Corporation tax rates
No changes were made to enacted corporation tax rates which remain as follows:
- 19% for the financial year 2019; and
- 17% for the financial year 2020.
Changes will be made to ensure that relief for carried- forward losses works as intended and to prevent excess claims. Changes will be made to:
- the definition of relevant profits;
- the computation of basic life assurance and general annuity business (BLAGAB) profits;
- the deductions allowance where a company is a member of more than one group;
- the calculation of terminal relief;
- shock losses of insurance companies being surrendered as group relief;
- the cap on profits against which group relief for carried-forward losses may be allowed in certain circumstances; and
- other minor and consequential provisions.
The draft legislation published on 6 July 2018 has been amended to include changes to the group relief cap on profits. The group relief cap changes apply from 1 April 2017; the relevant profits and BLAGAB changes apply from 6 July 2018 and the other changes apply from 1 April 2019.
Effective 1 April 2020, Finance Bill 2019-20 will restrict companies’ use of carried-forward capital losses to 50% of capital gains subject to an annual allowance of up to £5m capital or income losses. A consultation paper was published on 29 October 2018 and draft legislation will be published in summer 2019.
An anti-forestalling measure to support this change will be effective from 29 October 2018.
Intangible fixed assets
Finance Bill 2018-19 will:
- partially reinstate relief for acquired goodwill on the acquisition of businesses with an eligible intellectual property; and
- prevent the de-grouping charge from applying where de-grouping is the result of a share disposal that qualifies for the substantial shareholding exemption.
The de-grouping changes will be effective in relation to de-groupings occurring on or after 7 November 2018.
It is expected that explanatory notes will be published on 7 November.
Research and Development (R&D) tax relief
Subject to consultation, Finance Bill 2019-20 will introduce a limit on the payable tax credit that can be claimed by a company under the R&D SME tax relief. The limit will be three times the company’s total PAYE and NIC payment for the period. Any loss that a company cannot surrender for a payable credit may be carried forward for relief against future profits.
The measure will be effective for accounting periods beginning on or after 1 April 2020.
Digital services tax
A digital services tax will be introduced from April 2020 at a rate of 2% of the revenues of certain digital businesses which derive value from UK users. The tax will apply to revenues from the provision of search engines; social media platforms; and online marketplaces. It will apply:
- to revenues from activities linked to the participation of UK users, subject to a £25m annual allowance;
- to global revenues from business activities within scope of the tax which exceed £500m per annum; and
- subject to a safe harbour provision exempting loss – makers and reducing the effective rate of tax on businesses with very low-profit margins.
The government will consult on the detailed design of the digital services tax and will legislate in Finance Bill 2019-20.
UK property income of non-UK resident companies
Non-UK resident companies carrying on a UK property business (or receiving other UK property income) after 6 April 2020 will be charged to corporation tax rather than income tax. This measure takes effect after the end of the fiscal year 2019-20 on 5 April 2020. Draft legislation was published in Finance Bill 2018-19 on 6 July 2018 and the technical consultation concluded on 31 August 2018.
Consequential amendments to tax legislation will ensure that a non-UK resident company:
- will not have a disposal event for capital allowances purposes; its income will neither be taxed twice nor fall out of account and its expenses will be relieved only once;
- will not need to notify its chargeability to corporation tax in cases where its only UK income source is from a UK property business and the UK tax deducted at source from its rental income fully satisfies its liability to corporation tax on the profits of that business.
Transitional provisions will:
- allow the carry forward of existing income tax losses against future UK property business profits;
- prevent the deduction of derivative contracts amounts referable to pre-commencement periods which would not have been relievable under the income tax rules, e.g. because they are capital in nature; and
- allow companies to apply the Disregard Regulations (SI 2004/3256) to hedging derivatives with certain modifications to ensure the rules apply appropriately.
Transferable tax history mechanism
Following consultation in 2018, Finance Bill 2018 -19 will introduce a transferable tax history mechanism for oil and gas companies to encourage new investment in the North Sea. The measure is effective for transactions that receive Oil and Gas Authority approval on or after 1 November 2018.
Petroleum revenue tax simplification
Also following consultation in 2018, the petroleum revenue tax rules on retained decommissioning costs will be amended to simplify the way that older fields can be sold to new investors. The measure is effective for transactions that receive Oil and Gas Authority approval on or after 1 November 2018.
Hybrid capital instruments
This measure provides certainty of tax treatment for hybrid capital instruments which allow deferral or cancellation of interest payments. Subject to qualifying conditions, interest payable on hybrid capital instruments will be:
deductible for the issuer;
- taxable for the holder; and
- not subject to stamp duty or stamp duty reserve
- tax in relation to transfers.
The measure will also eliminate differences in the way that two linked loan relationships are taxed where companies raise loan capital from third parties and distribute that capital within a group in such a way that the internal and external loan relationships would be taxed on different bases.
It will apply to hybrid capital instruments not covered by the regulatory capital securities regulations effective from 1 January 2019.
An associated HMRC technical note is available here.
Regulatory capital securities
As a consequence of the hybrid capital instruments measures above, HMRC has reviewed the treatment of hybrid capital instruments generally to ensure that interest payments on all debt-like instruments are deductible.
Following this review, the regulatory capital securities regulations will be revoked and replaced with new tax rules for:
- hybrid capital instruments that can be issued by any sector; and
- tax mismatches, which align the tax treatment of linked loan relationships.
This measure will be effective from 1 January 2019.
IFRS 17 Insurance contracts
IFRS 17, effective from 1 January 2021, introduces significant changes to how insurance contracts are recognised, measured, presented and disclosed which may impact the timing of revenue recognition. A consultation process will help determine if changes are required in Finance Bill 2019-20 to the taxation treatment of insurance contracts in the light of the accounting changes.
Corporate interest restriction
As announced at Autumn Budget 2017, Finance Bill 2018-19 will amend the corporate interest restriction rules to ensure the regime works as intended.
Following consultation, changes have been made to the legislation and explanatory notes originally published on 6 July 2018.
The corporate interest restriction rules will also be amended by Finance Bill 2018-19 to ensure that they continue to operate as intended after the introduction of IFRS 16 Leases.
The draft legislation has been revised to include minor changes to the rules for structured finance arrangements, writing down allowances for finance lessors and the treatment of long funding leases on adoption of IFRS 16.
A change has also been made to the computational rules for the spreading of the transitional adjustment upon adoption of IFRS 16.
This measure will have effect for periods of account beginning on or after 1 January 2019. Certain amendments to the long funding lease rules are only effective for leases entered into on or after 1 January 2019.
Hybrid and other mismatch anti-avoidance rules
Consequential changes will be made to the hybrid mismatch anti-avoidance rules to reflect the adoption of the Anti-Tax Avoidance Directive (EU Directive 2016/1164) (ATAD) on 12 July 2016. The hybrid mismatch rules introduced by Finance Act 2016, effective from 1 January 2017, include almost all the minimum standards required by ATAD. Two changes are however necessary to ensure that the rules are fully aligned with the ATAD requirements.
The measures will be effective from 1 January 2020 and relate to specific requirements in relation to:
- the treatment of certain mismatches involving permanent establishments; and
- the exemption of regulatory capital.
Any legislative change required to comply with ATAD requirements in relation to the treatment of certain reverse hybrids will be considered later because the implementation date for those requirements is 1 January 2022.
Controlled foreign companies
Consequential changes will also be made to the controlled foreign company rules to reflect the adoption of ATAD. Two changes will be made in relation to the definition of control and the treatment of certain profits generated by UK activity.
The measures will be effective from 1 January 2019.
UK permanent establishments
The definition of permanent establishment for UK tax purposes will be changed to prevent foreign businesses operating in the UK taking advantage of exemptions for preparatory or auxiliary activities by splitting their business activities between different locations and related companies.
A non-UK resident company is liable to UK corporation tax only if it has a UK permanent establishment. The exemption from permanent establishment status for preparatory and auxiliary activities normally applies to low-value activities such as storing the company’s own products; purchasing goods; or collecting information for the non-resident company.
Finance Bill 2018-19 will amend CTA 2010, s. 1143 to deny an exemption from permanent establishment status to a non-UK resident company for such activities if they are part of a fragmented business operation, for example, if:
- that company, either alone or with related entities, whether foreign or UK, carries on a cohesive business operation, either at the same place or at different places in the UK;
- at least one of them has a permanent establishment where complementary functions are carried on; and
- the activities together would create a permanent establishment if they were in a single company.
The UK has already adopted this change in its tax treaties by virtue of the BEPS multilateral instrument which became effective in the UK on 1 October 2018.
This measure, newly announced at Budget 2018, replicates in UK domestic law the change already made to tax treaties and will be effective from 1 January 2019.
Diverted profits tax
Effective 20 October 2018, the diverted profits tax legislation will be amended to close planning loopholes and to make minor modifications to the mechanics of the legislation. The changes will:
- Close a tax planning opportunity under which amendments to a company’s corporation tax return can be made after the review period has ended and after the diverted profits tax time limits have expired;
- make clear that diverted profits will only be taxed under either the diverted profits tax or the corporation tax rules, but not both;
- extend the review period, within which HMRC and taxpayer companies are encouraged to work collaboratively to determine the extent of diverted profits, from 12 to 15 months;
- extend a company’s right to amend their corporation tax return during the first 12 months of the extended 15-month review period, but only for the purposes of including the diverted profits into a corporation tax charge;
- make clear that diverted profits liable to diverted profits tax can be reduced by amendment to the company’s corporation tax return during the first 12 months of the review period.
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Article Written by Paul Davies