Budget Key New Announcements

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1 March 2011 Business tax announcements George Osborne, the UK Chancellor of the Exchequer, delivered his "Budget for growth" today. Business will welcome a number of the new measures: additional cuts in the rate of corporation tax; the increase in the lifetime limit for entrepreneurs' relief; and the creation of new Enterprise Zones. Banks may have been the biggest losers in recent Budgets but this mantle appears to have passed to oil companies who face an additional 2 billion tax charge on profits from UK oil and gas production. Banks have little cause for celebration, however, given the increase in the rates of the Bank Levy. In this briefing, we set out a summary of the main business tax announcements. In terms of timing, the Finance Bill is due to be published on Thursday, 31 March Key New Announcements Further reduction in the main rate of corporation tax Bank Levy rate increased Entrepreneurs' relief extended New Enterprise Zones to be created Additional anti-avoidance measures Reforms to the taxation of non-domiciled individuals Increased taxes on North Sea Oil production Company Tax Reforms The Government has accelerated the timetable for the staggered reduction in the rate of Corporation Tax and reduced the rate by an additional percentage point. The main rate will now be reduced by two percentage points from 28% to 26% from next month, falling 1% per year over the following 3 years to a 23% rate by April The Government confirmed its ongoing plan of action to improve the competitiveness of the UK tax system: to attract new business to the UK; to stem any further corporate migrations; and to attract recent corporate migrants back to the UK. In addition to the reduced rate of Corporation Tax referred to above, the proposed measures include a reform of the CFC rules, the introduction of a foreign branch opt-in exemption and a new Patent Box regime. CFC full reform Full reform of the CFC rules is due by Finance Act 2012 and the consultation is continuing. The general direction of travel is that the intention is for the new CFC rules to apply a "lighter touch" with a more territorial approach, catching only income which is artificially diverted from the UK. If you would like to know more about the subjects covered in this publication or our services, please contact: DAVID HARKNESS Global Head of Tax +44(0) CHRIS DAVIES London Head of Tax +44(0) London Tax partners: MICHAEL BROSNAHAN +44(0) DOUGLAS FRENCH +44(0) JONATHAN ELMAN +44(0) JONATHAN KANDEL +44(0) DAN NEIDLE +44(0) NICHOLAS MACE +44(0) MARK PERSOFF +44 (0) DAVID F SALEH +44(0) SARAH SQUIRES +44(0) ANTHONY STEWART +44(0) ETIENNE WONG +44(0) To one of the above, please use firstname.lastname@cliffordchance.com Clifford Chance LLP, 10 Upper Bank Street, London, E14 5JJ, UK

2 2 There were no major announcements on the proposed full reform other than that the Government intends to develop its idea of a partial finance company exemption which would result in overseas group finance income eventually being taxed at 5.75%. Another consultation document on full CFC reform is to be issued in May this year with final legislation to be included in Finance Act CFC interim reform Pending full CFC reform, the Government last year published draft legislation for interim CFC reform for inclusion in Finance Act These draft rules contain two new interim exemptions for: intra-group trading activities where there is minimal connection with the UK; and foreign intellectual property with minimal UK connection. No major changes have been made to these proposals, other than that the implementation date has been accelerated (from accounting periods beginning on or after 1 April 2011 to accounting periods beginning on or after 1 January 2011). The draft rules published last year also include a 3 year statutory exemption for foreign subsidiaries which come within the scope of the CFC regime for the first time as a consequence of a reorganisation or a change to UK ownership (for example, where a UK multinational newly acquires foreign subsidiaries). Under the current regime, HMRC operates a shorter "period of grace". It is proposed that this interim exemption be extended so that it applies not only to companies which come within the CFC regime for the first time, but also to previously UK-headed groups if they return to the UK. This is clearly designed to attract recent, well-publicised corporate migrants back to the UK. The implementation date for this interim exemption has also been accelerated. Finally, no changes were announced to the deferral of the withdrawal of the exemption for certain holding companies until July 2012 (from 2011). Branch exemption As previously announced, Finance Act 2011 will introduce an opt-in exemption from UK corporation tax for foreign branches of UK companies. Draft legislation was published on 9 December 2010 to which a number of changes were announced today. This measure will be of particular relevance to the financial sector where branches (as opposed to subsidiaries) are commonly used for regulatory purposes. It will also help to achieve greater consistency of tax treatment between foreign branches and foreign subsidiaries of UK companies (the foreign profits of the latter being potentially exempt from UK corporation tax under the dividend exemption regime). UK resident companies are currently subject to corporation tax on their worldwide profits, including those of any foreign branches, with credit available for foreign tax paid on the branch profits. The new regime will enable companies to make an election for all of its branches to be exempt from UK corporation tax on their profits. Once made, the election will be irrevocable (subject to a short "cooling off" period). The exemption will apply to foreign branch trading profits, investment income connected to the branch and certain chargeable gains. However, the exemption will not apply to a company whose business is mainly investment business and which derives the principal part of its profits or losses from that business, nor will the exemption apply to international air transport and shipping on the basis that under double tax treaties these activities are generally not taxed by the foreign jurisdiction. Exempt profits will be determined by reference to individual treaties. For branches in territories where there is no treaty, the measure of exempt profits will be determined by the OECD Model Treaty. No relief will be available for branch losses and there will be transitional rules for companies with losses which will defer the benefit of an election for exemption. Anti-avoidance provisions will also apply to prevent profits, which would otherwise be subject to UK corporation tax, being diverted to an exempt branch. The Government announced today that a number of changes would be made to the draft legislation following comments and concerns raised as part of the consultation. These include elements of the anti-diversion rules, transitional rules and capital allowances. In addition, some life insurance business will now be eligible for the exemption. Patent Box The Government announced that, from 1 April 2013, it intends to press ahead with the "Patent Box" proposal, which will result in a 10% corporation tax rate for profits arising from patents. A further consultation document will be published in May this year with legislation proposed for Finance Act CGT reforms Changes intended to simplify three areas of the corporation tax on chargeable gains rules will be introduced in Finance Act These have been proposed for some time and draft legislation has previously been published. The following areas are affected:

3 3 Capital losses and change of ownership ("pre-entry losses") There are specific rules which restrict the use of certain capital losses where a company is acquired by another group. The rules are intended to prevent "loss buying" schemes (whereby a group buys a company pregnant with capital losses with a view to sheltering its own capital gains), but they are not restricted to schemes which have a tax avoidance motive and so have more wide-ranging consequences. The main changes are to disapply the rules in relation to losses that have not yet been realised at the time of the change of ownership of the company and to slightly extend the circumstances in which a restricted loss can be used to shelter a gain after the change of ownership. Where there is a scheme which has a tax advantage purpose, the use of losses can still be disallowed under another targeted anti-avoidance rule. Value shifting and depreciatory transactions Complex "value shifting" legislation, which applies to adjust capital gains realised on disposals of shares in companies where a transaction has been undertaken to reduce the value of those shares, is to be replaced with a streamlined, motive-based rule. Under the new rule, there would be a just and reasonable adjustment of the consideration received on a disposal of shares where there are arrangements that have reduced the value of those shares with the purpose of avoiding a liability to corporation tax on chargeable gains. Pre-sale dividends are supposed to be excluded from the new rule but the exclusion is narrowly drafted and having to rely on HMRC guidance to clarify the scope of the exclusion may create uncertainty in practice. Rules which disallow or reduce a loss on a sale of shares where the value of those shares has been reduced by a "depreciatory transaction" are to be changed so that only depreciatory transactions in the period of six years leading up to the disposal must be considered. De-grouping charges There are important changes to the chargeable gains de-grouping rules which can trigger a tax liability (or give rise to an allowable loss) where, broadly, assets are transferred intra-group and the transferee company subsequently leaves the group within 6 years. The main changes are as follows: In many (but, importantly, not all) circumstances a de-grouping charge will be levied on the seller by adjusting the consideration for the disposal, rather than on the company leaving the group. Importantly, if the seller qualifies for exemption from tax under the substantial shareholding exemption, the de-grouping charge will also benefit from that exemption (conversely, where the de-grouping would have given rise to a loss, that loss would be disallowed). The conditions for the substantial shareholding exemption are to be changed so that where a trade is transferred to a new company which is then sold to a purchaser, the 12 month holding period requirement in relation to the new company can be satisfied by reference to the period for which the trade was carried on by the seller. This should be helpful to companies which operate a number of businesses on a divisional basis and wish to sell one of those businesses. After the introduction of the new rules it may be possible for the seller to "hive-down" the target business into a new company and sell that new company without a de-grouping liability arising and without the seller paying tax on the disposal. Some detailed changes to these reforms have been announced today in response to comments raised during the consultation. However, it is very disappointing that the Government does not appear to be extending these changes to the intangible asset regime. Many companies hold assets which are taxed under the intangible asset code rather than the chargeable gains rules and limiting the reforms to the latter is likely to severely undermine their utility in practice. Finally, the Government also announced today amendments to the de-grouping rules designed to close a loophole which may have allowed assets to be transferred intra-group followed by a sale of the transferee and without a degrouping liability arising. Jonathan Elman David Harkness Nicholas Mace Mark Persoff Sarah Squires

4 4 Anti-Avoidance As part of today's package of announcements, a joint HMRC and HM Treasury document entitled "Tackling tax avoidance" was published. In his introduction to the document, the Exchequer Secretary to the Treasury estimates that around 7 billion of UK tax is lost to avoidance each year (part of the so-called "tax gap"). The document sets out the Government's new antiavoidance strategy, with its "focus on the core elements of prevention, detection and counteraction", and identifies HMRC s activities in each of these areas. It also sets out the criteria the Government will use to decide when to announce unscheduled tax changes in future. The document follows on the heels of "Tax policy making: a new approach", which was published at the June 2010 Budget and which "set the context for the Government s new strategic approach to tackling avoidance". The "Tackling tax avoidance" publication contains the following notable items: A rolling programme of reviews will be launched into areas of tax law which are perceived as being fertile ground for avoidance. The programme will commence with reviews into the legislation relating to reliefs for income tax losses and unauthorised unit trusts. The Government intends to dissuade taxpayers from entering into "high risk" avoidance schemes with the aim of obtaining a cash-flow advantage by retaining unpaid "tax" whilst disputing the relevant liability. Users of such schemes will be encouraged to pay the tax earlier than is currently required or face an additional charge for late payment if and when it becomes due. A consultation on the proposals will begin in May HMRC is currently seeking to improve the rules on disclosure of tax avoidance schemes. Consultations on new "hallmarks" will take place over the summer, focussing on schemes that seek to avoid income tax and NICs on employment income, schemes that incorporate offshore transactions to avoid corporation tax and artificial loss schemes. Following the publication of a draft document for consultation in December 2010, the Government has now published its final "Protocol on unscheduled announcement of changes to tax law". In response to comments during the consultation, various changes have been made (as set out in the Protocol which is available on HMRC's website). The paper states that consideration "will be given to consulting informally in confidence before an announcement is made, subject to the risk of forestalling". The study group being led by Graham Aaronson QC which is currently exploring the case for a "general antiavoidance rule" ("GAAR") will continue its work and is expected to report its findings before November The concern remains that a GAAR will undermine taxpayer certainty. Confirmation that 200 banks have adopted the "Code of practice on taxation", committing them to operate within the "spirit" as well as the letter of the law. Separately, it was announced that the Government intends to legislate in Finance Act 2012 to introduce an antiavoidance measure to ensure that relief or exemption from UK tax is not given where a claim is made under the UK's double taxation treaties and where arrangements have been made in relation to the claim to avoid UK tax. A consultation on this measure will begin once draft legislation has been published in the autumn. In contrast to some other jurisdictions, the UK has not (to date) adopted any general "treaty override" rules. The proposed change may give rise to some concern amongst the UK's treaty partners and could, unless carefully drafted, dissuade investment flows into (and from) the UK. In a continuation of the pattern seen in recent Budgets, the package of announcements made by HMRC and HM Treasury today also includes various measures designed to prevent specific tax avoidance arrangements with immediate effect. These include measures relating to: Payments through intermediaries to avoid PAYE and NICs. Corporate gains de-grouping charges avoidance (see Company Tax Reforms above). Stamp Duty Land Tax avoidance arrangements (see Real Estate Tax below). Avoidance involving the "sale of lessors" legislation. This is in addition to other anti-avoidance measures relating to plant and machinery leasing announced in a Ministerial Statement on 9 March Further details as to the schemes targeted by these announcements are available on HMRC's website. David Harkness Mark Persoff

5 5 Bank Levy The Chancellor today announced an increase in the rates of the levy which will apply from 1 January The rates from 2012 will be 0.039% for long-term equity and chargeable liabilities and 0.078% for short-term chargeable liabilities. The previously announced rates were % and 0.075% respectively. There is no change to the rates previously announced for The increase in the Bank Levy rate will offset the effect of the additional reduction in the rate of corporation tax. Dan Neidle Mark Persoff Securitisation Companies - Tax Treatment of Specified Investments It has been announced that legislation will be introduced in Finance Act 2011 to reverse, with retrospective effect, an unintended consequence of an amendment made earlier this year to the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 ("RAO"). The announced change is important to ensure that certain securitisation companies which have issued debt securities which are not listed, or which carry a return in excess of a reasonable commercial return, continue to qualify for the benefit of the UK's regime governing the tax treatment of securitisation companies and that unlisted limited recourse notes issued by such companies continue to be exempt from stamp taxes on transfer. The initial amendment to the RAO, which had an effective date of 24 February 2010, was designed to align the regulatory treatment of certain types of Shari'a compliant financial instruments with that of conventional debt securities to which they are economically equivalent. However, that amendment inadvertently prevented debt securities issued by securitisation (and similar asset backed) companies from being treated as "capital market investments" for the purposes of (i) certain key conditions which need to be satisfied in order for a company to qualify for the beneficial tax treatment afforded to qualifying securitisation companies under the regime set out in the Taxation of Securitisation Companies Regulations 2006 and (ii) the provision in section 79 of Finance Act 1986 which (in effect) allows qualifying limited recourse securities to be classed as "exempt loan capital" for the purposes of UK stamp tax legislation even though such debt arguably fails to satisfy the non-results-dependant condition in the "exempt loan capital" definition. The measure announced will, unless an affected taxpayer makes an election that the provision will not apply to it, reverse the unintended effect of the initial amendment to the RAO with retrospective effect from 24 February Accordingly, affected securitisation companies can continue to benefit from the beneficial tax treatment afforded by the Taxation of Securitisation Companies Regulations 2006 and their debt will continue to be exempt from stamp taxes on transfer. Chris Davies Islamic Finance Today's Budget announcements demonstrate the continued commitment of the Government to the promotion of the UK as a centre for Islamic finance, with a particular focus on ensuring that the tax rules do not hinder the continued development of Shari'a compliant products, in the context of a clear policy objective of ensuring a broadly level playing field for Islamic financial arrangements and equivalent conventional products. In this context, the Government has announced that it intends to make regulations in 2011 to introduce direct tax changes to allow both Shari'a compliant variable loan arrangements (which will require amendments to be made to the existing rules relating to purchase and resale arrangements (or murabaha)) and derivatives, following informal consultation with industry representatives. Clifford Chance is a member of the HM Treasury Islamic Finance Tax Technical Working Group and through this, and also in connection with its leading role in advising on the drafting of the 2010 ISDA/IIFM Tahawutt Master Agreement, will be participating in such consultation process. Sarah Squires

6 6 Disguised Remuneration As anticipated, the Chancellor's Budget speech announced a crackdown on tax avoidance involving "Disguised Remuneration", referring specifically to " ending the practice of highly paid employees [being] offered tax free, lifetime loans, that are never repaid." Unfortunately, the changes are far wider than the Chancellor suggested. The draft legislation on Disguised Remuneration ("DR") was originally published by HMRC on 9 December Although its principal focus was stated to be on benefits provided by employee benefit trusts ("EBTs") and employerfinanced retirement benefits schemes ("EFRBS"), the draft DR legislation was far too widely drawn and could catch many innocent/commercial arrangements, including deferred bonus arrangements and conventional employee share plans. The Budget announcements confirm that it is HMRC's intention to exclude from the DR legislation third party arrangements that HMRC consider are not tax-avoidance, as far as this is possible "without creating additional avoidance risks". This includes making certain changes to the DR legislation to exclude, amongst other things, remuneration provided by other group companies. Exclusions will also apply for employee share plans and "genuine" deferred remuneration arrangements although we understand that these exclusions will be restricted to arrangements that pay out within 5 years and meet certain other conditions. Today's Budget announcements reflect, at least in part, the "Frequently Asked Questions and Answers" ("FAQs") published by HMRC in February These FAQs should substantially reduce the impact of the new DR tax rules and are good news, particularly in the context of EFRBS and the taxation of foreign pensions paid to "non-doms". Companies should therefore be reviewing their EBT/EFRBS arrangements before 6 April 2011 to ensure that non-doms who participate in them can, where appropriate, take advantage of these favourable pension rules in the future. As expected, today's Budget announcements did not include the revised version of the DR legislation. This will be included in the Finance Bill, which is expected to be published on 31 March Very helpfully, however, today's Budget announcements do seem to suggest that there will not be any change to the scope of the "anti-forestalling rules" which apply from 9 December 2010 to 5 April This means that there remains a short window of opportunity, prior to 6 April 2011, to take actions which will not trigger a DR tax charge under the anti-forestalling rules. These include the earmarking of assets held in an EBT, transferring EBT assets into an EFRBS (especially for the benefit of non-doms), and making assets held by an EBT available to an employee/his family. Finally, before entering into any linking agreements or operating their share plans through an EBT from 6 April 2011, companies should take advice now as to what steps they ought to take to come within the promised exemptions from the DR legislation for some deferred remuneration arrangements and employee share plans. Kevin Thompson Robin Tremaine Funds UCITS IV management company passport The UCITS IV directive allows UCITS funds to be managed by an authorised fund manager resident in a jurisdiction other than the state of establishment of the fund itself. In some cases, the management of a non-uk established fund by a UK manager could raise questions as to whether that fund had been "brought onshore" to the UK for tax purposes by reason of the activities of the manager constituting "central management and control" of the fund. The new provision will expressly provide that a non-uk UCITS fund will not be considered UK resident by reason of the activities of its UK manager. Investment trust companies Today's announcement confirms that the provisions dealing with the modernisation of the tax rules for investment trust companies that were produced on 9 December 2010 will be introduced in substantially the same form in Finance Act Tax transparent fund Legislation will be introduced in Finance Act 2012 to establish a transparent UK fund vehicle. The press release states that the new vehicle is being introduced to support the competitiveness of the UK fund industry following European regulatory changes in the UCITS IV directive. This seems to indicate that this vehicle will be aimed at widely marketed mutual funds, rather than at private funds where limited partnerships have been available for many years and continue to be the vehicle of choice.

7 7 Disguised remuneration As noted above, today's release confirms the approach outlined in the FAQs issued by HMRC on 11 February 2011 to the effect that the revised legislation (to be published in the Finance Bill) will be drafted to limit the impact of these rules to arrangements that were inadvertently caught under the original draft legislation, the wide scope of which had potential implications for the funds industry. Jonathan Kandel Anthony Stewart Real Estate Tax On the whole, the commercial real estate market appears to have done reasonably well out of the Budget with positive developments in the area of REITs and re-introduction of Enterprise Zones. Stamp duty land tax ("SDLT") The top rate of 4% on commercial property remains. The top rate for residential transactions worth over 1million will increase to 5%, as announced by the previous Government in the March 2010 Budget (see below). The ever present fear that SDLT would be imposed on the transfer of shares in land-rich companies has again not materialised. The main new points to note are as follows: SDLT anti-avoidance New anti-avoidance rules aim to prevent three forms of SDLT schemes that HMRC has identified as being aggressively marketed (particularly in the residential market) and wants to stop. These, very broadly, involve: combining sub-sale relief with certain alternative ("Islamic") finance SDLT exemptions; taking advantage of the alternative finance SDLT exemptions afforded to "financial institutions" by establishing an SPV "financial institution" by virtue of a (relatively easy to obtain) licence under the Consumer Credit Act 1974; and devaluing a property in an artificial manner in a land exchange where the SDLT rules tax land exchanges by reference to the market value of the property being acquired (by each party) rather than actual consideration. The new rules will attack these schemes by: denying sub-sale relief where the sub-sale is exempt under any of the alternative finance SDLT reliefs (currently sub-sale relief is only denied where one particular alternative finance exemption applies); excluding the Consumer Credit Act licence option from the definition of "financial institution" for the purposes of the alternative finance SDLT exemptions; and taxing each limb of a land exchange by reference to the greater of market value and the actual consideration given. These changes will have effect for land transactions on or after 24 March 2011, with grandfathering provisions for transactions already subject to contract. Bulk residential purchases A new relief will be introduced in Finance Act 2011 for purchasers of residential property who acquire interests in more than one dwelling. Currently, for example, if the aggregate consideration for the properties exceeds 500,000, the current top rate of SDLT (4%) is payable on the aggregate consideration whatever the values of the individual properties. Where the relief is claimed, the rate of SDLT will be determined not by the aggregate consideration but instead by the mean consideration (i.e. by the aggregate consideration divided by the number of dwellings) subject to a minimum rate of 1%. The property industry has been lobbying for this change for some time. Under current rules, the rate of SDLT is determined by reference to the total consideration given for the land transaction and all linked transactions between the same purchaser and vendor (or, in either case, persons connected with them). This means that a purchaser acquiring multiple properties can pay a higher rate of tax than a purchaser acquiring a single property. The relief should allow purchasers of portfolios of lower value residential property to take advantage of the lower rate SDLT bands. Legislation will be introduced in Finance Act 2011, and will have effect for land transactions with an effective date on or after Royal Assent, with grandfathering provisions (so care needs to be taken to ensure you are not caught by the grandfathering provisions which would have the effect of depriving a purchaser of this new relief).

8 8 5% rate for residential property over 1m The top 5% rate for acquisitions of residential property for consideration greater than 1m is to come into operation with effect for land transactions on or after 6 April First-time buyers' relief under review The Government is reviewing the SDLT relief for first-time buyers and will announce the outcome in the autumn. Currently first-time buyers enjoy exemption from SDLT on acquisitions of residential property up to 250,000. REITs The REIT rules, as originally enacted in Finance Act 2006, focussed on the need for a REIT to be a listed entity with a broad investor base. This was reflected in the detailed conditions (including, in particular, the "non-close company" condition) that must be met for a company to qualify as a REIT for UK tax purposes. This meant in practice that initial take-up was generally limited to existing listed property investment groups, for which conversion was a relatively straightforward exercise, with only modest growth in the REITs sector since then. Over the last couple of years the property industry has been lobbying to seek relaxation of some of the more prescriptive REIT conditions to enable new entrants to join the regime and to encourage growth in the UK real estate sector, both in commercial and residential property, with a view to facilitating so-called "private REITs". These efforts appear to have been rewarded today by the announcement that the Government will shortly commence an informal consultation on the REIT rules with relevant stakeholders. The purpose of the consultation is to identify whether changes should be made to lower perceived barriers to entry to the REIT regime, in terms of both the entry conditions and the on-going compliance obligations. Today's announcement, which suggests that the Government is willing to consider radical changes to the current regime, is encouraging. In particular the Government has announced that it is seeking views on the following: relaxing the requirement for a UK-REIT to be listed on a recognised stock exchange (with a view to facilitating adoption of the REIT regime by start-up property investment companies); introducing a fixed grace period for new REITs to meet the "non-close company" condition in order to provide startup UK-REITs with an opportunity to attract investors over time as they build their reputation; facilitating the setting up of REITs by institutional investors (who would maintain a "seed" interest) by introducing a diverse ownership rule for such investors to allow the non-close company condition to be met; and abolishing the (2%) conversion charge for companies joining the REIT regime. As well as these potentially major changes, the Government has also indicated that it is willing to discuss other changes that appear designed to confer more flexibility on REITs in how they run their businesses. These include looking at whether cash can be treated as a "good" asset when applying the REIT balance of business asset test (currently, cash is only a "good" asset if it represents proceeds from the sale of property used in the REIT's property business for the two year period following the disposal) and whether "financing costs" for the REIT interest cover test should be redefined to give more certainty. In addition, the consultation will consider extending the time limit in which the distribution condition needs to be met in particular circumstances where stock dividends are paid by REITs to reduce the administrative burden for such REITs (the ability to issue stock dividends instead of or together with cash dividends to meet the 90% distribution test was enacted last year) as well as other (unspecified) technical changes to the rules. Any legislative changes resulting from the consultation will be included in Finance Act Enterprise Zones The Government has today announced the creation of 21 Enterprise Zones in the UK, the location of ten of which were announced in the Budget. To encourage investment in the areas covered by the zones, the Government has announced that it will make a range of policy tools available to all 21 zones to encourage growth and investment. These tools include providing a 100% business rate discount worth up to 275,000 over a five year period for businesses that move into an Enterprise Zone during the course of the current Parliament. In addition, the Government has stated that it will consult with relevant Local Enterprise Partnerships to consider whether, in a limited number of cases, there is scope for introducing enhanced capital allowances to support investment in Enterprise Zones where there is a strong focus on high value manufacturing, as well as the possible the use of Tax Incremental Finance to support the long-term viability of the Enterprise Zone. Although commentators have referred to the proposals as, in effect, replicating the policies employed to encourage investment in Enterprise Zones (such as London's Docklands) in the 1980s, it seems clear that this Government currently consider that the use of tax incentives in the form of capital allowances, in particular, should be more restricted (and, in particular, more targeted) than was perhaps the case then.

9 9 Corporate taxes and real estate The future reductions in the corporation tax rates, whilst obviously welcome, will not affect offshore investors who structure their UK real estate investments through offshore companies and are therefore only liable to income tax. For further details tax changes, please contact: David F Saleh Sarah Squires Sebastian Daly Personal Taxation Taxation of non-uk domiciliaries The annual charge of 30,000 to benefit from the remittance basis of taxation is to be increased to 50,000 for non-uk domiciliaries who have been resident in the UK for 12 or more years. The existing 30,000 charge is to remain for non- UK domiciliaries who have been resident in the UK for seven out of the last nine years. Non-UK domiciliaries benefitting from the remittance basis of taxation will be permitted to bring sums into the UK for commercial investment into UK businesses without being deemed to have remitted income or gains. Depending upon how these rules are introduced, this may allow non-uk domiciled investors to make investments into UK private equity funds without worrying about remittance issues. Entrepreneurs' Relief The current 5 million lifetime limit on gains qualifying for entrepreneurs' relief, which reduces capital gains tax in respect of qualifying gains to 10%, is to be doubled to 10 million with effect from 6 April The somewhat onerous conditions for gains to qualify for relief will, however, remain unchanged. Accordingly, many individual investors may continue to struggle to qualify for entrepreneurs' relief in the absence of specific structuring. Statutory residence test In response to extensive lobbying and to the confusion arising from the Gaines-Cooper litigation, the Government has announced its firm intention to consult on the introduction of a statutory definition of 'residence' for tax purposes. The consultation document, which is expected to be issued in June 2011, will pave the way for a statutory definition to be enacted in April 2012, providing clarity for taxpayers and replacing the current mix of 19 th century case law and HMRC practice. Income tax and national insurance contributions In his speech, the Chancellor stated that he regards the 50% income tax rate as "a temporary measure" and that he would be assessing how much revenue it raises. There will also be a consultation on whether to merge the income tax and national insurance contribution regimes, a measure the Chancellor stated was designed to simplify the tax regime, rather than to increase taxes. Anthony Stewart Insurance Companies Changes to the taxation of life business post Solvency II Following detailed consultation with the insurance industry in connection with the impact of Solvency II on the current basis of taxing insurance business, the Government has today published a technical note outlining a new life insurance tax regime that is intended to take effect from 1 January The intention behind the new regime is to create a simpler and more stable tax basis which is more consistent with the taxation of companies generally. This technical note will be followed by a further consultation document in April, which will explore how the decisions reflected in the technical note are to be implemented. This is intended to result in further discussions with insurance businesses prior to enacting legislation in Finance Act In terms of key points to note from the technical note: It is intended that the starting point for determining taxable profits under Solvency II will be the insurance company's statutory accounts.

10 10 A tax deduction will, in principle, be available for tax borne on behalf of policy holders, with the Government intending to consult on the measure of that deduction. The Government confirms that there is no intention to replace or reform the I-E basis within the Solvency II timescale, but in the long-term the Government has indicated that it intends further review. Simplification of the taxation of long-term business is proposed by reducing the number of categories of business to two, BLAGAB and a new category taxed on a trading profits basis (which will include the "old" categories of GRB and PIH). There is a stated aim of simplifying the manner in which income and gains are apportioned between businesses, with an emphasis on applying a factual commercial basis, that can be discussed and agreed between the insurance company and its inspector. Protection business will cease to exist as a separate business and policies written from 1 January 2013 will fall within the new category of business taxed on a trading profits basis. The distinction between shareholder fund assets and long-term insurance fund assets will no longer remain; instead there will be a distinction between fixed and circulating capital, established on first principles. It is intended that detailed guidance will be drawn up, working with the industry, as to how this will operate in practice. No changes are proposed to the tax treatment of mutual businesses. The rules for the transfer of business will be simplified with the focus, for transfers between unconnected persons, being on following accounting principles. An anti-avoidance rule will continue to apply. Transitional adjustments will need to be provided for, and this will be the subject of consultation. It is intended that existing tax losses can be carried forward against "new" regime profits (although for BLAGAB, this will be only be the case when applying the minimum profits test). It is clear from the technical note that many areas of detail remain to be discussed between HMRC and the insurance business and possible future changes to IAS in relation to insurance contracts may require yet further change. It is clear that the Government has valued the input from the industry to date and is looking to continue their discussions as the proposals move towards draft legislation. General insurance CERs Currently, general insurers get tax relief for claims equalisation reserves (CERs). The regulatory requirement to maintain CERs will fall away with Solvency II and as a result the Government intends to consult on the tax implications of such reserves; in particular it is inviting the industry to make representations as to its continuation (which would require specific legislation). The industry has been asked to provide a "robust justification" for such relief. Informal consultation will commence in April 2011, again with a view to any legislation being within Finance Act David Harkness Sarah Squires Oil and Gas Taxation : Supplementary Charge The supplementary charge levied on profits from UK oil and gas production is to be increased from 20% to 32% effective from 24 March The Government has indicated, as part of the proposed "fair fuel stabiliser", that it will reduce the supplementary charge if the oil price falls and suggested a possible trigger price for this of US $75 per barrel; the figure will be set following further consultation. According to the Government, this measure will raise approximately 2 billion of additional revenue. These funds will be used to delay inflation linked rises in fuel duty and to abolish the fuel duty escalator. However, as part of the proposed "fair fuel stabiliser", if the oil price falls below the trigger price referred to above on a sustainable basis, the government will increase fuel duty by the Retail Price Index plus 1 penny per litre in each such year. David Harkness Mark Persoff

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