CORPORATION TAX CHANGES – UPDATE

Mark Joscelyne, Tax Partner, CMS

The Chancellor has confirmed that certain previously announced corporation tax measures will be going ahead.  Additionally, he also announced a consultation on bringing non-UK resident companies with UK income (e.g. offshore companies carrying on a property business in the UK), which are currently subject to income tax on such income, within the scope of corporation tax.

Corporation tax rate

The proposed reductions in the corporation tax rate to 19% from 1 April 2017 and to 17% from 1 April 2020 have been confirmed.  Prior to the Autumn Statement, there was speculation that the government might reduce the rate even further to 15%.  This speculation was fuelled in part by the Prime Minister’s comment to the CBI that the government remained committed to achieving the lowest corporation tax rate in the G20 – a comment made in the knowledge that the US President-elect had expressed an intention to cut US corporation tax to 15%.  However, no additional cuts to corporation tax rates were announced in the Autumn Statement.

Interest deductibility and loss relief reforms

The reforms to interest deductibility and loss relief announced in Budget 2016 have also been confirmed.

In the March 2016 Budget, the government announced proposals to address BEPS Action 4 by reforming the rules around the tax deductibility of interest expenses.  A detailed consultation document was issued in May 2016, according to which the new interest deductibility rules are expected to apply from 1 April 2017 and, broadly, will cap a UK group’s deductions for net financing costs at the greater of:

  • 30% of the UK group’s EBITDA; and
  • a percentage of the UK group’s net financing costs, with the percentage being found by expressing the worldwide group’s net financing costs as a percentage of the worldwide group’s EBITDA.

On top of this, deductions will be further capped at the amount of the worldwide group’s net financing costs.  The rules will only apply to net financing costs in excess of a £2million de minimis and will apply after the application of any adjustments for transfer pricing and other existing rules restricting interest deductibility.

The proposals on loss relief, also expected to have effect from 1 April 2017, will effectively create two regimes for carry-forward losses:  one for losses arising prior to 1 April 2017 and one for losses arising afterwards.  Those arising prior to 1 April 2017 will remain subject to the existing restrictions (e.g. carried forward trading losses can only be set against profits of the same trade) but will also be subject to a new restriction whereby only 50% of profits in excess of £5million can be relieved by carry-forward losses.  Losses arising after 1 April 2017 and carried forward will have greater flexibility in the way they can be used:  they will be available to be set against profits arising from different activities and in different group companies; however, they will also be subject to the 50% restriction mentioned above.

Both sets of reforms are currently the subject of consultation, and the Autumn Statement has not provided any further information other than to confirm that they are still going ahead.  Updates on the consultations and draft legislation are now expected on 5 December 2016.

Substantial shareholding exemption

The government is pressing ahead with reform of the substantial shareholding exemption.  This exemption has been criticised for being overly restrictive when compared to equivalent “participation exemption”-type reliefs in other jurisdictions, particularly due to the detailed and prescriptive trading status requirements.  A consultation document was issued in May 2016 and the government has now stated that it will make changes with effect from April 2017 to “remove the investing requirement” (presumably, this means the requirement that the investing company is trading or is a member of a trading group) and to “provide a more comprehensive exemption for companies owned by qualifying institutional investors”.

As with the upcoming changes to interest deductibility and loss relief, more detail and draft legislation should be available on 5 December 2016.

Non-resident companies and corporation tax

The government has announced that it is considering bringing non-resident companies with UK taxable income into the corporation tax regime.  The stated motive for this proposal is to ensure that all companies are subject to the same tax rules, such as restrictions on loss relief and interest deductibility.  This suggests that the proposed extension of the scope of corporation tax might be confined to companies doing business in the UK (e.g. offshore companies carrying on a UK property business, and companies trading in the UK otherwise than through a permanent establishment), and that it might not include companies that are subject to UK income tax merely by virtue of receiving UK source investment income (such companies are, effectively, only subject to UK income tax through withholding tax at present).  However, we will have to wait until Budget 2017 for more detail on what the government has in mind.

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