UK Budget includes Business Tax Roadmap and other business tax changes

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1 18 March 2016 Global Tax Alert UK Budget includes Business Tax Roadmap and other business tax changes EY Global Tax Alert Library Access both online and pdf versions of all EY Global Tax Alerts. Copy into your web browser: Executive summary On 16 March 2016, the UK Chancellor of the Exchequer delivered his 2016 Budget (the Budget). The Budget was a mixed bag for big businesses and the impact is not easily determined. The further one percentage point cut in corporation tax to 17% that was announced to have effect from 2020 will help, as will deferral of the announced advance in payment dates for very large companies, but the seven other changes announced to corporation tax will raise over 9bn over the five-year Budget period. The key announcement for business was the introduction of the Business Tax Roadmap (BTR) setting out the Government s plans for business taxes to 2020 and beyond. At 35 pages, the BTR is perhaps not the clear route guidance that was hoped for and is not as extensive as previously indicated. As anticipated, the Chancellor provided clarification of the next steps on the implementation of the Organisation for Economic Co-operation and Development s (OECD s) Base Erosion and Profit Shifting (BEPS) recommendations including almost 4b raised from a restriction on deductibility for corporate interest which is to be brought in earlier than many hoped. The perceived tax advantage arising from the use of mismatches involving permanent establishments will also be eliminated as an add-on to the OECD recommendations on hybrids.

2 2 Global Tax Alert Other key announcements for business include changes to the treatment of tax losses from April The Budget promises an increase in the flexibility for losses to be used within groups or against other income, meaning that some of the existing UK restrictions on losses carried forward will be relaxed for new losses from that date. However, carried-forward losses will only offset up to 50% of profits in excess of 5m, a measure of a type that the Chancellor had previously only applied to banks. Now all types of company may have to borrow to fund their greater tax payments and for the banks the existing restriction was made even tighter from April Detailed discussion Business Tax Roadmap The much-anticipated BTR is intended to make Britain s business tax system fit for the future and set out plans for major business taxes to 2020 and beyond. In drawing together plans for the taxation of multinationals, setting out plans for tax and business rates and highlighting measures to simplify and modernize the UK tax regime, the Government plans to deliver a low tax regime that will attract multinational businesses, while making sure that they pay taxes in the UK. At the same time, the Government is looking to level the playing field, which it believes has been tilted against smaller UK firms. The BTR covers several key areas of tax policy and reflects work done at the OECD level on tax to be paid by multinationals. The measures cover: Reductions in tax rates including cutting corporation tax to 17% in 2020, supporting investment in the North Sea, and reducing the business rates burden. Addressing tax avoidance and aggressive tax planning including limiting the level of deductions for interest expense (OECD BEPS Action 4) and taking forward arrangements to address the use of hybrid mismatch arrangements (OECD BEPS Action 2). These changes will be introduced from 1 April and 1 January 2017 respectively. The Budget proposals contain new points of detail while leaving some areas outstanding and more discussions can be expected in finalizing the arrangements. In addition, the BTR includes new measures to impose UK withholding tax on royalty payments, some of which are effective from 17 March 2016, and measures to ensure that nonresident developers of UK property will always pay UK tax on the trading profits from that development. This last measure will come into effect from Report Stage of Finance Bill Simplifying and modernizing the UK tax regime; perhaps most notably including new rules for corporation tax on the use of losses, allowing greater flexibility in the way losses incurred from 1 April 2017 can be used but with the trade-off that the use of losses will be restricted to 50% of taxable profits (but only in respect of profits in excess of 5m). The BTR also retains, and indeed tightens, the sector specific restrictions for banks and does so from 1 April Other measures include upcoming consultations on to the Substantial Shareholding Exemption and on the Double Taxation Treaty Passport scheme along with the reform of stamp duty land tax on non-residential property transactions and the simplification of the business energy tax regime. The key areas of tax policy are considered in more detail below. The BTR also contains a useful timetable for reform, showing the route up to the intended position in However, the BTR does not contain any significant proposals on improving the operation of the Customer Relationship Manager model for interacting with business or refreshing the tax party making framework, both of which were expected. The message from business before the Budget was that the BTR should be less about tax rates and more about structuring the tax system so businesses can operate more effectively. More detail will be needed regarding the BTR to see whether it can deliver on its proposals. Changes to corporation tax rates and payment dates The main rate of corporation tax will be reduced further in This follows a progressive reduction in corporation tax rates from its current rate of 20%, to 19% from 1 April 2017, with a further reduction to 18% planned from 1 April This further reduction will now be to 17%. Separately, the Government had been intending to amend the installment payment regime from 1 April 2017 for companies with annual taxable profits of over 20m so that such companies will be required to make payments four months earlier than under the current system (where installment payments are made quarterly from month seven in the accounting period to which the liability relates). This change will now only come into effect from 1 April 2019.

3 Global Tax Alert 3 The Chancellor also confirmed that from 6 April 2016, capital gains tax rates on most disposals will be reduced from 18% to 10% for basic rate taxpayers and from 28% to 20% for higher rate and additional rate taxpayers. However, these new rates will apply to individuals, trusts and personal representatives of death estates and not companies which pay corporation tax (currently 20%) on chargeable gains. The Government has for a number of years had an ongoing policy of reducing corporation tax rates and, as emphasized in the Business Tax Road Map, this further reduction is intended to help support investment in the UK and deliver further on the Government s pledge for the UK to have the lowest rate in the G20. The acceleration of payment dates for very large companies will have a significant cashflow impact, so its deferral is a positive development. Interest restrictions The UK s interest relief rules are set to change with effect from April 2017 with the introduction of a fixed ratio rule. This will limit net interest deductions to a maximum of 30% of earnings before interest, taxation, depreciation and amortization (EBITDA), likely to be based on taxable rather than accounting earnings. A group ratio rule will allow greater interest deductions for groups with a third party net debt to group EBITDA ratio that exceeds the 30% limit. There will be a group threshold of 2m of net UK interest expense before the rules apply. There will also be rules to ensure that the restriction does not impede private finance for certain public infrastructure in the UK as well as rules to address volatility in earnings and interest. The new interest restrictions implement the OECD s recommendations under the BEPS project. HM Treasury issued a consultation in October 2015 and is expected to publish a consultation on the detailed proposals later this year. At the Budget, it was announced that the existing worldwide debt cap would be repealed. However, under the new rules, a group s net UK interest deductions will be restricted to the global net third party expense of the group. This restriction goes beyond the OECD s recommendations. The start date of 1 April 2017 announced at the Budget gives groups little time to restructure their operations, especially given that detailed rules have yet to be published. The breadth of the exemption for certain industries such as infrastructure and the extent to which disallowed interest and unused interest capacity can be utilized are also critical unanswered questions. The treatment of banks and insurance companies was held over from the OECD s final report on interest restrictions and the Government has said it will continue to engage with the OECD on the design of rules to prevent excessive interest deductions by financial institutions. The latest draft of the European Union s Anti-Tax avoidance Directive, to be discussed at a meeting of the European Council Working Party on Tax Questions on 18 March, also includes interest restriction rules based on a 30% fixed ratio cap. At this stage, however, it does not include the OECD s permitted exclusion for public benefit projects and has a de minimis threshold of only 1m, although the details may change before the directive is finalized. New rules on use of corporation tax losses The BTR promises that, for corporation tax losses incurred on or after 1 April 2017, companies will be free to use carried forward losses against profits from other income streams or from other companies within a group. However, from 1 April 2017, only 50% of taxable profit will be able to be offset through losses carried forward. This restriction will only apply to profits in excess of 5m. So a company with profits of 6m will be restricted to offsetting losses against 50% of its profits over 5m in this case allowing it to offset losses against 5.5m of profit with any surplus losses being carried forward again to future periods. Where a number of companies are in a single group, the 5m allowance will apply per group, rather than per company. The group will then have discretion as to how it applies the allowance. The changes do not apply to oil and gas companies within the ring fence corporation tax regime. However, the existing restriction for banks historical losses is retained and in fact tightened. The amount of profit that banks can offset with pre-april 2015 carried forward losses is reduced to 25% from 1 April Losses incurred post April 2015 will be treated in the same way as losses in other non-banking companies. The Government appears to be particularly concerned by companies which make profits in one year but pay no tax due to losses brought forward. Although the proposals are in line with other international regimes, they do put additional strain on groups cash flow and put pressure on the recognition of deferred tax assets in respect of carried forward tax losses for reporting purposes. Both outcomes reduce the attractiveness of the UK tax regime. In this regard the 5m allowance is important in limiting the companies affected.

4 4 Global Tax Alert Patent box The Government confirmed that it will move forward with the modification of the existing patent box regime such that it complies with the OECD proposals to deal with preferential intellectual property regimes. In particular, the benefits of the patent box should be dependent on the extent to which research and development expenditure is incurred by the company claiming the patent box as opposed to outsourced to related parties or acquired intellectual property. These rules will be included in Finance Bill 2016 and will come into effect on 1 July Draft Finance Bill 2016 clauses with respect to the patent box were released in December This draft legislation has now been subject to a formal consultation process and the finalized legislation to be included in the Finance Bill is expected to reflect the outcomes of this consultation process. There is limited detail on the changes to be made to the draft legislation previously seen. However, it is expected that significant changes will be included in the draft legislation expected on 24 March Royalty payments and deduction of income tax at source For royalty payments made on or after 17 March 2016, a new anti-avoidance rule will be introduced in respect of connected party arrangements which seek to avoid the deduction of income tax by targeting the provisions of a double taxation agreement. In such a case, the benefits of the relevant double tax arrangements/international agreements will be denied. The draft legislation sets a low hurdle for the application of the rule by only requiring it to be reasonable to conclude that a tax advantage was a main purpose of the arrangement. The definition of a royalty for the purposes of the rules on the deduction of income tax at source will be broadened to ensure that income tax is deducted from all royalty payments to nonresident persons where the royalty has a UK source (seemingly irrespective of whether or not the payment would otherwise be an annual payment). The relevant legislation will be introduced at a later stage of the Finance Bill 2016 process. Finally, the rules to determine whether a royalty has a UK source will be extended to include scenarios where a royalty is connected with a UK permanent establishment (or an avoided UK permanent establishment). These updates were relatively unexpected, with no real detail having been previously announced. Updates to the UK transfer pricing rules Changes to incorporate the latest version of the OECD transfer pricing guidelines will be included in Finance Bill The current OECD transfer pricing guidelines have yet to be updated to reflect the recommendations of the BEPS project. However, the Government has endorsed these recommendations and committed to including them in the UK transfer pricing rules. The Government is also consulting on whether to introduce secondary adjustment rules into transfer pricing legislation. These rules are intended to address the underlying cash benefit from incorrect transfer pricing and encourage broader compliance with the transfer pricing legislation. A secondary adjustment, as defined in the OECD transfer pricing guidelines, is an adjustment that arises from imposing tax on a secondary transaction. Secondary adjustments recognize the fact that funds which would have been retained by one of the parties if the provision had been made at arm s length have not been actually retained by it. This is done by deeming a secondary transaction (e.g., a loan or a distribution) to have been undertaken. Secondary adjustments are imposed by other countries, such as France and the US, to encourage restoration of funds to their proper place or failing this, allow adjustment of the tax effects of the distortion which might otherwise arise. It appears that the enforcement of secondary adjustments by other major treaty partners may have compelled the Government to re-examine its earlier position not to include them in law. Secondary adjustments can be problematic as, for instance, some territories do not believe they can be considered under the Mutual Agreement Procedures and, as such, double taxation may arise as a result. Anti-hybrid rules scope expanded Draft legislation was published in December 2015 as part of draft Finance Bill 2016 to implement the OECD s recommendations for the neutralization of hybrid mismatches. These rules come into effect from 1 January Hybrid mismatches occur when a payment is deductible in one territory but not taxed in any other, or when a payment is deductible in more than one territory. The rules nullify any benefits either by denying a tax deduction or by increasing taxable income.

5 Global Tax Alert 5 The scope of these rules will now be expanded to deal with mismatches arising through the use of exempt branches. For example, the proposals would deny a deduction where a UK company pays interest to a branch in another territory where the interest is not taxed in the branch because it is not treated as a taxable presence there and not taxed in the head office territory due to an exemption for branches. This rule will also have effect from 1 January Note that the European Union is also considering including rules neutralizing hybrids between Member States in its Anti-Tax Avoidance Directive which is currently in draft. The latest draft directive takes a different tack, but only where the hybrid mismatch is not already solved by other means such as a result of the implementation by one of the relevant territories of the OECD s recommendations. Possible improvements to the UK corporation tax regime The Government is to review the substantial shareholdings exemption (SSE) and Double Taxation Treaty Passport (DTTP) scheme two features introduced to simplify and make the UK corporation tax system more attractive. There is, as yet, not much by way of detail provided in the BTR as to the scope of either of the two consultations, which are timetabled for later this year. In respect of SSE, the Government says that it will consult on the extent to which the SSE is still delivering on its original policy objective and whether there could be changes to increase its simplicity, coherence and international competitiveness. However, this development comes against a background of discussions between HM Treasury, HM Revenue & Customs (HMRC) and global investment funds and it is to be hoped that the consultation includes discussion as to the extension of the exemption to the disposal of shares in investment companies, including those that invest in real estate. The DTTP does not provide any tax exemption itself but does reduce the administrative burden of companies relying on the benefit of a double tax treaty. The BTR does suggest that the scheme could be extended to other types of foreign investor, including sovereign wealth funds, pension funds and partnerships. Both these measures are part of the Government s objective to establish a tax regime that will attract the multinational businesses it wants to see in the UK. In this context, the BTR makes specific reference to the investment management sector and it will be interesting to how wide the scope of the consultations is, once they are issued. Introduction of new legislation to tax profits from trading in and developing UK land Changes have been announced to ensure that non-uk residents pay corporation tax on their trading profits from dealing in or the development of UK land. The changes take effect from Report Stage of Finance Bill 2016 but antiavoidance measures will take effect from Budget Day to prevent rebasing of land values through transactions with related parties before that date. The target of these rules is property development structures which seek to exploit current tax rules such that non-uk resident developers of UK land pay much less tax than UK resident property developers. New legislation will provide that profits of a trade carried on by a company will be subject to corporation tax where the trade comprises dealing in or developing UK land regardless of the company s tax residence or where the trade is carried on. The basic charge will be supplemented by a targeted anti avoidance provision to prevent avoidance of this new charge through artificial arrangements, a provision targeted at arrangements designed to reduce the charge through fragmentation of trading activities and a charge on the sale of shares in the property owning company. Changes have also been made with effect from Budget Day to the double taxation agreements the UK has with the Isle of Man, Guernsey and Jersey to ensure the UK has taxing rights over UK land under those treaties. Given these comprehensive changes to the taxation of offshore property development structures, groups affected should plan on the basis that trading profits from existing and future property dealing and/or development will be within the scope of UK corporation tax. Reduction in business rates The Government has announced changes to the business rates thresholds designed to reduce business rates from 1 April 2017 for half of all UK properties and a cut for all business rate payers from 2020 by switching from RPI to CPI as the measure for the annual indexation of business rates. Small business rate relief will be permanently doubled from 50% to 100% for businesses with a property with a rateable value of 12,000 and below, with a tapered relief for property with a rateable value between 12,000 and 15,000. Furthermore, the threshold for the standard business rates multiplier will also be increased to a rateable value of 51,000. These changes are designed to help small

6 6 Global Tax Alert businesses. All businesses will benefit from the switch to CPI as the measure for the annual indexation of business rates from April The Government has also announced its intention to revalue properties more frequently and to digitize billing and collection. Business will welcome these changes, especially those benefiting from the permanent increase in small business rate relief. However, landlords will again be disappointed that no increase in relief from empty property rates has been announced. Capital allowances Cars The 100% capital allowance available for businesses purchasing low emission cars was due to expire in April This has now been extended for a further three years to April The carbon dioxide emissions threshold will be reduced from 75g per kilometer to 50g per kilometer. From April 2018, the threshold for main pool rate treatment will also change from 130g/kilometer to 110g/kilometer. These thresholds will be reviewed again at Budget The main impact of this change is likely to be a reduction in the number of cars that will qualify for the main rate of allowance and an increase in the number that will attract plant and machinery allowances at the reduced special rate (currently 8%). Enterprise zone enhanced capital allowances Enhanced capital allowances (ECAs) in enterprise zones were introduced in 2012 for a five year period to 31 March This was extended for a further three years to 2020, giving eight years of ECAs. All enterprise zones will now be entitled to eight years of ECAs from the date of their announcement. In addition, the Northern Ireland Executive has set the boundaries of a new pilot enterprise zone near Coleraine and the Government will create a new MarineHub enterprise zone in Cornwall. Subject to the necessary business case approvals and local agreements, the Government will also create new enterprise zones in Brierley Hill in Dudley, Loughborough, Leicester and Port Talbot as well as extending the Sheffield City Region enterprise zone. The Government continues to extend the use of ECAs to incentivize investment in new enterprise zones. However, the relief is limited to 100% first year allowances on plant and machinery assets. This still leaves the cost of land and buildings as non-deductible for tax purposes making the relief significantly less attractive than previous enterprise zone allowances. Business Premises Renovation Allowance The Business Premises Renovation Allowance (BPRA) scheme will not be extended and the capital allowance incentive will expire on 31 March BPRA was initially introduced in 2007 for a period of five years and was extended for a further five years in The BPRA scheme provides a tax incentive for companies to bring unused business premises in disadvantaged areas back into qualifying use. BPRA provides companies with a 100% capital allowance for qualifying expenditure in the year it was incurred. While many companies investing in disadvantaged areas will be disappointed to see the abolition of a generous tax relief, it is appreciated that the relief was not widely used. There was a perception that, in some cases, the incentive was being exploited which led to the introduction of antiavoidance measures. Companies should ensure that tax relief is obtained, wherever possible, through other parts of the capital allowances regime. Abolition of the renewals allowance The renewals allowance allowed a tax deduction for both income and corporation tax purposes for the cost of replacement tools which would otherwise have been considered capital for tax purposes. The accepted definition of tools included implements, utensils and articles and examples included glasses, cutlery and small equipment such as spanners. The relief was used by residential landlords and businesses. From April 2016, taxpayers will no longer be able to claim a full deduction and, instead, relief will be available through capital allowances or the new relief for domestic items for landlords. The renewals deduction is considered outdated (it predates capital allowances) and the definition of tools has often been the subject of debate. Businesses will now need to consider if expenditure is capital for tax purposes and whether it qualifies for main pool plant and machinery allowances. Where plant and machinery allowances are available there may be advantages in treating the assets as short life assets. Residential landlords can continue to deduct the actual cost of replacing domestic items such as furniture and appliances.

7 Global Tax Alert 7 Trading income in non-monetary form New legislation to be included in Finance Bill 2016 but effective from 16 March 2016 will ensure that trading and property income received in non-monetary form are subject to corporation tax or income tax. New sections will be inserted into the Income Tax (Trading and Other Income) Act 2005 and Corporation Tax Act 2009 to make clear that income received as both money and money s worth is subject to tax. Accounting standards may result in certain non-monetary receipts not being included in a company s profits and hence there was previously an argument that they should not be added to taxable profits in tax computations either. The new sections put this question beyond doubt. The new rule does not represent a change in HMRC s view of the correct tax treatment of non-monetary income. However, it makes clear that where income is received in kind, this must be included in tax computations even if it is not included in the accounts. Securitization vehicles The Finance Act 2016 will include powers for HM Treasury to make regulations to ensure that residual payments made by securitization vehicles can be paid free of withholding tax. Residual payments arise because securitization vehicles typically contain more assets than are likely to be required to repay the investors, meet transaction costs and retain a profit. There can be uncertainty as to whether the residual payments should be classified as annual payments and, therefore, whether they should be subject to withholding tax. This uncertainty will be eliminated by removing the obligation to withhold income tax in respect of such payments. The change has come about as a result of a working group that has been considering whether the securitization rules need to be modernized. It is a welcome change to eliminate uncertainty that previously required securitization vehicles to apply for clearance from HMRC for confirmation that their residual payments were not annual payments. Oil and gas taxation The Budget delivered by the Chancellor included a number of oil and gas measures outlined below. Rate changes With effect from 1 January 2016: The rate of supplementary charge is reduced from 20% to 10% The rate of petroleum revenue tax is permanently reduced to 0% Investment and cluster allowance Relevant income for the purpose of activating these allowances is to include tariff income. In addition there is to be a change in the legislation to ensure costs on the acquisition of an asset do not qualify for these allowances. Decommissioning tax relief HMRC has clarified the existing law as it applies to companies that retain decommissioning liabilities. Loss restrictions The UK is to introduce restrictions on the quantum of profits against which brought forward trading losses can be offset. These rules will not apply to companies within the North Sea ring fence corporation tax regime. They will, however, apply to oilfield service companies. Tax deductibility of interest expense The UK is to introduce restrictions on the tax deductibility of interest expense, by reference to 30% of UK taxable earnings or based on the net interest to earnings ratio for the worldwide group, if applicable. There is no specific carve-out for oil and gas but there is to be a specific consultation on the application of these new rules to the oil and gas sector. Implications The announcement of a 10% cut in corporate taxes, and the effective abolition of petroleum revenue tax for the UK oil and gas sector will fall short of industry expectations. Since 2011, there has been a compelling case to lower the tax burden to recognize the maturity of the basin, the high cost base, and the falling production efficiency of older assets which support vital offshore infrastructure. The case for a significant change to the oil and gas regime has also been exacerbated by the collapse in the oil price. The changes, while positive, seem to be a missed opportunity, as abolishing supplementary charge completely would have simplified the regime by sweeping away the complexity of investment allowance and its interaction with decommissioning losses.

8 8 Global Tax Alert New rates of stamp duty land tax (SDLT) for nonresidential property transactions SDLT on purchases of non-residential (including mixed use) properties has previously been determined under the so called slab system so that the tax rate for the highest band into which the purchase price falls is applied to the entire amount of the purchase price. It has been announced that, with effect from 17 March 2016, a progressive tax structure will be introduced for purchases of non-residential property at the following rates: 0 to 150,000 0% Over 150,000 and up to 250,000 2% Over 250,000 5% In relation to the grant of a new lease of non-residential property (including mixed use), SDLT is charged at the rate of 1% on the net present value (NPV) of the aggregate rents payable over the term of the lease, after deducting 150,000 (in addition to the charge on any premium for the grant of the lease). It has been announced that with effect from 17 March 2016 a new 2% rate of charge will apply where the NPV of the rents is above 5m. This will apply on a progressive basis (i.e., the portion of the NPV over 150,000 up to 5m will be taxed at the rate of 1%, with the balance over 5m taxed at the new 2% rate). These changes are subject to transitional measures. Higher rates of SDLT on purchases of additional residential properties As previously announced in the 2015 Autumn Statement, and following a period of consultation, it has been confirmed that higher rates of SDLT will be introduced from 1 April 2016 on purchases of additional residential properties, such as second homes and buy to let properties. The higher rates will be 3% above the current rates of SDLT and will be as follows: 0 to 125,000 3% Over 125,000 and up to 250,000 5% Over 250,000 and up to 925,000 8% Over 925,000 and up to 1,500,000 13% Over 1,500,000 15% The higher rates will not apply to certain transactions such as purchases under 40,000, individuals replacing a main residence (subject to meeting certain conditions) and purchases of residential property in Scotland (although similar measures are being introduced by the Scottish Government). Although the higher rates are aimed primarily at buy-to-let investors and owners of second homes, they will also apply to first purchases by non-natural persons, such as companies and funds. The Government has decided against introducing an exemption for large scale investors. However, it is understood that the existing provision under which the nonresidential SDLT rates will apply to purchases of six or more dwellings in a single transaction will continue to apply. Transitional measures will apply in certain situations for purchases that complete on or after 1 April 2016 where, broadly, the transaction is effected pursuant to a contract entered into before 26 November These changes, together with the direct tax changes to the taxation of buy-to-let properties, may significantly affect the buy-to-let market. The changes will also impact on residential property developers (unless acquiring six or more properties in a single transaction) as there is no exemption for property development businesses. Stamp Taxes: Other Budget 2016 announcements The Government also confirmed in the Budget a number of previous announcements in respect of changes to the stamp tax treatment of deep in the money options (DITMOs), the introduction of SDLT seeding relief for property authorized investment funds (PAIFs) and co-ownership authorized contractual schemes (CoACSs). Similarly the extension of certain reliefs from the annual tax on enveloped dwellings (ATED) and the higher 15% rate of SDLT for certain purchases of residential property were also confirmed. These changes are in line with previous announcements except for the measures relating to DITMOs which were previously announced to take effect from Budget Day but now take effect from 23 March Large Business: measures to ensure tax compliance HMRC has confirmed that the Summer Budget 2015 proposals for a requirement for large companies to publish their tax strategy and a special measures regime are to be legislated for in Finance Bill 2016.

9 Global Tax Alert 9 At Summer Budget 2015, HMRC announced a range of proposals intended to improve tax compliance by large businesses. The main elements of the proposals were a requirement for large companies to publish their tax strategy, a voluntary Code of Practice and a special measures regime aimed at a small number of businesses that persistently engaged in aggressive tax avoidance. The proposals were the subject of a formal consultation process, with responses published on 9 December In light of these, the proposal for a Code of Practice has been changed to a Framework for Cooperative Compliance which includes mutual obligations rather than the one-sided obligations as originally drafted. Draft legislation was also published in December 2015 and representations have made on this. The budget contains no new information about how the proposals will be implemented, so the publication of the Finance Bill will need to be awaited to see the extent to which comments on the draft legislation have been taken into account. We also await the details, including the start date, for the updated Framework for Cooperative Compliance. Following a consultation process, proposals originally announced last year will now be legislated for in Finance Bill These include measures targeting serial avoiders and a broadening of the Promoters of Tax Avoidance Schemes (POTAS) provisions. The serial avoiders proposals are aimed at taxpayers who persistently enter into tax avoidance schemes that are found to be ineffective. The scope of the POTAS regime is to be widened by bringing in promoters whose schemes are regularly defeated. Additionally it has been confirmed that a new penalty of 60% is to be introduced for all cases that are successfully tackled by the general anti-abuse rule. While the objectives of the proposals are clear some of the detail is not. In particular, the element of retrospection inherent in some of the POTAS proposals and the definition of a defeat that can trigger the application of both the serial avoiders and POTAS provisions as set out in the draft legislation require clarification. Representations on these points have been made to HMRC and it is hoped that these will be reflected in the legislation published in Finance Bill Strengthening sanctions for tax avoidance A range of measures aimed at further deterring tax avoidance will be introduced in the Finance Bill For additional information with respect to this Alert, please contact the following: Ernst & Young LLP (UK), London Claire Hooper chooper@uk.ey.com Chris Sanger csanger@uk.ey.com Ernst & Young LLP, UK Tax Desk, New York Matthew Newnes matthew.newnes@ey.com

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