UK Budget 2015: business taxes

Transcription

1 20 March 2015 EY Library Access both online and pdf versions of all EY Global Tax Alerts. Copy into your web browser: Services/Tax/International- Tax/Tax-alert-library#date UK Budget 2015: business taxes Executive summary The UK Chancellor took a cautious path in the last Budget of this Parliament, announcing just 26 tax measures. The Budget 2015 balances between rounding up the commitments made at the start of this Parliament and saving some key measures for the election manifesto. In confirming the introduction of the diverted profits tax from 1 April 2015, the Chancellor has not moved the timetable, if adjusting somewhat the approach. Greater clarity is expected as to the detail when the Finance Bill is published on 24 March, but any further debate is unlikely as the Bill will pass from the House of Commons on the very next day. With 10 of the Chancellor s tax announcements badged as fairness, evasion and avoidance, including the increase in the bank levy and the removal of tax relief for compensation payments which together are forecast to raise over 1bn per annum, there were few tax measures to overtly help businesses. The oil industry will welcome the help with the cut in both the supplementary charge and the petroleum revenue tax, as well as the investment allowance. Other companies will need to be satisfied with the one percentage point cut in corporation tax to 20% as already announced. The Chancellor has offered a fundamental review of business rates in time for Budget 2016 and the revaluation in While this offers the opportunity for this tax to be reformed, the constraint that the outcome of the review must be revenue neutral will be disappointing, particularly at a time when other countries are reassessing where the tax burden arises. By extending, amending and creating new enterprise zones across the UK and funding key emerging industries in the regions, the Chancellor has acknowledged the importance of helping entrepreneurial, high growth firms shape the future of regional growth and the wider UK economy. With encouragement for hubs of excellence in specific industries and segments, the Chancellor will be hoping that this will

2 create the next wave of globally competitive companies, as well as attract vital jobs and wealth to the UK regions via inward investment to help rebalance the economy. Detailed discussion Diverted profits tax The new diverted profits tax will be introduced with effect from 1 April The legislation included in the Finance Bill will have some amendments from the draft clauses issued by HM Revenue & Customs (HMRC) in December. The legislation will be revised to narrow the conditions under which groups must notify HMRC that they may fall within the rules. There will also be changes to clarify which taxes can be credited against a diverted profits tax liability, the operation of the conditions under which a charge can arise and specific exclusions. There also are expected to be specific provisions dealing with companies subject to the oil and gas regime. Diverted profits tax is intended to arise where a group has avoided having a permanent establishment in the UK or has created a tax advantage using transactions or entities of low economic substance although that is widely defined. The tax is levied at a penal rate of 25% so as to encourage groups to be transparent with HMRC and restructure their arrangements to avoid it. Although the final legislation will not be released until next week, groups will be pleased at the relaxation of the notification requirements which, as originally drafted, threatened to catch many groups that would not ultimately expect to have a charge to the diverted profits tax once all the facts and conditions are considered. New restrictions on using brought forward losses A new rule is aimed at perceived avoidance where trading losses, nontrading deficits and management expenses brought forward are converted into current period losses. The new rule announced today applies where the arrangements have a main purpose of creating new profits to use up brought forward losses while also generating a current year loss to reduce other profits in the group. The rule only applies where it is reasonable to assume the expected tax benefit of the arrangements exceeds any commercial benefits and where one of the main purposes of the arrangements is to refresh the losses. Tax losses that a company generates in a particular accounting period can usually be set off against the company s total profits or surrendered as group relief to other members of the group. Unused losses are carried forward to future periods. Brought forward losses cannot be surrendered as group relief and their use against current year profits in the lossmaking company is restricted. The new rule comes into effect where profits that arise on or after 18 March 2015 (when a notional accounting period begins) are set off against brought forward losses. Groups may wish to review their corporate structures so that they can efficiently use current year losses as far as possible and avoid brought forward losses being trapped in entities where they cannot be utilized. They may also need to assess the deferred tax implications of the new rule in respect of the recognition of any brought forward losses. Annual investment allowance The reduction in the cap on the annual investment allowance (AIA), which is currently due to drop from 500,000 to 25,000 on 1 January 2016, will be reassessed and is likely to be significantly higher than 25,000. The AIA allows businesses to set 100% of the capital cost of plant and machinery against taxable profits in a year. The limit on expenditure that can benefit from the AIA has been changed a number of times since the AIA was introduced in In the 2014 Budget, the Chancellor temporarily increased the AIA from its limit then of 250,000 to 500,000 per annum with effect from 1 April 2014 for companies and from 6 April 2014 for sole traders/ partnerships. The limit was due to revert to 25,000 per annum with effect from 1 January 2016 with transitional rules for accounting periods that span those dates. The significant drop in the AIA would mean that business owners acquiring plant and machinery post 31 December 2015 would not benefit from accelerated allowances on plant and machinery investment 2

3 in excess of 25,000. Clarity on what the new limit will be is important to enable businesses to make informed investment decisions. Enterprise zones enhanced capital allowances A number of existing enterprise zones are to be expanded, with some re-designated to offer enhanced capital allowances (ECA), and new enterprise zones are also being created. Enterprise zones are designated to offer either ECA or business rate discounts depending on the business case of each site and the type of investment that the respective local authorities are looking to attract. A first year allowance of 100% is available for capital expenditure incurred on qualifying plant and machinery within ECA designated enterprise zones. The ECA is available for a maximum 100m investment in plant and machinery, providing that it is retained throughout a five year period. The Government will expand existing ECA enterprise zones at Humber & Tees Valley and will change the designation of two sites at Leeds Enterprise Zone to include ECA in order to support energy and waste technology businesses. Additionally, the Government will expand business rate discount enterprise zones at Mersey Waters, MIRA, Manchester, Discovery Park and Oxford Science Vale. After business case completion, the Government will create new enterprise zones at Blackpool and Plymouth offering either enhanced capital allowances or business rate discounts. HM Treasury has indicated that, since their reintroduction in 2012, enterprise zones have created 12,500 jobs and attracted 2bn in private investment. The latest expansion is to be welcomed and should ensure further growth in jobs and private investment. Enhanced capital allowances: energy- saving and water-efficient technologies The list of energy and water saving technologies qualifying for enhanced capital allowances will be updated in summer A first year allowance of 100% is available on capital expenditure incurred on unused, qualifying plant and machinery that meets the environmental or energy saving criteria specified by Treasury Order. The first year allowances allow businesses to set 100% of the cost of the assets against taxable profits in a single tax year. This means the company can write off the cost of the new plant or machinery against the business s taxable profits in the financial year the acquisition was made. The list of qualifying technologies will be updated: To include a new technology of waste heat energy recovery equipment to capture energy from heat that would otherwise be wasted. It has been identified that waste heat to electricity conversion equipment could appreciably improve on-site energy saving and reduce use of grid electricity consumption. To remove the packaged chillers sub-technology. Qualification for packaged chillers will be based upon meeting appropriate seasonal performance (ESEER) conditions. Product qualification based upon Energy Efficiency Ratio (EER) will no longer be accepted and will be phased out in late summer/autumn In addition, the qualifying criteria for some sub-technologies in both energy and water saving schemes will be amended. The Government intends to make these changes by Treasury Order in summer 2015, subject to State Aid approval. The Government is keen to promote the use of energy and water saving technologies and, as such, this update is to be welcomed. Capital allowances anti-avoidance measures Anti-avoidance legislation will be introduced to restrict plant and machinery allowances to nil following connected party transactions and sale and leaseback transactions where assets have previously been acquired without incurring capital expenditure. Where a person becomes entitled to claim capital allowances on an item of plant and machinery as a result of a connected party transaction, sale and leaseback, transfer and long funding leaseback or transfer and subsequent hirepurchase, the amount of qualifying 3

4 expenditure is currently restricted. The restriction is based on the circumstances of the seller or, in certain circumstances, the market value. This measure is designed to counteract situations where proposed sale and leaseback transactions in respect of plant and machinery could create substantial capital allowances on assets that previously entitled the owner to no allowances. Draft legislation was published on 26 February 2015 and the new restriction takes effect from that day. This is designed to counter arrangements that result in entitlement to plant and machinery allowances where the person disposing of the asset, or a person with whom they are or have previously been connected, acquired the asset without incurring either capital expenditure or qualifying revenue expenditure. Qualifying revenue expenditure is expenditure of a revenue nature that was incurred at an arm s length price or, where the person who acquired the asset is a manufacturer, has incurred all the normal costs of manufacturing the asset. Where the new restriction applies, the person acquiring the asset will be treated, for the purposes of plant and machinery allowances, as having no qualifying expenditure. This new restriction does not apply in cases where the person disposing of the asset (or a person with whom they are or were connected) is deemed to have incurred expenditure for the purpose of plant and machinery allowances, such as where an asset is gifted. This has been positioned as clarification of the anti-avoidance rules relating to capital allowances. The speed of introduction indicates that this provision is aimed at a specific arrangement. Research and Development (R&D) tax credits Alongside increasing the rate of the above the line credit from 10% to 11% and the rate of the small and medium enterprise (SME) scheme from 225% to 230% from 1 April 2015, as announced in the Autumn Statement the Government has now confirmed: A revision to the proposed changes to the consumable legislation to address concerns expressed in consultation by clarifying that the new restriction will not apply where the product of the R&D is transferred as waste, or where it is transferred but no consideration is received. The introduction of voluntary advance assurances for smaller businesses making a first claim. There will be new standalone guidance aimed at SMEs and HMRC will publish a roadmap for further improvements to be made to the scheme over the next two years. The increase to the rates for both the SME and large company schemes and the SME consultation is in response to pressure to make the UK regime competitive and targeted in comparison to other global regimes. The restriction of consumable expenditure is in response to HMRC s perception that there was inconsistent interpretation of the existing consumables legislation. The announcement in relation to the revisions to the proposed consumable legislation in response to the consultation is welcomed although does not appear to go far enough to address all the concerns raised to HMRC. HMRC has confirmed, however that it will continue to monitor how the new consumables legislation operates and will propose further changes if necessary. Extensions of creative sector reliefs The Government has announced changes to make TV and film tax credits more generous, introducing a new orchestra tax credit and consulting on supporting local newspapers. The Budget 2015 announcements on tax relief for the creative industries expanded the following reliefs. High-end television tax relief - the minimum UK spend requirement necessary to qualify for this relief will fall from 25% to 10%. Changes will also be made to the cultural test to bring this in line with similar changes made to the film cultural test. Children s television tax relief - legislation will provide a tax relief for the producers of children s television programs. Following 4

5 consultation, the legislation has been extended to include children s game shows and competitions. The relief will have effect from 1 April Film tax relief - the rate of payable tax credit will be increased to 25% for all films with effect from 1 April 2015 or the date of approval by the European Commission, if later. Orchestra tax relief - it was confirmed that a new relief for orchestras will have effect from 1 April The legislation will be contained in a future Finance Bill. In addition, a consultation will look at how tax support can be provided to local newspapers. The continued focus and extension of the reliefs available to the creative industries shows the Chancellor s continued commitment to a sector which increasingly sees the UK as the place to locate. Corporate debt and derivative contracts It has been announced that draft clauses on corporate debt and derivative contracts that were published on 10 December 2014 will be enacted in a future Finance Bill without any material changes. HMRC launched a consultation on reforming the taxation of corporate debt and derivative contracts in the summer of The changes will align the tax treatment of financial instruments more closely to the amounts going through companies profit and loss accounts. It will also include new principles-based targeted anti-avoidance rules that were expected to come into force from 1 April 2015 but it is unclear whether this will now be deferred given the legislation is not scheduled for the pre-election Finance Bill. This enables the repeal of some of the existing detailed antiavoidance in the loan relationships and derivative contracts rules. However, the current rules disallowing deductions in relation to an unallowable purpose will remain. Other new rules enhance the tax reliefs available on a corporate restructuring. Most of the rules are expected to come into force for accounting periods that begin on or after 1 January The draft clauses released so far do not represent the totality of the reform package. For example, any changes to the treatment of partnerships and clarifying the treatment of undated securities have been deferred for further development. Bank levy rate increase The bank levy is increased from 0.156% to 0.21% for short-term chargeable liabilities and from 0.078% to 0.105% for chargeable equity and long term liabilities. This is a significant increase and one which HMRC expects will raise an additional 900mn per year. There were no announcements regarding any changes to the bank levy base. The bank levy is a charge on the balance sheets of banks. The Government had previously said that they considered an annual bank levy take of 2.9bn to be a reasonable target but the newly announced rates are expected to increase this considerably. The increase of the bank levy by around a third may impose a significant additional cost for banks which may also be affected by the loss relief restriction from 1 April It is impossible to rule out further increases in the future. Bank loss relief restriction The Government has confirmed the introduction of bank loss relief restriction rules which were announced in December As announced, the Government will restrict the amount of banks annual taxable profits that can be offset by brought-forward losses existing as at 1 April 2015 to 50%. Minor amendments are expected to the draft provisions which were released in December to reflect the results of consultation, including a change to the targeted antiavoidance rule. This rule also will take precedence over the new rules (above) restricting the use of brought forward losses that apply to all corporates. A 25m allowance for affected building societies will also be introduced though further details of this are not yet available. In the aftermath of the financial crisis, many banks were left with substantial tax losses which they were entitled to carry forward to set off against future profits. The bank loss restriction is intended to accelerate the rate at which these banks become tax paying again. The amendment to the targeted antiavoidance rule is welcome if it deals with the issue that, as originally 5

6 drafted, it could have applied to common tax housekeeping measures. Abolition of interest withholding tax on private placements The Government is moving forward with the exemption from withholding tax on interest paid on debt issued as a qualifying private placement. The proposed exemption has been widened from what was set out at the time of the Autumn Statement so as to remove the minimum term for qualifying debt of three years. Enabling legislation will be ncluded in the Finance Bill and regulations on the exemption enacted later in In the absence of an applicable exemption, income tax at 20% must be deducted from interest payable on loans with duration of more than a year. In the Autumn Statement, the Government proposed a new exemption from this rule for debt that was unlisted and subject to a private placement. Regulations will include various conditions for the exemption to apply, including that the debt must be issued by a trading company to an unconnected lender. The removal of a requirement for a minimum term of three years for the exemption to apply is welcomed and will aid the development of the private placement market in the UK. No tax deductions for financial compensation payments Banks will be prevented from obtaining a corporation tax deduction for compensation payments they make to customers for the mis-selling of products such as payment protection insurance. The Government will consult on how this restriction should be brought in with the aim of legislating in a future finance bill. Banks have been ordered to make compensation payments for mis-selling various financial products. At the moment, these compensation payments can be deducted from the banks profits chargeable to corporation tax. This measure could have a significant impact on at least those banks which still have compensation payment provisions in place. It is as yet unclear whether it will only apply to compensation payments that have not already been made. UK oil and gas tax regime A number of changes to the UK oil and gas regime have been proposed. In the 2014 Autumn Statement it was announced that the rate of supplementary charge was to be reduced from 32% to 30%. The Budget 2015 announcement sees a further reduction in supplementary charge to the pre-2011 rate of 20%. This newly announced rate reduction is to be effective from 1 January 2015, being aligned with the previously announced 2% reduction. In addition, and as part of the package of measures announced affecting the oil and gas industry, the rate of Petroleum Revenue Tax (PRT) is to be reduced from 50% to 35%. This change is to be effective from 1 January Finally, the introduction of the much heralded investment allowances was also announced and while we expect that the related detail will be published on 20 March 2015, what was confirmed included the following announcements: Investment allowance will be generated by qualifying expenditure incurred from the commencement date of 1 April Qualifying expenditure is to be translated into the investment allowance by applying 62.5% to the expenditure. The resulting investment allowance is then deducted from adjusted ring fence profits which are liable to supplementary charge. This package of measures is welcome news for the UK oil and gas industry. The reduction in supplementary charge to the pre-2011 rate of 20% would seem to be the minimum meaningful reduction that the Chancellor could make to demonstrate that he wants to move to a new tax regime for the North Sea. This new regime appears designed to focus on the macroeconomic benefits of the oil and gas sector to the UK economy, and not simply on maximizing revenue from production taxes. The investment allowance is also a very welcome development as it replaces all the existing field allowances and so-called brownfield allowance with a cost-based, basin-wide allowance. That provides an element of simplification to a 6

7 very complicated fiscal regime, and ought to have the effect of lowering the effective corporate tax rate in the North Sea towards 30% for those companies that are investing in the sector. The PRT reduction is certainly the least anticipated measure and will be especially well received by the very mature North Sea fields that have been suffering a marginal tax rate of 81% despite falling production and rising integrity costs. In the round, these announcements are good news for the UK oil and gas sector and reduce the effective top rate of oil taxation for upstream oil and gas companies from 80%, as it was after the 2014 Autumn Statement, to 67.5% from More work is required by industry and the supply chain to reduce the cost base so that the exploitation of North Sea and Atlantic Margin fields remains commercially attractive, and is capable of attracting investment capital. Nevertheless, the Government has taken a big step towards creating a fiscal regime that is appropriate for the long term exploitation of the UK s natural resources. The hope is that industry, HM Treasury and the new regulator can work together over the remainder of the year to build momentum for further change and increased competitiveness. Value Added Tax (VAT): Recovery of VAT relating to non-uk branches Legislation will be introduced to limit a partly exempt business ability to recover VAT on costs which support their global networks. This is likely to have a negative impact on many institutions VAT recovery position, resulting in an increase in their operating costs. Most affected will be businesses in the financial services sector. Under current rules, UK businesses which incur costs which are used to support their branch networks are entitled to a level of VAT recovery. For partly exempt businesses, this is important as their supplies of VAT exempt services to third parties do not typically carry this right. This practice has, therefore, been helpful for businesses which provide services to their overseas offices or which act as a center of excellence for certain functions. It also allows UK branches of overseas institutions to recover VAT on costs incurred in supporting their non-uk head office. This recovery right has been removed for businesses which determine their VAT recovery using either the partial exemption standard method or special method. The new rules will take effect for tax years beginning on or after 1 August Under the amended legislation governing the standard method of calculation, the turnover of an overseas branch must be excluded from the UK business recovery calculation. In addition to this, businesses will not be able to undertake a usebased calculation to recover VAT on branch support costs. Under the current regulations, businesses are entitled to identify and recover VAT on a use basis. For example, a UK bank which provides services to its US branch should be able to carve out and recover VAT on associated costs. Going forward, it will be unable to do so and these costs will only be recoverable by reference to (primarily exempt) supplies made to third parties. The amended legislation will also impact businesses which operate a partial exemption special method. This is a bespoke recovery calculation typically used by larger institutions for which the use of a simplified calculation is inappropriate. In addition to the specific exclusion of overseas branch turnover from calculations, HMRC s explanatory notes suggest that businesses operating a partial exemption special method will also not be permitted to undertake a use-based calculation. These changes have been introduced following the Court of Justice of the European Union s judgment in the case of Le Credit Lyonnais (C-388/11). This confirmed that the inclusion of the value of supplies made by overseas branches should be excluded from the business partial exemption calculations. HMRC s explanatory notes also state that the new rules are designed to simplify tax accounting and to prevent businesses from artificially increasing VAT recovery rates by allocating costs to their branch support activities. Denial of this recovery right could have a significant impact on large and complex financial services institutions. It is commonplace for businesses in this sector to include within their partial exemption special method a specific sector 7

8 which deals with VAT incurred to support its global operations. Under special methods, which must be agreed with HMRC, banks and insurers will often identify these central function costs and recover the applicable proportion. By centralizing in-house functions in the UK, banks and insurers have historically been able to benefit both from economies of scale and UK expertise. Any new limitation on VAT recovery rights in relation to these activities could, at its worst, increase the cost of providing services by 20%. Conversely, where a business has blocked in full its recovery on EU branch support, the new rules may allow it to recover costs at its current UK-centric rate. In any event, businesses will need to critically assess their cost base and current VAT recovery calculation to determine the potential impact. Business rates reform In his Budget speech the Chancellor noted the need for reform of business rates and the Government has launched a review of this tax which brings in over 20bn of revenue per annum. On 16 March 2015, HM Treasury issued Business Rates review: terms of reference and discussion paper, looking at the reform of business rates. Rates are administered by local authorities, based upon assessments made by the Valuation Office Agency. In practice, the majority of the tax raised is allocated across England and Wales to help fund local services on the basis of a funding formula. Issues to be examined by the review include the following: Should business rates be based on an alternative metric such as the market value of property or the turnover of businesses? Should local authorities have more discretion on the setting of business rates and the use of the revenue raised? Can business rates more closely reflect the wider business environment while remaining clear and stable so businesses can plan ahead? How can business rates take into account businesses circumstances and better target relief for small and medium enterprises? Should investment such as plant or energy-efficiency measures not increase a property s rateable value? The review will report its findings by Budget The Government s preference is for business rates to remain a tax based on property values, collected by local authorities. While the Chancellor recognizes the current system needs far- reaching reform, the discussion paper notes that the review is intended to be fiscally neutral. 8

9 For additional information with respect to this Alert, please contact the following: Ernst & Young LLP (UK), London Claire Hooper Chris Sanger Ernst & Young LLP, UK Tax Desk, New York Matthew Newnes

10 EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com EYGM Limited. All Rights Reserved. EYG No. CM5312 This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. ey.com