Yesterday's Budget surprised many people with the large volume of tax changes announced. Tech companies and non-resident owners of UK real estate found themselves in the spotlight, with the proposed introduction of new taxes affecting them from 1 April 2019. In addition, there was a range of other measures all relevant to business.

Corporate tax

Extending royalty withholding tax: the UK will create a new extraterritorial royalty withholding tax charge targeting low-taxed overseas royalties paid in connection with sales of goods or services to UK customers, the first of a broader range of measures targeting the digital economy. The new measure will be introduced in the Finance Bill 2018-19, and will come into effect from 1 April 2019. The Treasury will publish a consultation paper on 1 December 2017 to consult on points of detail. [See our alert].

Gains on UK real estate owned by non-residents: given the changes made over the past few years to level the playing field in respect of the taxation of UK property as between UK residents and non-UK residents, the Government's announcement that it plans to fundamentally change the taxation of gains arising to non-UK residents from the disposal of UK property (both residential and commercial) from April 2019 was not wholly unexpected. The Government's plan is that gains arising to non-UK residents on the disposal of UK property will be subject to tax in respect of gains that have accrued after April 2019 (i.e. base costs will be revalued to market value as at April 2019). This will also apply to disposals of shares in land-rich companies and anti-forestalling measures will be introduced with effect from today to prevent restructuring pre-April 2019 to make use of Treaties that would prevent the UK imposing the tax. The Government has also confirmed plans to bring non-resident companies within the scope of corporation tax in respect of rental income from April 2020.

These changes will greatly reduce the attractiveness of using offshore companies to hold UK real estate and it would not be surprising to see the Government look to extend SDLT to the transfers of shares in land-rich companies in the future to remove any benefit in holding a UK property through an offshore company. [See our alert].

UK anti-hybrid mismatch rules: the Government has announced amendments to update and supposedly clarify the anti-hybrid rules. Most changes are intended to apply from 1 January 2017 when the anti-hybrid rules became effective, with the exception of those specifically mentioned below:

  • Previously it was controversial as to whether arrangements involving a jurisdiction that imposes tax at a nil rate could create a hybrid mismatch. This will now be enacted into the rules and will take effect from 1 January 2018.
  • Withholding taxes are to be ignored for the purposes of the anti-hybrid rules.
  • Capital taxes can be taken into account in certain circumstances • The treatment of entities that are transparent to some investors but opaque to others is to be clarified.
  • The scope of the rules regarding multinational companies is to be clarified. This change will also be effective from 1 January 2018.
  • For hybrid entity double deduction mismatches, the quantification of mismatches where there is no corresponding deduction for a taxable receipt is to be adjusted.
  • The treatment of income that is taxable in two jurisdictions under the imported mismatch rules is to be amended.
  • The adjustment rules will be amended to include making certain accounting adjustment to reverse a hybrid mismatch.

Substantial shareholding exemption: changes will be made to avoid the unintended tax liability that may be triggered where a corporate restructuring takes place after a UK company has transferred the trade and assets of a foreign branch to a foreign company in exchange for the issue of shares in that company. Under current rules, a corporate restructuring (such as inserting a local holding company) following such a share exchange could terminate the postponement of any gains available under the substantial shareholding exemption ("SSE") because of the priority of the SSE over the usual treatment of share exchanges. The amendment will ensure that a restructuring following such share exchanges will not be treated as a disposal and therefore, will not terminate the postponement of tax. The measure will facilitate capital reorganisations in certain circumstances where postponed tax charges traditionally became payable. The changes will apply to disposals of shares in or securities of a company made on or after 22 November 2017.

Capital gains indexation allowance freeze: when a company makes a capital gain on or after 1 January 2018, the applicable indexation allowance that is used to determine the amount of chargeable gain will be calculated only up to December 2017, using the Retail Price Index or factor for that month. This measure aligns capital gains treatment for companies with that for individuals and non-incorporated businesses, for whom the indexation allowance was abolished in 2008.

Groups of companies: 6-year rule removed for depreciatory transactions. UK legislation contains specific rules to restrict an allowable loss on the disposal of shares or securities in a company, where it can be shown that the loss was caused by an earlier 'depreciatory transaction' that materially reduced the value of the shares or securities. Common examples include the payment of a dividend or the transfer of an asset for less than market value, by the company whose shares are disposed of. At present, the "look-back" period is six years prior to the date of disposal. From Budget day, and for some disposals treated as taking place before that date because a negligible value claim has been made, there is no limit on the lookback period. This means the rule cannot be avoided by simply holding onto, for 6 years, a company that no longer has any value.

Intangible fixed asset "step-up" schemes: the Budget contains amendments to the intangible fixed asset rules to "clarify" the treatment of related party disposals for non-cash consideration and ensure that grants of licences are covered by the market value rule. The rules require that the gain arising on a disposal of an intangible fixed asset is computed by reference to the proceeds of the realisation for accounting purposes. Integrity measures were introduced in 2015 to "put beyond doubt" that if there is a disposal of an intangible fixed asset and the proceeds are not wholly cash (for example, shares) the disposal should be deemed to occur at market value rather than value in the accounts (which may report the cost of the new asset at the net book value of the asset disposed of rather than at the market value of the asset that has been acquired). Beyond this specific rule, the transfer pricing rules may similarly apply to deem the disposal and acquisition to take place at market value. The amendments ensure that this market value rule also applies to grants of licences or other rights in respect of an intangible asset to related parties through deeming the Grantor's non-cash consideration to be market value (where the amount recognised is less than market value) and capping the Grantee's non-cash consideration at market value (where if the amount recognised is more than market value). The amendments also clarify that the grant of a licence is subject to the market value rule that applies for disincorporation relief even where it does not involve the disposal of an underlying asset. These measures apply from 22 November 2017.

Increase in rate of R&D expenditure credit: effective 1 January 2018, the rate of the R&D expenditure credit will be raised from 11% to 12%, with a view to supporting business investment in R&D.


Corporate interest restriction: the UK introduced a new regime effective 1 April 2017, restricting the amount of finance expense that groups could deduct, broadly to 30% of EBITDA. Some technical changes are being introduced to ensure the regime works as intended. Some of these will be treated as having effect from 1 April 2017 when the rules commenced:

  • The rules about relevant derivative contract debits and credits will be amended to ensure that derivatives hedging a financial trade that is not a banking business are not inappropriately excluded from the rules.
  • The calculation of group-EBITDA will be changed to align the treatment of R&D expenditure credits with the approach taken in the calculation of tax-EBITDA. • Various amendments will be made to the public infrastructure rules: (i) to ensure that insignificant amounts of non-taxable income do not affect their operation; (ii) in respect of the election to be a qualifying infrastructure company; and (iii) in respect of the limitation on relief for related party interest.
  • The definition of a group will be more closely aligned with accounting standards; this amendment is also intended to ensure that asset managers do not cause otherwise unrelated businesses to be grouped together.
  • The rules governing compliance will be amended so that when an interest restriction return is submitted, companies will be required to amend their corporation tax returns if their tax position is changed (currently corporation tax returns are deemed to have been amended).

The legislation is complex and it is likely that additional inconsistencies will continue to be found as groups work through the detailed provisions.

Bank levy: UK banks will welcome confirmation that from 1 January 2021, the bank levy will be restricted to the UK balance sheet of banks and building societies. The measure is expected to help level the playing field between UK and foreign banking groups. The Summer Budget 2015 set out a long-term plan for the taxation of the UK financial services industry. Yesterday's Budget saw renewed confirmation from the Government that the bank levy, currently chargeable on the worldwide balance sheets of UK banking groups, will only apply to UK-based equity and liabilities. Equity and liabilities attributable to non-UK resident entities will usually be outside the scope of the charge and groups will be able to disregard from their bank levy calculation any equity and liabilities attributable to overseas branches of UK entities. A new deduction from a group's equity and liabilities that are chargeable to the bank levy will be available for certain loss-absorbing instruments issued by an overseas subsidiary of a UK resident group member.

Simplifications to the calculation of the bank levy will include an option to choose whether to calculate the equity and liabilities of a subgroup member as part of a wider calculation for the whole subgroup or on a standalone basis. The "netting" rules will be modified and revisions to the rules governing collection and management of the bank levy will replace the current requirement to nominate a "responsible member" annually. The joint and several liability rules will also be updated to be consistent with ring-fencing; this change will limit the extent to which certain members of a bank's ring-fenced group will be liable for the bank levy debts that are attributable to non-ring fenced entities.

Stamp Duty and Stamp Duty Reserve Tax 1.5% charge on the issue of shares: the Government has confirmed that it will continue to uphold the judgements in two cases (HSBC Holdings PLC and Vidacos Nominee Ltd V HMRC (C569/07) and HSBC Holdings PLC and the Bank of New York Mellon Corporation v HMRC [2012] UKFTT 163 (TC)) that the Stamp Duty and SDRT 1.5% charge on the issue of shares (and transfers integral to capital raising) into overseas clearance services and depository receipt issuers is incompatible with the EU Capital Duty Directive. As a result the Stamp Duty and SDRT 1.5% charge will continue not to apply following UK's exit from the EU.

Withholding tax exemption for debt traded on Multilateral Trading Facilities. As first announced in March 2017, no UK withholding tax will apply on interest payments on interest-bearing securities issued by a company if:

  • the interest-bearing security is admitted to trading on a "multilateral trading facility" (MTF); and
  • that facility is operating by a recognised stock exchange regulated in an EEA territory.

The purpose of the exemption is to address situations where interest on debt traded on wholesale UK MTFs is not covered by the qualifying Eurobond exemption (QEE) as they are not "listed". It is also aimed at preventing situations where mismatches between UK and other listing rules mean that the debt qualifies for the QEE in some jurisdictions but not the UK. The changes apply for corporation tax purposes for accounting periods beginning on and after 1 April 2018 and for income tax purposes for the tax year 2018 to 2019 and subsequent tax years.


Double taxation relief and permanent establishment losses: from 22 November 2017 the relief for foreign tax suffered by an overseas permanent establishment ("PE") of a company is restricted where the company has received relief in the foreign jurisdiction for the losses of the PE against profits other than those of the PE. The change applies whether such double taxation relief is given by way of credit or deduction. The amount of relief available will now be determined by reference to the foreign tax suffered by the overseas PE, less any reduction in foreign tax which results from the PE's losses being relieved against non-PE profits in a foreign jurisdiction in the same or earlier periods. This prevents companies effectively obtaining relief for the same amount twice: firstly as losses against other profits in the foreign jurisdiction and secondly as double taxation relief due to the consequential increase in local tax borne by the PE.

Double taxation relief: changes to targeted anti-avoidance rule. The Government will legislate in Finance Bill 2017-18 to make two changes to the Double Taxation Relief Targeted Anti- Avoidance Rule (DTR TAAR). The first change will remove the need for HMRC to give a counteraction notice before the DTR TAAR applies and will have effect on or after 1 April 2018. The second change will extend the scope of the TAAR, which concerns schemes that would reduce a person's tax liability, to include tax payable by any connected persons. The second change will have effect on or after 22 November 2017.

Giving effect to the Multilateral Instrument. The Government will amend the powers that give effect to double taxation arrangements with other countries to ensure that the UK can implement the BEPS Multilateral Convention, which it signed on 7 June 2017.

Personal taxation

Carried interest: those fund managers who hoped that the UK tax rules in relation to carried interest have now been settled will be disappointed. The proposed changes, however, do not go as far as the previous ones. Under transitional rules that applied to the existing regime, certain amounts of carried interest are excluded, in particular arising to an investment manager after 8 July 2015 from the disposal of a partnership asset before that date, and arising for the purposes of the disguised investment management fees rules on or after 22 October 2015 (unless from the disposal of a partnership asset before that date). However, these transitional rules will no longer apply to carried interest arising on or after 22 November 2017. The Government has stated that this measure will prevent the current regime for carried interest from being manipulated to unfairly reduce the tax payable by asset managers and will ensure that those managers that receive carried interest on or after 22 November 2017 pay capital gains tax on their full economic gain. It is anticipated that the new measure will be included in Finance Bill 2017-18. Fund managers are advised to revisit their current arrangements and consider whether this new measure will have an impact on their returns going forward.

Capital gains tax: entrepreneurs' relief. A welcome change is in prospect, to follow consultation next year, on how to preserve relief for entrepreneurs whose shareholding is diluted below the 5% qualifying threshold as a result of a new share issue to raise funds.

Employment taxes: while there were no specific measures announced in the Budget, it is clear that the Government is looking at the gig economy and modern working practices, both in terms employment rights and tax. Specific consultations and papers relating to off-payroll working in the private sector and employment status have been flagged for the future.

Anti-fragmentation by UK traders or professionals: the government will consult in 2018 on the best way to prevent traders or professionals from avoiding UK tax by fragmenting their UK income between unrelated entities. No further detail is currently available.