UK Tax Alert. Corporate Tax. 21 March 2013

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1 21 March 2013 UK Tax Alert. On 20 March 2013, George Osborne delivered his fourth Budget speech. From a business tax perspective, there were not many major new announcements, the further cut in the main rate of corporation tax to 20 per cent. from April 2015 being a notable exception. Anti-avoidance measures also played a part, and alongside some significant specific, targeted measures (particularly on loss relief) it was confirmed that the much-anticipated general anti-abuse rule will be introduced in Finance Bill However, it is possibly surprising given the current political climate that there were no new domestic measures to counter profit shifting by international groups. Looking further ahead, some of the biggest changes are yet to come. In particular, the Government has announced a review of the loan relationships and derivative contracts rules with a view to including legislation in Finance Bill 2014 and It has also announced a package of measures to help the funds industry and has confirmed that banks will be able to deduct interest on Additional Tier One debt. Contents Corporate Tax... 1 Anti-Avoidance... 3 Property Tax... 6 Funds Tax... 7 Personal Tax... 7 Other Measures... 8 Future Changes... 8 Further Information In this Tax Alert, we aim to summarise the key new measures relevant to large business. We also include links to the underlying materials on the HM Treasury and HMRC websites. For the full Overview of Tax Legislation and Rates for Budget 2013, click here. For details of measures previously announced, please see our Tax Alerts Chancellor s Autumn Statement 2012: Announcements Relevant to Large Business dated 6 December 2012 and Draft Finance Bill 2013 Clauses: Announcements Relevant to Large Business dated 12 December For further information, please contact Dominic Winter tel: (+44) , Michael Hardwick tel: (+44) , or your usual Linklaters LLP tax contact. Corporate Tax Corporation tax and bank levy rates The main rate of corporation tax is to decrease to 20 per cent. for the financial The main rate year commencing 1 April This represents a further one percentage of corporation tax is to point cut from the previously announced rate of 21 per cent. due to take effect decrease to 20 in April per cent. for the financial UK Tax Alert. 1 year commencing 1 April

2 As with other recent reductions in the corporation tax rate, the Government does not intend to pass the benefit of this on to the banking sector. As a result, this reduction will be offset by increasing the Bank Levy (which currently stands at per cent.) to per cent. from 1 January A proportionate increase to per cent. will be made to the Bank Levy half rate with effect from the same date. Controlled foreign company ( CFC ) rules A package of measures amending the CFC rules enacted by Finance Act 2012 will be introduced. The changes include: > extending the scope of the rules so they apply to profits from all assets leased under finance leases, including hire purchase and similar types of contract; > limiting the amount of double taxation relief for UK companies that form part of certain arrangements involving the routing of a loan from one CFC to another CFC through a UK company; > ensuring that references to the interpretation of certain accounting practices are consistent throughout the new CFC rules; > aligning the definition of a group treasury company in the worldwide debt cap rules and the CFC rules; > relaxing the limitation for qualifying resources funded from UK debt in specified circumstances; and > ensuring that the matched interest rule can apply to all leftover profits. A number of these amendments had already been announced in the draft Finance Bill 2013 clauses published on 11 December Deferral of payment of exit charges As announced in December 2012, legislation will be introduced in Finance Bill 2013 to enable companies to opt to defer payment of exit charges. The legislation has been revised to extend the scope of the charges which can be deferred to include corporation tax attributable to the revaluation of trading stock. UK permanent establishments of non-resident companies incorporated elsewhere in the EU or EEA will now also be able to defer payment. These changes are intended to bring the legislation into line with EU law. It is still not obvious, however, that the measure goes far enough to comply with EU law, because the exit charge cannot be deferred for more than ten years. Other changes > Legislation will be introduced in Finance Bill 2013 to allow large companies to claim R&D relief as a taxable above-the-line credit to the value of 10 per cent. of their qualifying R&D expenditure (rather than the 9.1 per cent. rate announced in December 2012). UK Tax Alert. 2

3 > Finance Bill 2013 will amend the chargeable gains computation rules for disposals of ships, aircraft, shares and interests in shares by companies which have a functional currency other than sterling so that such companies will be required to compute their chargeable gains and losses using their functional currency at the date of disposal. This goes further than the previously announced changes in the draft Finance Bill 2013 clauses, which only applied to disposals of shares. The changes will be welcomed by companies with a non-sterling functional currency, who until now have been exposed to the risk of chargeable gains arising solely because of exchange rate movements. Anti-Avoidance Combatting tax avoidance did not take centre stage in this year s Budget, despite what might have been expected given the current political and media spotlight. Nevertheless, George Osborne did announce that he was unveiling one of the largest ever packages of tax avoidance and evasion measures presented at a Budget. The key aspects of this package for large business are set out below. General measures > The widely-consulted on general anti-abuse rule ( GAAR ), which is designed as an additional means by which HMRC can challenge abusive tax avoidance schemes, will be introduced in Finance Bill 2013 as expected. > Looking internationally, the Government stated that it considers the global rules governing the taxation of multinational firms should be updated and made relevant to the global internet economy, and will look to the G8, G20 and OECD to achieve this. There were, however, no new domestic rules to ensure multinational companies do not engage in profit shifting. Any international developments in this area are likely to prove slow to agree and implement. Targeted measures On a more targeted, domestic level, certain identified loopholes are to be closed. Interestingly, this year the majority of these specific anti-avoidance measures are aimed at loss schemes. This may be because of a concern that banks will find inventive ways of using the losses which have arisen from the credit crunch. Broadly, the measures all take effect from Budget Day. > Under the heading of Loss Loophole Closure : - the existing group relief rules, and specifically Section 105 Corporation Tax Act 2010 which restricts the surrender of certain relevant amounts eligible for group relief unless they exceed the gross profits of the surrendering company, will be amended so that apportioned CFC profits are included in the calculation of gross profits ; Interestingly, this year the majority of these specific anti-avoidance measures are aimed at loss schemes... UK Tax Alert. 3

4 - the loss buying rules in Part 14 Corporation Tax Act 2010, which restrict the availability of loss relief where there is a change in the ownership of a company accompanied (within three years) by a major change in the nature or conduct of the trade, will be extended to apply to a transfer of ownership of a shell company (i.e. one not carrying on a trade, investment business or UK property business), that has non-trading loan relationship debits, non-trading deficits from loan relationships and/or non-trading losses on intangibles, and to apply where there is a change of ownership of a company carrying on a trade followed by a transfer of that trade to a fellow group company. This last change will stop a common tax planning strategy that HMRC has been aware of for many years, under which groups which have bought a loss making company seek to safeguard the losses by transferring the company s trade intra-group before making changes to the trade to improve its profitability. A technical note, detailing these changes, has been published. > A second technical note, Targeted Loss Buying Rules, introduces changes to Chapter 16A Capital Allowances Act 2001, as well as two new targeted anti-avoidance rules ( TAARs ). - Chapter 16A Capital Allowances Act 2001, which is designed to prevent tax-motivated capital allowance buying, will be extended in particular by removing the unallowable purpose test where the amount of the relevant excess of allowances is 50 million or more, and by modifying the test to a not insignificant benefit test where the amount of the relevant excess of allowance is 2 million or more but less than 50 million. This is likely to make the provision more relevant to M&A transactions, particularly when loss making companies are sold, since such companies will often not have maximised capital allowance claims in order to optimise their group relief position. - As noted above, two new TAARs will be introduced, relating to the sale of companies or businesses carried on in partnership with certain unrealised losses. A Deduction Transfer TAAR will ring-fence those losses so that they cannot be used to shelter profits (whether of the company concerned or, via the group relief rules, of another member of the buyer s group), where (inter alia) the purpose, or one of the main purposes, of the arrangements is to claim such a relief. A Profit Transfer TAAR applies in similar circumstances, but where a main purpose is for the buyer to transfer profits into the company to be sheltered by its losses. In those circumstances, the TAAR will deny relief for the losses altogether....two new TAARs will be introduced...[a] Deduction Transfer TAAR [and a] Profit Transfer TAAR... UK Tax Alert. 4

5 Further details will be published on 28 March > Rules will be introduced in Finance Bill 2013 to clarify that where companies grant share options or award shares to their employees, they will only be permitted a corporation tax deduction pursuant to Part 12 Corporation Tax Act 2009 (the broad effect of which is to link the amount of corporation tax relief to the amount that is chargeable to income tax). The new legislation will also make it clear that, other than in certain circumstances, no corporation tax deduction is available in relation to an employee share option unless shares are acquired pursuant to that option. > The rules governing the tax charge on loans from close companies to their participators (the so-called Section 455 tax charge ) will be strengthened. In particular changes will be made to counter arrangements which have sought to make use of perceived loopholes in the legislation by (i) making loans via certain intermediaries, (ii) transferring value other than in the form of a loan or advance of money, and/or (iii) using bed and breakfasting arrangements so that the loan is not outstanding for long enough for the charge to arise. These targeted measures will be accompanied by a wider review of the loans to participators regime later this year. > The stamp duty land tax ( SDLT ) rules in Section 45 of Finance Act 2003 (transfers of rights) are to be amended with retrospective effect from 21 March 2012 to put beyond doubt that a particular type of SDLT avoidance scheme is ineffective. The schemes in question involve an onward sale (a subsale or transfer or rights ) which is not to be completed for a number of years. The intended result of the arrangement is that the immediate purchaser is left in possession of the property but bears no SDLT liability, while the transfer of rights, although in principle subject to SDLT, falls below the SDLT threshold. The amendments to Section 45 will broadly provide that the transfers of rights rules will not operate to disregard the initial sale of the property under the original contract where the purchaser under the original contract (or a person connected with them) is in possession of the land, the sub-sale is substantially performed (e.g. by payment of the consideration) but not completed at the same time as the original contract and a main purpose of the sub-sale is the obtaining of a tax advantage by the purchaser. As discussed below, the current rules are also to be reformed more generally for future transactions. No doubt one of the purposes of this retrospective change is to deter further antiavoidance in the residential property sphere. Procurement process > Although not in itself an anti-avoidance measure, the proposal that potential suppliers to the Government will have to self-certify that they have complied with their tax obligations as part of the procurement process is nevertheless likely to have a deterrent effect on tax UK Tax Alert. 5

6 avoidance. A Summary of Responses to the informal consultation on this measure has been published as one of the Budget documents. Some important changes are to be made from the initial proposals, and some useful clarifications given. In particular, the ten-year look back will now be a six-year look back, and the rules will only apply where an occasion of non-compliance occurs on or after 1 April 2013, and in respect of tax returns submitted on or after 1 October Further, TAARs will no longer form part of the definition of non-compliance, which will be limited to where tax returns are found to be incorrect as a consequence of the application of the GAAR, the Halifax abuse principle or because a scheme notified (or which should have been notified) under the disclosure of tax avoidance schemes ( DOTAS ) rules has proved to have failed (as well as where the tax affairs give rise to a criminal conviction for tax related offences which is unspent or a civil penalty for fraud or evasion). Finally, in a useful clarification, the Government has confirmed that an economic operator is only required to give the confirmation on a sole basis (i.e. the confirmation does not extend to other group companies, individual partners in a partnership etc., although it does extend to all the members of a joint venture or consortium). These changes are likely to make the rules more palatable and focus them better on changing behaviour for the future than on penalising businesses for their past conduct. In particular, the ten-year look back will now be a sixyear look back, and the rules will only apply where an occasion of noncompliance occurs on or after 1 April Property Tax Annual tax and capital gains tax on enveloped dwellings As announced in Budget 2012, legislation will be introduced in Finance Bill 2013 for an annual charge on residential properties valued at more than 2 million held by certain companies and other non-natural persons. Following consultation, changes are to be made to introduce additional reliefs and exemptions and modify the conditions for some of the existing reliefs. Rules for claims, appeals, information powers, disclosure of tax avoidance schemes and penalties are also to be included in the draft legislation. The details of these changes will become clear once the Finance Bill is published on 28 March The Government is also due to legislate in Finance Bill 2013 to introduce a CGT charge payable by certain non-natural persons when they dispose of interests in high value residential property in the UK on or after 6 April Stamp duty land tax The legislation to be included in Finance Bill 2013 to simplify the reporting requirements that apply when a lease continues after the expiry of its fixed term and where an agreement for lease is substantially performed before the actual lease is granted has been amended following consultation. As announced in Autumn Statement 2012, legislation will also be introduced in Finance Bill 2013 to reform the stamp duty land tax rules for transfer of rights (or sub-sales ). Following consultation, the legislation has been UK Tax Alert. 6

7 revised to improve its clarity and structure and address a number of technical issues, including identifying who the vendor is in various circumstances. However, in each case, the full details of the changes will only become apparent when Finance Bill 2013 is published on 28 March A number of reliefs will also be introduced in Finance Bill 2013 to reduce the 15 per cent. rate of SDLT on the acquisition by certain non-natural persons of dwellings costing more than 2 million to 7 per cent. in some circumstances. Funds Tax Investment trust amendments Legislation will be introduced in Finance Bill 2013 to make it clear (with retrospective effect) that provided all, or substantially all, of the business of a company is investing its funds in shares, land or other assets with the aim of spreading investment risk then other ancillary activities will not prevent the first condition of the definition of investment trust from being satisfied. Secondary legislation will also be introduced to amend the Investment Trust (Approved Company) (Tax) Regulations 2011 to provide a further exception to the income distribution requirement where an investment trust has accumulated realised revenue losses in excess of its income for an accounting period. Other changes Two changes will be made to the offshore funds regulations. With effect from 20 March 2013, amending regulations make it clear that an offshore income gain cannot be avoided by a merger or reorganisation of the offshore fund. Further changes will be made (which are expected to come into force by 30 June 2013), broadly to ensure that investors in reporting offshore funds are taxed on their correct proportionate share of the income arising to the fund. The Government has also announced that it will consult on the possible removal of the withholding tax requirement on interest distributions made by UK domiciled bond funds, in circumstances where they are sold via reputable intermediaries and marketed only to non-uk investors. Personal Tax Employee shareholder status As announced in December 2012, legislation will be introduced in Finance Bill 2013 to exempt gains made on disposals of up to 50,000 worth of employee shareholder shares from CGT. Following consultation, the legislation has been revised to prevent an income tax charge arising on a distribution where a company buys back CGT-exempt shares and to strengthen the material interest anti-avoidance provision. Legislation will also be introduced so that income tax and NICs will not be chargeable on the first 2,000 of share value received by eligible employee shareholders. It is UK Tax Alert. 7

8 anticipated that these changes will have effect from 1 September It remains to be seen whether employee shareholder status will take off, and it is noteworthy that the House of Lords has voted against it. Transfer of assets abroad Following consultation, the legislation for inclusion in Finance Bill 2013 relating to a transfer of assets abroad has been revised to partially exempt income from charge when the income is attributable to a transaction where part is genuine and part is not. The proposed changes to clarify the matching rules (the rules governing the calculation of the income chargeable when an individual other than the transferor receives a benefit following the transfer of an asset) have been postponed pending further consultation. Gains on assets held by foreign companies The changes to the gains on assets held by foreign companies legislation (Section 13 Taxation of Chargeable Gains Act 1992) to be introduced in Finance Bill 2013 have been amended to remove the requirement in the new economically significant activity exemption for activity to be carried on wholly outside the UK through a non-uk business establishment. Other Measures The following list of previously announced measures likely to be of relevance to large business remain largely unchanged: > Clarification of the treatment of banks Tier Two regulatory capital. > Proposed changes to the worldwide debt cap. > Removal of an inadvertent restriction on corporation tax group relief. > Amendments to the Real Estate Investment Trusts regime and the lease premium relief rules. > Measures reforming (and largely repealing) the rules governing withholding tax on manufactured payments. > Other anti-avoidance measures concerning unauthorised unit trusts, changes to the DOTAS rules, the bank levy and avoidance schemes involving loan relationships and derivatives. Future Changes > Additional Tier One regulatory capital instruments: The Government will, following the conclusion of the Capital Requirements Directive IV, issue secondary legislation to confirm and ensure that banks Additional Tier One debt capital instruments (both already in issue and yet to be issued) will be tax deductible. Banks will welcome this change, which follows detailed discussions between HMRC, banks and advisers.... banks Additional Tier One debt capital instruments (both already in issue and yet to be issued) will be tax deductible. UK Tax Alert. 8

9 > Review of loan relationships and derivative contracts rules: The Government will consult on modernising the legislation in Parts 5, 6 and 7 of the Corporation Tax Act 2009 governing the taxation of loan relationships and derivative contracts. Legislation will be included in Finance Bill 2014 and Finance Bill This will be the third major revamp of this legislation, in addition to the continual tinkering to close down schemes. > Partnerships: The Government has asked the Office of Tax Simplification to carry out a review of ways to simplify the taxation of partnerships. Partnership taxation is also to be the subject of a consultation in Spring 2013 regarding measures to tackle the disguising of employment relationships through LLPs and counter the manipulation of profit/loss allocations by partnerships with a corporate or other non-natural member in order to secure tax advantages. The private equity industry and funds sector will want to monitor these changes carefully. > Code of Practice on Taxation for Banks: Following consultation, the Government will introduce legislation in Finance Bill 2014 to provide for HMRC to publish an annual report, from 2015, on the operation of the Code of Practice on Taxation for Banks, which may include naming any bank that HMRC considers not to be complying with the Code. > There will be four measures aimed at helping the UK funds industry: > Stamp duty/sdrt: Legislation will be introduced in Finance Bill 2014 to abolish the stamp duty reserve tax charge applicable to unit trusts and open-ended investment companies in Schedule 19 to Finance Act The Government also intends, following consultation, to use Finance Bill 2014 to abolish stamp duty on shares quoted on growth markets such as the Alternative Investment Market. The Government will consult on modernising the legislation in Parts 5, 6 and 7 of the Corporation Tax Act 2009 governing the taxation of loan relationships and derivative contracts... The Government also intends... to use Finance Bill 2014 to abolish stamp duty on shares quoted on growth markets such as the Alternative Investment Market. > UK management of offshore funds: The Government will consult on introducing changes in Finance Bill 2014 to provide that locating the fund management activities of certain offshore non-ucits funds in the UK will not lead to a risk of that fund being UK tax resident. > Investment management exemption: The Government will also consult on the possibility of expanding the published White List within secondary legislation governing the investment manager exemption, authorised investment funds, investment trusts and offshore reporting funds. UK Tax Alert. 9

10 > Limited partnerships with legal personality: As part of its investment management strategy, HM Treasury will also consult with a view to making technical changes to the law on limited partnerships as it applies to funds, including the possibility of allowing them to elect for legal personality. > Employee ownership: The Government will introduce a new capital gains tax relief in Finance Bill 2014 on the sale of a controlling interest of a business into an employee ownership structure. It remains to be seen whether this has relevance to the large corporate sector, or whether it will be focussed on small management buy outs. > Notification requirement for avoidance scheme users: The Government will consult on a proposal to introduce legislation in Finance Bill 2014 to require taxpayers who have used avoidance schemes which are defeated in another party s litigation to acknowledge to HMRC that the judgment applies to them and amend their returns accordingly, or confirm that they stand by their original return. This would be backed up by a tax-geared penalty if the taxpayer failed to take reasonable care. Contacts For further information please contact: Dominic Winter Partner (+44) dominic.winter@linklaters.com Michael Hardwick Consultant (+44) michael.hardwick@linklaters.com Further Information For further information, please contact Dominic Winter tel: (+44) , Michael Hardwick tel: (+44) , or your usual Linklaters LLP tax contact. Authors: Dominic Winter / Michael Hardwick This publication is intended merely to highlight issues and not to be comprehensive, nor to provide legal advice. Should you have any questions on issues reported here or on other areas of law, please contact one of your regular contacts, or contact the editors. Linklaters LLP. All Rights reserved 2013 Linklaters LLP is a limited liability partnership registered in England and Wales with registered number OC It is a law firm authorised and regulated by the Solicitors Regulation Authority. The term partner in relation to Linklaters LLP is used to refer to a member of Linklaters LLP or an employee or consultant of Linklaters LLP or any of its affiliated firms or entities with equivalent standing and qualifications. A list of the names of the members of Linklaters LLP together with a list of those non-members who are designated as partners and their professional qualifications is open to inspection at its registered office, One Silk Street, London EC2Y 8HQ or on and such persons are either solicitors, registered foreign lawyers or European lawyers. Please refer to for important information on our regulatory position. We currently hold your contact details, which we use to send you newsletters such as this and for other marketing and business communications. We use your contact details for our own internal purposes only. This information is available to our offices worldwide and to those of our associated firms. If any of your details are incorrect or have recently changed, or if you no longer wish to receive this newsletter or other marketing communications, please let us know by ing us at marketing.database@linklaters.com. One Silk Street London EC2Y 8HQ Telephone (+44) Facsimile (+44) Linklaters.com UK Tax Alert. 10