government will make changes both to reduce the barriers to entry and investment and to reduce the regulatory burden for existing and future REITs. The proposed legislation will be included in Finance Bill 2012. Further information will be posted on both the HM Treasury and HMRC websites as it becomes available. The consultation will seek views on:
- the introduction of a diverse ownership rule for institutional investors which will enable them to meet the non-close company rule. This will enable institutional investors to set up UK-REITs;
- allowing cash to be a “good” asset for the purpose of the REIT balance of business asset test. This will allow UK REITs to make investment decisions on a commercial basis;
- extending the time limit for complying with the distribution requirement in particular circumstances involving stock dividends. This will reduce the administrative burden on those REITs that pay out dividends on a six monthly basis;
- redefining “financing costs” for the REIT interest cover test to give certainty regarding this requirement;
- abolishing the conversion charge for companies joining the REIT regime;
- introducing a fixed grace period for new REITs to meet the non-close company requirement. This will enable start up UK-REITs to build sufficient reputation to attract shareholders;
- relaxing the requirement for a UK-REIT to be listed on a recognised stock exchange. This will encourage entry into the REITs regime, particularly for start-up property investment companies; and
- making technical changes to the REITs legislation.
Stamp Duty Land Tax (SDLT) Reform of Rules for bulk purchases
Legislation will be introduced in Finance Bill 2011 to provide a relief for purchasers of residential property who acquire interests in more than one dwelling (usually referred to as bulk purchases). Where the relief is claimed the rate of SDLT is determined not by the aggregate consideration but instead is determined by the mean consideration (i.e. by the aggregate consideration divided by the number of dwellings) subject to a minimum rate of 1%.
Legislation will be introduced in Finance Bill 2011 to put beyond doubt that SDLT-avoidance schemes exploiting three areas do not work. The changes clarify the relationship between the rules for ‘sub-sales’ and alternative finance, narrow the definition of ‘financial institution’ for the purposes of alternative finance and counter the effect of an engineered reduction in market value when properties are exchanged. They are effective on or after 24 March 2011.
PERSONAL TAX ASPECTS
Legislation will be included in Finance Bill 2011 to increase the lifetime limit on gains qualifying for entrepreneurs' relief from £5million to £10million with effect from 6 April 2011. Subject to satisfying certain conditions gains on disposals of entrepreneurial businesses by individuals and certain trustees qualify for entrepreneurs’ relief. Qualifying gains are taxed at a rate of 10%. The Government has confirmed that there will not be any other changes to the rules or conditions relating to entrepreneurs' relief.
Enterprise Investment Scheme and Venture Capital Trusts
As referred to above, legislation will be introduced in Finance Bill 2011 to increase the rate of income tax relief given under the Enterprise Investment Scheme from 20% to 30% with effect from 6 April 2011, subject to State aid approval.
Furnished Holiday Lettings
Legislation will be introduced in Finance Bill 2011 to revise the tax rules for furnished holiday lettings (FHL) and to extend the regime to the European Economic Area (EEA). From April 2011 loss relief may only be offset against income from the same FHL business. UK losses can relieve UK FHL income only and similarly with the EEA losses. From April 2012 to qualify in a year, a property must be available to let for at least 210 days and actually let for 105 days. Businesses meeting the actually let threshold in one year may generally be able to elect to be treated as having met it in the two following years.
Restricting Pensions Tax Relief
The Government has confirmed once again that the annual allowance for tax relief on pension savings for individuals will be reduced from £255,000 to £50,000 from the tax year 2011-12, and the lifetime allowance will be reduced from £1.8million to £1.5million from the tax year 2012-13.
Sale of Lessor Companies: Preventing Avoidance
Legislation will be introduced in Finance Bill 2011 with effect from 23 March 2011 to ensure that the sale of lessor company legislation continues to have the intended effect. The rules are intended to impose a charge, at the time of sale, on profits of a lessor company that have been earned but not recognised for tax purposes before it changes ownership. It also gives subsequent matching relief. The changes made now will ensure that all plant or machinery leasing is taken into account in determining whether the company comes within the scope of the rules. The legislation will also make sure that the calculation of the charge fully reflects the deferred taxable profits. The changes will also withdraw, with effect from 23 March 2011, the option to elect out of the charge when a lessor company is sold. Further changes will ensure that a company that has previously elected out of the charge will bring into account for tax purposes the full value to the company of any asset later sold.
Legislation will be introduced in Finance Bill 2011 to tackle third party arrangements which seek to avoid or defer the payment of income tax or national insurance contributions due on employment income or avoid restrictions on pensions tax relief. The legislation is to have effect on and after 6 April 2011 and applies to rewards which are earmarked for an individual employee or otherwise made available on or after that date.
Legislation will be introduced in Finance Bill 2011 and take effect from when the Bill receives Royal Assent to prevent tax losses through the asymmetrical tax treatment of loans and derivatives (group mismatch schemes). Following consultation there have been a number of minor changes to the draft legislation published on 6 December 2010 which include clarification that only UK-to-UK transactions will be affected. The objective element is that the scheme must be one that is more likely to produce a tax advantage than a tax disadvantage.
Disclosure of Tax Avoidance Schemes
A package of five measures improving the disclosure of tax avoidance schemes (DOTAS) regime took effect on 1 January 2011 following formal consultation. The package included some refinements to the hallmarks (the descriptions of schemes to be disclosed) to remove known loopholes. The Government intends to implement the remaining changes to the hallmarks in the tax year 2011-12. These further changes to the hallmarks will target known avoidance risks, primarily schemes that seek to avoid income tax and national insurance contributions on employment income, schemes that incorporate offshore transactions to avoid corporation tax, and artificial loss schemes. The Government will be consulting on this measure. It will hold further informal consultation with stakeholders over the summer. The disclosure regime will also be extended to include inheritance tax, as it applies to transfers of property into trust, with effect from 6 April 2011.
Corporate Gains: Degrouping Charges Anti-Avoidance
Legislation will be introduced in Finance Bill 2011, with effect from 23 March 2011, to prevent groups of companies avoiding corporation tax on chargeable gains by using arrangements that seek to exploit the “associated companies exception” to a degrouping charge.
As part of its new approach to tax policy making, the Government has published a joint HMRC and HM Treasury report on tackling tax avoidance which sets out details of the first two areas of tax legislation that are to be subject to a complete review. These are (i) reducing the cash flow benefit of using tax avoidance schemes, and (ii) rolling program of review of high risk areas. This is in addition to considering a general anti-avoidance rule the review of which is underway at present and the continuation of implementing targeted tax measures to address specific schemes.
Changes to the Capital Allowances – Replacement of ‘Sole or Main Benefit’ Test and Mandatory Pooling
Chapter 17 of the Capital Allowances Act 2001 contains anti-avoidance legislation to provide protection against abuse of the capital allowances rules that apply to plant and machinery. The Government proposes to make this legislation more effective. The legislation currently applies to transactions where the sole or main benefit arising from the transaction is obtaining an allowance. The Government intends to replace this 'sole or main benefit' test with a new rule that is in line with effective anti-avoidance tests elsewhere in the tax related legislation. Further changes will be proposed to make the legislation as clear and effective as possible. The Government will be consulting on this measure and will publish a consultation document with further details in May 2011 with a view to introducing legislation in Finance Bill 2012.
The Government will also consult on plans to introduce changes to the capital allowances fixtures rules that businesses must pool their expenditure on fixtures in a building within a short period of acquiring the building, in order to qualify for capital allowances. A consultation document will be published at the end of May.
Income Tax and NICs Reform
The Government has announced that it will consult on the options, stages and timing of reforms to integrate the operation of income tax and national insurance contributions. In exploring potential reforms the Government aims to remove distortions created by the tax system, reduce burdens on business and improve fairness for individuals. However, it recognises that any change will be complex and involve a wide range of policy and implementation issues.
HMRC Powers, Deterrents and Safeguards Security for PAYE and National Insurance Contributions
Legislation will be introduced in Finance Bill 2011 to provide a power allowing HMRC to make regulations enabling them to require a security from employers for PAYE and NICs that is seriously at risk of non-payment. It will also introduce a criminal offence for not providing a security when one is required.
Gift Aid Donor Benefit Limits
Legislation will be introduced in Finance Bill 2011 to increase, from £500 to £2,500, the maximum value of the benefits that individuals and companies may receive as a result of making a donation to a charity of more than £10,000 under Gift Aid. The new limit will be subject to the existing rule that the benefit must not exceed 5% of the gift.
Inheritance Tax – Reduced Rate
The Government has announced that a reduced rate of inheritance tax (IHT) will apply where 10% or more of a deceased’s net estate (after deducting IHT exemptions, reliefs and the nil rate band) is left to charity. In those cases the current 40% rate will be reduced to 36%. The new rate will apply where death occurs on or after 6 April 2012. The Government will be consulting on the detailed implementation of this measure and will issue a consultation document before the summer.
Fuel Duty Rates
The fuel duty escalator that was first announced in Budget 2009 will be abolished and replaced with a fair fuel stabiliser. When oil prices are high, as now, fuel duty will increase by the retail prices index (RPI). However, if the oil price falls below a set trigger price on a sustained basis, the Government will increase fuel duty by RPI plus 1 penny per litre. The Government believes that a trigger price of $75 per barrel would be appropriate, and will set a final trigger price and mechanism after seeking the views of oil and gas companies and motoring groups.