Spring Budget: corporate tax announcements

Mark Joscelyne, Tax Partner, CMS

Today’s Budget was fairly thin both on detail and on new announcements. In addition to a small number of new measures, most of the Chancellor’s announcements were minor adjustments to measures which had been announced in the Autumn Statement or the subject of consultation. We await more detail over the next couple of weeks and will have more to say then, but in the meantime here is a quick recap of the headline tax changes affecting corporates.

As announced by George Osborne, the rate of corporation tax will reduce to 19% in April 2017 and 17% in April 2020. There had been speculation that the Chancellor would reduce rates further (in the light of  Donald Trump’s plans to reduce US taxes)  in order to retain what he described as “the most competitive corporate tax regime in the G7”, but he confirmed that he would stick with Osborne’s plans on this.

In response to concern that these low corporate tax rates are  encouraging people to form companies simply to reduce tax liabilities, the annual dividend tax exemption is to be reduced from £5,000 to £2,000 from April 2018.  This exemption was introduced partly to compensate shareholders for loss of tax credits on dividends, but after this reduction  fewer shareholders will be fully compensated for the loss of tax credits.

New rules for corporate losses arising on or after 1 April 2017  will come into force as previously announced.  To recap, these  restrict to 50% the amount of profits above £5 million per annum which can be reduced by carried forward losses but provide greater ability to set losses off against other income and profits of the same year. Since our earlier blog the government has announced that provisions will be included for application of the rules to oil and gas companies and oil contractors.

A new measure is the removal of the ability of businesses with loss-making capital assets to obtain a tax advantage by converting those losses into more flexible trading losses. Generally when capital assets are appropriated to trading stock, the appropriation is treated as taking place at market value but an election can be made to reduce the gain or loss to zero.  The effect of the election where assets are standing at a loss is to increase the value at which they are brought into trading account and therefore generate a trading loss when they are sold. As from today, 8 March, these elections can only be made if the capital asset is standing at a gain and not at a loss.

The new restrictions on interest deductibility will come into force with effect from 1 April 2017.  In broad terms these restrict deductions to 30% of EBITDA or a higher group ratio of external interest:group EBITDA. Since we blogged on these rules here, further draft legislation has been published including provisions for an exemption for public infrastructure projects which appears to be wide enough to cover some real estate investment companies. It will be interesting to see the scope of this exemption when the Finance Bill is published on 20th March.

As the interest deductibility restrictions apply only to corporation tax, they will initially not apply to non-UK resident companies, which pay income tax on their UK income rather than corporation tax. However this advantage looks likely to be short-lived as the Government intends to proceed with a consultation on bringing such companies within the charge to corporation tax.  There had been concern that non-resident companies might also become liable to corporation tax on UK-source capital gains but, while the Budget announcement is somewhat ambiguous on this point, it seems likely that this will only apply to capital gains on UK residential property. In April 2015  non-residents became liable to capital gains tax on disposals of UK residential property but they generally remain outside the charge to UK tax on gains on commercial property.

Changes to the chargeable gains substantial shareholdings exemption will come into force as planned with effect from 1 April. See our earlier blog for details. Broadly this will allow some investment companies to benefit from the exemption if selling shares in a trading company or holding company of a trading group. Previously the selling company also had to satisfy a trading requirement too.

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