Budget 2013 completed the coalition’s ‘corporate tax road map’, with the announcement of a 20% main rate of corporation tax from 2015, and a single corporation tax rate. The rate will be enacted in FA 2013. The patent box starts on 1 April, as do some of the creative industries tax reliefs. The government will consider including visual effects. There’s anti-avoidance to counter corporate loss buying in relation to unrealised tax attributes and manipulation of the close company ‘loans to participator’ rules. Finally, look out for substantial reform of the loan relationship and derivative contract rules, which will take effect in 2014 and 2015.
Budget day is one of the fun days in the tax calendar – even when it seems that we might be in for a quiet afternoon. At Deloitte, we thought we’d liven up our coverage by using some speech analysis software on the chancellor’s Budget. The software revealed that there were four key themes: housing, active monetary policy and two tax themes – national insurance and corporation tax.
When the coalition government took office in 2010, one of its first acts was to launch the ‘corporate tax road map’. The idea was to help companies plan sensibly for the future and set out a path to reform. The context was a combination of the government’s desire to make the UK the most attractive place in the G20 for business and an understanding that there had been too many unexpected changes in the past.
The road map had three key elements: the phased reduction in the corporate tax rate; the reform of the controlled foreign companies’ regime; and the introduction of tax incentives for some types of mobile income.
Budget 2013 marks the effective completion of the road map, with the announcement of a 20% main rate of corporation tax from 1 April 2015. The rate, together with the 21% rate for 2014, will be enacted in FA 2013. The Act is likely to become law on 18 July 2013 (with substantive enactment a couple of weeks earlier). This means that the new rates will need to be reflected in UK, IFRS and US GAAP financial statements for periods ending after that date – almost certainly missing the important 30 June half-year.
The next step, in 2014, will be to get rid of the marginal rate calculations, as there will be no difference between the main rate and the small profits rate. It will no doubt be necessary to retain instalment payments for large companies, without extending this burden to those with lower profits. It would be good to find a way to do this whilst removing the complicated associated company test.
Tax incentives
Little new emerged on the ‘above the line’ research and development tax credits. The rate was confirmed at 10%, but details on the PAYE/NIC offset (which can result in cash repayments) will be shown in the Finance Bill. The relief will cost an additional £80m in the first year which, as it is a grant, is accounted for as spending rather than as negative tax. There was a progress report on the creative industries tax credits, where the European Commission is about to give state aid approval for the high end television and animation reliefs. These will therefore start on 1 April and the Manchester-based film unit of HMRC will expand its activities to administer claims. However, the Commission is struggling to identify the ‘culturally British’ elements of video games – and so that element of the package will be deferred. Additionally, the government will consider whether it is possible to extend the relief to visual effects – another strength of the UK entertainment sector, but one which other countries compete for.
Anti-avoidance
Some important anti-avoidance was announced, which took effect from Budget day and which will apparently raise £260m p.a. For many years, successive governments have taken against the idea that a group can transfer the economic benefit of tax losses to another group. In one sense, this view seems quite unfair – why shouldn’t a company be able to realise value from an economic attribute which cost money to create, but which cannot be used by the creator?
The latest changes focus on unrealised losses and, in particular, excess capital allowances. The new rules are intended to match those which already restrict the use of realised losses. Until now, it has been possible for a potential seller not to claim the benefits of attributes, leaving them to be claimed by the purchaser after sale. Since the loss had not been crystallised as a tax loss, the rules limiting the future use of losses did not apply.
There are three separate rules planned to target such transactions. Firstly, the application of the anti-avoidance rules in CAA 2001 will be expanded so that the capital allowances available to a company following a change in ownership are restricted in their use. In addition, there are two targeted anti-avoidance rules. One – a ‘deduction transfer TAAR’ – applies to reorganisations between unconnected parties involving other forms of relevant deductions associated with these unrealised losses and has the effect of disallowing the relevant deduction. The second – a ‘profit transfer TAAR’ – prevents the transfer of profits to companies to offset against these unrealised losses, by denying the relief for deductible amounts under specified circumstances.
There are also anti-avoidance rules being introduced in connection with the change of ownership legislation, affecting trading losses and certain other types of loss of a company acquired from an unconnected company. Anti-avoidance legislation has for many years prevented certain types of loss from being carried forward, if there has been a major change in the nature or conduct of the business in a three-year period either side of the change of ownership. However, it has been known for many years that the rule doesn’t apply where, after the acquisition, the trade is transferred to another company within the purchaser group. This gap is now being closed. In addition, a new chapter will be inserted into the legislation to restrict the availability of non-trading debits, non-trading loan relationship deficits and non-trading losses on intangible fixed assets after a change of ownership of a shell or dormant company.
There is a small change to the group relief rules, which applies to UK property business losses, management expenses and non-trading losses on intangible fixed assets, etc. Only the excess of these amounts over the company’s ‘gross profits’ can be surrendered. In future, ‘gross profits’ is to include apportioned controlled foreign company profits.
There are also further anti-avoidance provisions to stop close companies from circumventing the ‘loans to participators’ rules, which levy repayable tax where a close company lends to a participator. These changes target loans made to an intermediary (such as a partnership or trust), where at least one participator is a member, partner or trustee. They will now apply to transfers of value other than loans, which are not currently caught, and there is an amendment to the repayment rules so that relief is only given for genuine repayments. Repayments where there is a redrawing within a short time will not qualify.
Procurement
Public procurement came into the public eye last year, when the Public Accounts Committee suggested that companies and individuals engaged in tax avoidance should not be awarded public contracts. Public procurement is governed by an EU regulation, backed up by a statutory instrument. As a result, a new approach does not require new legislation. Instead, guidance on what is meant by an ‘occasion of non-compliance’ (OONC) is all that is needed. The first stab at the guidance was confusing and not well focused on the Treasury’s objective – that those providing goods and services should not be engaged in tax avoidance. The draft issued on Budget day is much better. Only issues arising from returns filed from 1 October 2012, where the adjustment is made from 1 April 2013 are considered. OONCs are tax adjustments falling foul of the GAAR, or in relation to a scheme notified under the tax disclosure rules. Additionally, criminal fraud and penalties for civil fraud and evasion trigger an OONC. The rules will apply to contracts over £5m and typically only to the tendering company.
Other changes
One of the most complicated areas of tax law – and one which has led to considerable planning – concerns so-called loan relationships and derivative contracts. The Budget announced that HMRC will work on a new combined regime for this area. The idea seems to be to write the law in a clearer manner, which is both easier to understand and also less open to unintended planning. Little detail has been announced, but the changes will take effect in 2014 and 2015. It’s unlikely that entirely new principles will apply, but no doubt the new regime will need to take account of the major changes to UK GAAP, applying from 2015.
Corporation tax deductions for the cost of share options and awards have been allowed by statute – essentially by linking the deduction to the employee’s tax treatment. However, some have sought to claim corporate tax deductions for lapsed options, on the basis that an accounting charge has been recorded in the profit and loss account – and that such a deduction is only precluded by statute where the option is exercised. This has been debated with HMRC for some time, which considers that any accounting provision for option costs is only deductible where a monetary expense is expected to ensue eventually. This is not the case with lapsed options. However, in view of the amounts potentially at stake, HMRC has recommended that the law be ‘clarified’ to make it clear that deductions can only be claimed under the statutory regime and not for any accounting charges. HMRC has made it clear that claimants will need to litigate if they wish to maintain their claim.
Finally, perhaps the silliest change relates to elected police and crime commissioners. The law providing for these new posts stated that chief constables and the commissioner of police of the metropolis were to have the status of a ‘body corporate’. The not so funny result of this status is that they are liable to pay corporation tax on any profits. Legislation will be introduced to exempt chief constables and the commissioner of police of the metropolis from corporation tax.
Bill Dodwell leads Deloitte’s tax policy group
