UK Tax Alert. Autumn Statement Key Measures for Large Business.

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1 4 December 2014 UK Tax Alert. Autumn Statement Key Measures for Large Business. Pre-election Budgets often contain significant new measures and it is clear from Autumn Statement 2014 that the 2015 Budget will not disappoint in this respect. The beneficiaries, however, will be mainly individuals, especially through reductions in stamp duty land tax on residential property and an increase in the income tax personal allowance. Businesses on the other hand will be affected by a raft of anti-avoidance measures, some of which will put an end to a number of tax planning techniques which had, until now, been widely accepted for many years. Whilst some of the measures were accompanied by detailed legislation and guidance, a number of the proposals were set out in far less detail. We expect further information on many of those measures to be made available on 10 December 2014 ( Legislation Day ), when the draft clauses for inclusion in Finance Bill 2015 are scheduled to be published. In this Tax Alert we aim to draw out the main tax measures likely to be relevant to large business. Contents Highlights... 1 Corporate Tax... 2 Financial Services Tax... 4 Domestic Anti-avoidance Measures... 5 International Anti-avoidance Measures... 7 Real Estate Tax... 9 Employment and Individual Taxation... 9 Measures with Immediate Effect For further information, please contact Martin Lynchehan tel: (+44) , Lynne Walkington tel: (+44) , Dominic Winter tel: (+44) , or your usual Linklaters LLP tax contact. Highlights The Government announced a very significant number of important new tax measures. Which of the range of measures announced will have the biggest impact for large business will depend in part upon the sector in which the business operates and its structure. For example, for banks and building societies it will be the new restriction on the use of bank losses and the proposed anti-hybrid rules. For the real estate sector, it is likely to be the reform of the residential SDLT rates and bands. For the private equity sector, the partial repeal of the late-paid interest rules will remove a useful tax planning technique which was widely used to avoid incurring stranded losses. M&A is likely to be impacted by the prohibition on the use of cancellation schemes of arrangement for takeovers and, although only brief mention is UK Tax Alert. 1

2 made of it, the Government also intends to target so-called B share schemes used to return cash to shareholders tax-efficiently. Autumn Statement 2014 also contained a number of more general announcements aimed at reducing so-called base erosion and profit shifting ( BEPS ), which is currently the focus of a major OECD initiative. As part of this, multinationals could be affected by the proposed new 25 per cent. Diverted Profits Tax and the measures on country-by-country reporting. We set out more information on all of these measures, along with a number of others, below. Save where indicated, the details of these measures can be found in the full Autumn Statement and/or the Autumn Statement 2014: policy costings. Click here for a table setting out the measures which have immediate effect. Corporate Tax Targeting B share schemes The Government has announced that it will be targeting arrangements whereby companies use special purpose share schemes to offer shareholders the choice to receive either a dividend (which would be an income item for tax purposes) or to receive a similar amount through an issue of new shares that are subsequently purchased by the company or sold to a pre-arranged third party (which would be a capital gains tax item for tax purposes). These arrangements are commonly known as B share schemes (or B and C share schemes ). The effect of this measure will be to align the tax consequences of the share purchase with those of the dividend, such that all shareholders will be taxed as if they had received a dividend. The measure will be effective from 6 April 2015, although it is not yet clear whether it will affect B shares that are issued before, but repurchased after, that date. It would seem that arrangements which are structured so that all shareholders receive a capital return (i.e. there is no choice) will not be affected. This development is somewhat surprising given that B share schemes have been used for a number of years, seemingly without concerns on the part of HMRC, and indeed are included in HMRC s general anti-abuse rule ( GAAR ) guidance as an example of long-established practice that it will not seek to challenge under the GAAR. Preventing the use of cancellation schemes of arrangement for takeovers The Government is concerned about the increasing use of cancellation schemes of arrangement in takeovers of UK companies. A takeover by way of a cancellation scheme of arrangement, which involves the cancellation and reissue of the target s shares, enables the stamp duty charge that would arise on a takeover by way of a simple transfer of the target s shares to be avoided. The Government is concerned about the increasing use of cancellation schemes of arrangement in takeovers of UK companies... UK Tax Alert. 2

3 The Government considers that takeover structures that achieve the same outcome should have the same stamp duty consequences, and amendments to Section 641 Companies Act 2006 will therefore be brought forward, by early 2015, to prevent the use of cancellation schemes of arrangement for company takeovers. It appears that schemes of arrangement involving transfers instead of cancellations will be unaffected. Amendments to the patent box and R&D regimes Although not strictly forming part of the Autumn Statement, the Financial Secretary to the Treasury, David Gauke, also announced on 3 December 2014 that the Government intends to consult on the changes to the UK s patent box regime. This will follow on from the OECD s work as part of its BEPS initiative designed to align benefits under IP regimes more closely with the location where research and development activity is carried out (the so-called modified nexus approach)....the Government intends to consult on the changes to the UK s patent box regime... Separately, from April 2015, the rates of research and development credits are to be increased. However, the scope of the credits will be reduced to exclude the costs of materials incorporated in products that are sold. Following the changes, for example, much of the cost of products used in research and development, like prototypes, may not qualify for research and development credits where they are subsequently sold. Devolution of tax powers to Northern Ireland In addition to the tax powers that it has already been agreed will be devolved to Scotland (which do not include corporation tax), Northern Ireland is to be devolved corporation tax rate-setting powers, provided that the Northern Ireland Executive can show that it is able to manage the financial implications. If this measure is implemented, it is likely that the rate of corporation tax in Northern Ireland will be reduced to below 20 per cent., in order to attract investment. If so, it will be interesting to see whether some UK companies choose to migrate to Northern Ireland to benefit from the reduced rate. Restricting tax relief for transfers of goodwill on incorporation Capital gains tax entrepreneurs relief will no longer be available on disposals of goodwill associated with a business to a close company to which the seller is related for disposals made on or after 3 December In a related measure, Part 8 CTA 2009 is also to be amended by Finance Bill 2015 to restrict the corporation tax relief available in respect of internally-generated goodwill and customer-related intangible assets where the relevant asset is acquired by a company from related party individuals on or after 3 December UK Tax Alert. 3

4 Relaxation of consortium relief conditions The Government has announced that, from 10 December 2014, it will remove all requirements relating to the location of the link company for consortium relief claims, presumably in an effort to resolve remaining concerns about the compatibility of these provisions with EU law. Financial Services Tax Restriction on the use of losses by banks The Government is to restrict the proportion of banks annual taxable profit that can be offset by carried-forward losses to 50 per cent. The restriction will apply to the carried-forward: > trading losses; > non-trading loan relationship deficits; and > management expenses, of a banking company. The draft legislation for inclusion in Finance Bill 2015 contains a detailed definition of this term but, broadly, it means an authorised person under the Financial Services and Markets Act 2000 that also carries out certain regulated activities and is liable to UK corporation tax (and includes building societies). The Government is to restrict the proportion of banks annual taxable profit that can be offset by carried-forward losses to 50 per cent. The restriction will take effect from 1 April 2015 and will only apply to reliefs accruing prior to this date. It will apply separately to trading and non-trading profits and by reference to profit remaining after the offset of any reliefs which fall outside of the rules and in-year reliefs against total profits. The legislation also contains a targeted anti-avoidance rule which, broadly, applies to arrangements entered into on or after 3 December 2014 that create profits in companies with relevant reliefs and which it would be reasonable to assume have a greater expected tax benefit than economic benefit. Further details can be found in the accompanying technical note. Reform of the loan relationships and derivative contracts rules Following the review announced at Budget 2013, the Government has confirmed that it is to proceed with making wide-ranging changes to update, simplify and rationalise the loan relationships and derivative contracts rules. One of the overarching aims is to achieve a clearer and stronger link between commercial accounting profits and taxation, basing taxable amounts on items of accounting profit or loss. Detailed legislation setting out the changes is yet to be published (with some of this expected on Legislation Day) but the Government has confirmed that it will include the introduction of a new relief for companies in financial distress writing off debt and the regime TAAR discussed below....the Government has confirmed that it is to proceed with making wide-ranging changes to... the loan relationships and derivative contracts rules. UK Tax Alert. 4

5 Withholding tax exemption for private placements Finance Bill 2015 is to contain a new withholding tax exemption for interest on qualifying private placements (a type of unlisted debt) with the intention of helping businesses and infrastructure projects access this form of financing. However, the scope of the exemption is not yet clear. Spreading of relief for credit losses under IFRS 9 IFRS 9, a new accounting standard for financial instruments, was published in July 2014 and has effect for accounting periods beginning on or after 1 January 2018 (although early adoption is possible once the standard has been approved by the EU). IFRS 9 will require companies which apply International Accounting Standards or the UK GAAP Financial Reporting Standard 101 to make allowances for credit losses on a more forward looking basis. This will result in an increase of credit loss allowances, which in turn will effectively bring forward tax relief. In order to avoid an up-front hit to the Exchequer as a result of these changes, it was announced in the Autumn Statement that measures will be introduced to spread the relief over a ten year period. Domestic Anti-avoidance Measures Preventing abuse of the late-paid interest rules Prior to the Autumn Statement, the late-paid interest rules in Chapter 8 Part 5 CTA 2009 applied in four different scenarios, in each case with the effect that tax relief for interest which was still unpaid 12 months after the end of the period in which it accrued would only be allowed once the interest was actually paid. The scenarios in which the rules applied included where the creditor and debtor were connected and where one party to a loan had a major interest in another and, in each case, the creditor was resident in a non-qualifying territory (essentially a non-treaty territory). There was also an equivalent rule which applied to discounts on deeply discounted securities in corresponding circumstances. Legislation will be introduced in Finance Bill 2015 to disapply the late-paid interest rules in each of the above scenarios by repealing Sections 374, 377 and 407 CTA The other two scenarios covered by the late-paid interest rules (involving close companies and occupational pension schemes) will still fall within the rules. The repeals will have effect in respect of new loans entered into on or after 3 December For loans entered into before 3 December 2014, the repeals will have effect in respect of interest accruing or discounts arising on or after 1 January 2016, unless material changes are made to the loan, or there is a change to the creditor under it, in which case the repeal will be effective from the date of the change. Legislation will be introduced in Finance Bill 2015 to disapply the late-paid interest rules... UK Tax Alert. 5

6 Given that the late-paid interest rules were introduced as an anti-avoidance measure, at first glance this might seem like a surprising move in the current climate. However, the Government is concerned that the rules are themselves being used for avoidance by allowing companies to manipulate the timing of tax losses, so that losses only arise in subsequent periods when there are sufficient taxable profits elsewhere in a group to use the losses (e.g. by surrendering them to other group companies). Further, any gap left by this partial repeal of the late-paid interest rules is to be plugged by other legislation (arising from the wider consultation on loan relationships and derivative contracts) to be published separately on Legislation Day. In particular, the Government has confirmed that this legislation will include a regime-wide anti-avoidance rule for loan relationships (the so-called regime TAAR ), which will counter timing advantages in appropriate cases, including those originally targeted by the late-paid interest rules. Disclosure of tax avoidance schemes The disclosure of tax avoidance schemes ( DOTAS ) rules are to be strengthened (with effect from Royal Assent of Finance Act 2015), and a DOTAS taskforce established (with effect from April 2015) to try to ensure that the rules cannot be circumvented. Details of the exact changes are likely to be published on Legislation Day next week, however it is worth noting that in the DOTAS consultation which took place earlier in the year one key (and contentious) change proposed was a new financial products hallmark. HMRC is also to be given powers to publish summary information about DOTAS-notified tax avoidance schemes and their promoters, indicating that naming and shaming and education are to be increasingly important tools for HMRC. Deterrents and penalties The Government is to introduce legislation in Finance Bill 2015 to ensure that the accelerated payments legislation works effectively where avoidance arrangements give rise to losses surrendered as group relief. The legislation on high risk promoters is also to be updated and further clarified. Finally, HMRC is to consult in early 2015 on further deterrents for serial tax avoidance and penalties for avoidance cases where the GAAR applies (currently there are no GAAR-specific penalties). Avoidance involving fee income of investment fund managers Measures will be introduced with effect from April 2015 to stop investment fund managers from disguising their annual management fees as capital gains. The Government considers that these fees (which are normally based on a percentage of assets under management) represent work undertaken to manage the investment, and are not dependent on investment performance, and should therefore properly be regarded as trading income. The Government notes that these changes should not affect private equity carried interest which is linked to performance....these changes should not affect private equity carried interest... UK Tax Alert. 6

7 Targeting miscellaneous income tax avoidance Legislation will be introduced in Finance Bill 2015 with effect from 3 December 2014 to deny miscellaneous loss relief for income tax purposes under Section 152 ITA 2007 where the miscellaneous loss or miscellaneous income arises as a result of tax avoidance arrangements. A further measure will limit the miscellaneous income against which a miscellaneous loss can be relieved more generally with effect from tax year International Anti-avoidance Measures A key focus of the UK (along with many other jurisdictions) in the last few years has been on cross-border tax avoidance. Such avoidance may take the form of multinationals artificially moving profits out of high tax jurisdictions and into low tax jurisdictions, or exploiting the differences in tax systems. As noted above, the G20 and the OECD have also been very active in this area, the OECD leading the way with its action plan on BEPS. Autumn Statement 2014 contained a number of announcements relevant to tackling BEPS. A new Diverted Profits Tax The headline-grabbing announcement was a new Diverted Profits Tax, which the Government has announced will be introduced from 1 April The tax will apply to business activities between connected entities that are set up in order to achieve an unfair tax advantage, and will tax diverted profits at a rate of 25 per cent. At this stage details are, however, very limited and it is not entirely clear how such a tax will be made compatible with the numerous double tax treaties which the UK has in place (under which the UK typically agrees to limit its taxing rights to UK residents or UK permanent establishments of non-residents), and existing transfer pricing rules. Further information may be available on Legislation Day. Country-by-country reporting The Government confirmed that it is taking steps to implement the G20- OECD model for country-by-country reporting, probably with effect from 1 January UK multinationals will be required to provide HMRC with detailed information for each country in which they do business, including in relation to taxes paid. The Government considers that this enhanced level of information (which will not be made public) will enable HMRC to better identify and assess tax avoidance risks....a new Diverted Profits Tax... will be introduced from 1 April The Government confirmed that it is taking steps to implement... country-bycountry reporting... New anti-hybrids rules The Government is consulting on the introduction of new anti-hybrids rules into UK law, which will be in line with the G20-OECD recommendations made as part of Action 2 of the BEPS action plan (referred to above). The rules will be designed to prevent multinationals from exploiting differences between the tax rules in different jurisdictions, whereby either one party gets a tax UK Tax Alert. 7

8 deduction for a payment while the other party does not have a taxable receipt (a deduction/no inclusion outcome), or there is more than one tax deduction for the same expense (a double deduction outcome). The consultation document notes that the UK already has a number of antihybrids rules, but, in view of the differences between the scope and operation of the OECD recommendations and the UK s existing rules, the Government has decided to introduce new legislation to give effect to the OECD recommendations in full. This may enable the existing anti-arbitrage rules in Part 6 TIOPA 2010 to be repealed. The new UK rules will apply to payments made on or after 1 January The consultation document does not contain draft legislation, but does provide a detailed description of how the new UK rules will operate. There is a particular focus on banks hybrid regulatory capital (which the OECD highlighted as an area of particular concern, and left to be addressed by countries on an individual basis). The consultation document notes that similar concerns may apply to the insurance sector. The Government recognises that, unlike most other industry groups, banks face regulatory requirements to hold loss-absorbent capital which in many cases is hybrid in nature. The new UK rules will be targeted towards intra-group transactions, and should therefore not impact financial institutions issuing hybrid regulatory capital directly to third party investors. However there is a concern that the new UK rules would have a negative impact on hybrid regulatory capital issued intra-group (which may be necessary for a number of non-tax reasons, particularly in the case of a non-uk headquartered banking group with UK operations). The Government is consulting on the introduction of new antihybrids rules... Consequently, the Government proposes introducing special provisions so that intra-group hybrid regulatory capital will not be subject to the new UK rules to the extent that it originates from an external issuance at the top holding company level. Encouragingly, the consultation document goes on to acknowledge that it may not be possible to directly trace intra-group hybrid regulatory capital back to the external issuance (because the bank s funding is likely to be fungible) and therefore sets out two (quite complex) options for approximating this. Comments on the consultation are invited by 11 February VAT place of supply rules The VAT place of supply rules for broadcasting, e-services and telecommunications are already scheduled to change so that, with effect from 1 January 2015, VAT on these services will be payable where the customer is located rather than where the supplier is located. This is expected to increase VAT revenues in the UK, and remove the incentive for suppliers to relocate to jurisdictions with lower VAT rates. UK Tax Alert. 8

9 Real Estate Tax Reform of SDLT rates and bands The Chancellor saved one of the most high profile tax announcements until last: a major reform of the way in which the SDLT rates and bands operate for residential property. The announcement was accompanied by draft legislation and a guidance note giving more detail on the measures. Prior to the Autumn Statement, SDLT was charged at a single percentage of the price paid for the property, with the rate depending on the band within which the purchase price fell (a so-called slab tax approach). This has now changed. With effect from 4 December 2014, SDLT will be charged at each rate on the portion of the purchase price which falls within that rate band, with the bands and rates being changed so as to be as follows: SDLT will be charged at each rate on the portion of the purchase price which falls within that rate band... Property value band Rate 0-125,000 0% 125, ,000 2% 250, ,000 5% 925,001-1,500,000 10% 1,500, % Where contracts for the sale of a property had been exchanged but the transaction had not completed on or before 3 December 2014, the purchaser will have a choice of whether the old or new structure and rates apply. Overall, the changes will be beneficial to the vast majority of home-buyers, with transactions with a purchase price of less than 937,500 being subject to the same or less SDLT under the new rules. The new measures only apply to sales of residential property. There will be no changes in respect of non-residential and mixed property, which will remain subject to SDLT at the rates set out in Table B in Section 55 FA 2003, nor to the charge on the net present value of rent set out in Schedule 5. Alongside this, SDLT avoidance involving the use of corporates and other vehicles as envelopes is to be further targeted by increasing the rates of the annual tax on enveloped dwellings (or ATED ) by 50 per cent. above inflation. Employment and Individual Taxation There were a number of announcements relevant to employment and individual taxation, including the following: > the rules concerning the administration of employee benefits and expenses are to be reformed. In particular, from April 2015, the UK Tax Alert. 9

10 Government will provide a statutory exemption for trivial benefits in kind costing less than 50. From April 2016, an exemption will be introduced for certain reimbursed expenses and a statutory framework set up for the voluntary payrolling of expenses; > the Government has decided not to proceed with changes to the taxation of employee shares that would have introduced a marketable security concept; > the Government has decided not to proceed with a new employee shareholding vehicle; > the Government will increase the annual charge paid by non-domiciled individuals resident in the UK for longer periods of time who wish to retain access to the remittance basis of taxation and consult on making the election to pay the remittance basis charge apply for a minimum of three years; and > further work is to be done on whether or not to restrict the income tax personal allowance for non-residents. Measures with Immediate Effect > Restriction on the use of bank losses Contacts For further information please contact: Martin Lynchehan Partner (+44) martin.lynchehan@linklaters.com Lynne Walkington Partner (+44) lynne.walkington@linklaters.com Dominic Winter Partner (+44) dominic.winter@linklaters.com > Preventing abuse of the late-paid interest rules > Reform of the residential SDLT rates and bands > Restricting tax relief for transfers of goodwill on incorporation > Targeting miscellaneous income tax avoidance Authors: Martin Lynchehan/Lynne Walkington/Dominic Winter 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 2014 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