UK Parliament Announce Budget 2018
The Chancellor of the Exchequer delivered the government’s 2018 Budget on 29 October 2018, against a backdrop of uncertainty in the UK economic landscape. His announcements were largely targeted at the changing dynamic of the economy. No specific tax measures were announced in respect of Brexit, although the Chancellor made it clear that he reserved the right to convert the 2019 Spring Statement into a fiscal event, if required. In the meantime, draft legislation detailing the proposed changes is expected to be published on 7 November 2018.
Some key measures that will impact corporates are outlined below. Download the comprehensive Budget 2018 analysis for commentary on other tax areas such as income tax and indirect tax.
Corporation Tax Rate
Although there was some speculation in the media prior to the Budget that the current UK corporation tax rate could be frozen at 19%, this proved to be unfounded. The UK corporation tax rate, therefore, should fall to 17% on 1 April 2020, as previously enacted in 2016.
Controlled Foreign Companies – Changes in 2019
The measure: As previously announced in July 2018, two amendments will be made to the UK’s controlled foreign company (CFC) rules with the intention of bringing them into line with the Anti-Tax Avoidance Directive (ATAD).
First, the definition of control will be broadened so that the interests of non-resident associates are taken into account when considering whether a foreign company is a CFC.
Second, the Chapter 9 finance company rules will be amended so that the full or partial exemption will not be available in respect of profits attributable to UK significant people functions (SPFs).
Who will be affected: It is expected that the first measure will affect corporate taxpayers where UK persons do not themselves have sufficient rights in a foreign company for it to be regarded as CFC, but will be regarded as doing so when the rights of associated entities are taken into account. For example, if a foreign company is 20% owned by a UK resident company, and 80% owned by the UK resident company’s non-UK parent, it is expected that the foreign company will become a CFC under the new rules.
The second measure will affect taxpayers relying on the Chapter 9 full or partial exemption in respect of non-trade finance profits arising in CFCs. To the extent a CFC’s non-trade finance profits are attributable to UK SPFs, it is likely they will in future be subject to a full CFC charge, unless the CFC qualifies for an entity level exemption.
When will the measure come into effect?: The changes will take effect from 1 January 2019.
We look forward to seeing the draft legislation setting out the detail of these changes.
The change to the definition of control will bring some additional foreign companies within the scope of the UK CFC rules. The impact will likely be greatest for non-UK parented groups and a number of these will face new compliance obligations.
The change with respect to Chapter 9 will be relevant for the many taxpayers who rely on the finance company full or partial exemption. Although HMRC have referred to the change as “minor” it will require those taxpayers to undertake a detailed factual analysis that was simply not needed previously. This comes alongside the current uncertainty in relation to the Chapter 9 regime that has been caused by the European Commission’s State Aid Challenge.
Corporate Capital Loss Restriction
The measure: Under current rules companies can offset up to 100% of their chargeable gains against capital losses brought forward from prior accounting periods. From 1 April 2020, it is proposed that the proportion of chargeable gains that may be relieved by losses brought forward will be limited to 50% for gains in excess of £5m. The first £5m of chargeable gains will remain eligible to be fully offset.
This change will bring the treatment of capital losses brought forward in line with other categories of tax losses brought forward, following changes in 2017.
Who will be affected?: The measure will affect companies which generate chargeable gains of £5m or more in an accounting period and have brought forward capital losses. We anticipate that the £5m will be a group wide threshold.
When will the measure come into effect?: The 50% limitation on the offset of brought forward capital losses will apply from 1 April 2020. The government will consult on the detailed design of this change and legislate in Finance Bill 2019/20. The measure is subject to anti-avoidance rules that will apply with immediate effect.
For some taxpayers this will be a significant change, and potentially unwelcome. Affected taxpayers may wish to participate in the consultation process to ensure that areas of complexity, such as the application of the rules to groups of companies, are adequately addressed.
Digital Services Tax
The measure: The UK government will introduce a new 2% tax on the revenues of certain digital businesses.
Who will be affected?: Businesses with annual global revenues of at least £500m and annual UK revenues in excess of £25m where those revenues arise from the provision of social media platforms, online marketing platforms or search engines and those revenues are linked to the participation of UK users. It is stated that there will be exemptions or reliefs for businesses that generate losses or have very low profit margins. Notwithstanding this the measure is expected to raise £400m per year by 2022/23.
When will the measure come into effect?: The tax will apply from April 2020. The government will consult on the detailed design of the rules and legislate in Finance Bill 2019/2020.
While understanding the pressure to act to ensure that the corporate tax system is sustainable and operates appropriately across all types of business, a global solution to the taxation of the digital economy, supported by the OECD and G20, would seem more likely to lead to a long term, sustainable position than unilateral action. As such the government’s commitment to participate in ongoing discussions at an international level and to only apply the new tax until an international solution is in place is welcome.
Intangibles: Reinstatement of relief for acquired goodwill
The measure: The UK government has announced a partial reinstatement of relief for acquired goodwill. Relief was previously restricted in respect of goodwill acquired on or after 8 July 2015.
Who will be affected?: This measure will affect companies acquiring goodwill.
When will the measure come into effect?: It is intended this measure will have effect from April 2019. Proposals are expected to be published on 7 November 2018, followed by a consultation period.
This should help to make the UK’s intangible fixed assets regime more consistent with that of other major economies.
The measure: Following consultation earlier this year, the government has announced a reform of the degrouping rules in respect of post-2002 intangible fixed assets, such that they are more closely aligned with the equivalent chargeable gains rules. In short, this should result in degrouping charges not arising where the disposal giving rise to the degrouping event qualifies for relief under the substantial shareholding exemption.
Who will be affected?: This measure will impact groups seeking to dispose of an entity holding post-2002 intangible fixed assets that were transferred within a group to that entity within the preceding six years.
When will the measure come into effect?: This measure will have effect for degrouping events occurring on or after 7 November 2018.
This change should help to simplify the intangible fixed assets regime and remove an asymmetry between it and the chargeable gains code.
Property Tax – Non-resident chargeable gains tax and corporation tax changes
The measure: Following an announcement at Autumn Budget 2017, draft legislation was published in July 2018 covering the extension of non-resident chargeable gains tax (NRCGT) to non-resident commercial property owners from 6 April 2019. Further draft legislation and a technical note covering the application of NRCGT rules to funds will now be published on 7 November 2018. Additionally, the government announced that for UK property-rich REITs, the exemption for capital gains on disposals of properties will be extended to share sales of entities that are UK property rich. Again, further details will be provided in draft legislation on 7 November 2018.
In addition, as previously announced from 6 April 2020, non-resident corporate landlords (NRLs) will be chargeable to corporation tax at 17% (rather than income tax at 20%) on rental income. This will require them to electronically file UK corporation tax returns on a financial year basis (rather than a fiscal year basis). Following initial draft legislation published in July, updated draft legislation was published alongside the Budget. HMRC expects to publish guidance on the transition during 2019.
Key aspects of the draft legislation include:
- bringing the loans and derivative contracts that a NRL is party to for the purposes of its property business within the scope of the existing corporation tax rules on loan relationships and derivative contracts, including the UK’s corporate interest restrictions and anti-hybrid rules;
- confirming that carry forward income tax losses as at 5 April 2020 will transfer into the corporation tax regime, and be capable of offset against the NRL’s future property business profits without restriction;
- bringing NRLs within the scope of the UK corporation tax loss restriction and group relief rules for any losses arising on or after 6 April 2020. This will include the restriction to the use of brought forward losses above £5 million per annum (on a group basis) to 50% of profits, together with the more flexible group relief rules that effectively now permit brought forward as well as current period losses to be surrendered to profitable group companies.
- confirming that capital allowances will transfer from the income tax regime to the corporation tax regime at tax written down value, i.e. on a tax neutral basis.
Who will be affected?: Non-resident holders of UK real estate.
When will the measure come into effect?: NRCGT changes are to be introduced from 6 April 2019. NRLs will be chargeable to corporation tax on their rental income from 6 April 2020.
The proposed changes were announced some time ago and should come as no surprise to non-resident owners of UK real estate. The draft legislation and the technical note covering NRCGT for funds will, when published on 7 November 2018, be of particular interest to a number of investors in UK real estate.
Stamp taxes on shares consideration
The measure: Stamp duty and stamp duty reserve tax will be charged on the market value of listed shares and securities where transferred to a connected company at an undervalue.
Who will be affected?: Companies that purchase listed UK shares and securities at an undervalue from connected parties.
When will the measure come into effect?: The new provision will apply to transfers of shares and securities from 29 October 2018.
This change will have limited impact on commercial transactions and markets as it only applies to listed securities and is intended to stop “contrived arrangements”.
If you have any questions in respect of how these measures may impact your business, please reach out to your usual Deloitte contact.