UK: Summary Of Significant Corporate Tax Related Announcements In The 2016 Budget

Last Updated: 11 April 2016
Article by Andrew Terry

There were a number of significant corporate tax related announcements in the recent budget some of which were anticipated and some of which were unexpected. We have summarised below a selection of those which we regard as most significant.

Business tax roadmap

The roadmap has been eagerly awaited and is supposed to make the UK's tax system fit for the future and to set out the Government's plans for the main business taxes in the period to 2020 and beyond. As expected there is talk of simplifying and modernising the UK's tax system and providing a low tax regime that will be attractive to international businesses whilst ensuring that such businesses pay taxes in the UK. The roadmap covers issues such as the rate of corporation tax, investment in the North Sea and reform of business rates. It also tackles tax avoidance and aggressive tax planning through limitation of interest deductions (BEPS Action 4) and hybrid mismatch arrangements (BEPS Action 2) as well as extending royalty withholding tax and tightening the rules on property development by offshore based developers.

An interesting feature of the roadmap is the introduction of greater flexibility of the use of corporation tax losses combined with a new restriction on the amount of taxable profits against which losses can be used.

Further details of the main features of the roadmap are detailed below.

Corporation tax – Rates and payment dates

Unexpectedly the main rate of corporation tax is cut by an additional 1% to 17% with effect from 1 April 2020. Also, with effect from 1 April 2019, the instalment payment regime will be amended for companies with annual taxable profits in excess of £20 million so that they will be required to make payments four months earlier than under the current system.

Interest deduction restrictions

With effect from 1 April 2017 the UK's existing generous interest deduction rules are set to change. From that date net interest deduction will be limited to a maximum of 30% of EBITDA. There will also be a group ratio rule that will permit larger interest deductions for groups with a third party net debt to group EBITDA ratio that exceeds the 30% limit. The new rules will not apply to the first £2 million of next interest expense and there will also be provisions that ensure that the new restriction does not impact negatively on private finance for certain UK infrastructure projects (which traditionally have relied on high levels of debt financing). These new interest deduction restriction rules effectively implement BEPS Action 4.

Use of corporation tax losses - New rules

Again with effect from 1 April 2017 new rules will permit greater flexibility in the use of corporation tax losses. From that date losses can be carried forward for use against profits not only of the same trade but also against profits in the company from other income streams. Significantly carried forward losses will also be capable of being surrendered by way of group relief to other group companies. The quid pro quo to these greater loss use flexibilities is that only 50% of taxable profits will be capable of being offset via carried forward losses. However, the new 50% restriction rules are subject to a de minimis profits figure of £5 million. This means that if, for example, a company has profits of £7 million it will only be able to offset carried forward losses against 50% of its profits over £5 million. This results in an offset of £6 million with the other £1 million available for carry forward against profits in a future accounting period. It should be noted that the £5 million allowance applies per group as opposed to per company.

These new rules do not apply to oil and gas companies that operate within the ring fence corporation tax regime. The already existing restrictions on the use of bank losses are tightened further. With effect from 1 April 2016 the amount of profits that can be reduced by carried forward pre-April 2015 bank losses is reduced to 25%. Post April 2015 bank losses will, however, be treated in the same way as losses incurred in companies that operate outside the banking sector.

Patent box

It has been confirmed that the existing patent box regime will be modified so as to comply with the OECD proposals (BEPS Action 5) in connection with preferential IP regimes. The main point is that going forward the benefits of the patent box will depend upon the extent to which research and development activity expenditure is incurred by the company electing for the regime as opposed to being outsourced to related companies or bought in IP.

Royalties and tax deduction at source  

Royalty payments made on or after 17 March 2016 are subject to a new anti-avoidance rule. This will provide that where royalties are paid between connected parties and a double taxation agreement or other international agreement such as the EU Interest and Royalties Directive is used to avoid an income tax deduction then the benefit of the agreement or directive will be denied. There is a presumption that the rule will apply where it is reasonable to conclude that a tax advantage was the main purpose of the arrangement.

The category of royalty payments to which deduction of tax at source can apply will be widened to make sure that income tax is deducted from all payments of royalties to non-UK residents where the royalty has a UK source (except in legitimate cases of treaty relief). This actually has a simplification advantage over the previous system in that it should no longer be necessary to determine whether or not the payment is an 'annual payment' (which in some cases might possibly have led to withholdings on a non-royalty basis).

Transfer pricing

The UK's transfer pricing rules are still to be updated to reflect BEPS Actions 8 to 10 although the Government is committed to make any necessary changes. The Government is also consulting on whether to introduce 'secondary adjustment' rules into the UK's transfer pricing code. Such secondary adjustments operate by recognising that funds which would have been kept by one party to a transaction if it had been carried out at arm's length have not actually been retained by it. Instead this is done by deeming a secondary transaction such as a loan or distribution to have been made.

Anti-hybrid rules

Such rules had already been announced at the end of last year in order to comply with BEPS Action 2. The rules come into effect on 1 January 2017 and are designed to combat the situation that arises where a payment is deductible in one country for tax purposes but not taxed in any other or where a payment is tax deductible in more than one country. These rules will now be expanded to deal with situations where mismatches arise through the use of exempt branches.

UK land - Trading profits

It has been possible to realise tax free profits from trading in UK land by using a structure with a non-resident property owner without a UK permanent establishment where the property owner was established in Jersey, Guernsey or the Isle of Man. Broadly the double taxation agreements between these countries and the UK did not deem a building site to constitute a UK permanent establishment of the offshore owner so with careful planning profits from trading in UK land could be realised free of corporation tax (or income tax). Provisions will be introduced which will subject profits from trading in UK land to corporation tax whether or not the owner is UK resident and regardless of whether there is a UK permanent establishment. Changes to the double taxation agreements with Jersey, Guernsey and the Isle of Man have also been agreed and these changes have already taken effect.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions