Tax Focus web seminar

Transcription

1 Tax Focus web seminar Corporate loss utilisation and SSE HM Treasury consultations 28 June 2016

2 Presenters Claire Hooper Partner, EY Phone: Mandy Pachol Associate Partner, EY Phone: Page 2

3 Agenda Corporation tax loss relief reforms Background Proposed changes Groups, consortia; change of ownership and cessation Impact on capex, capital gains and deferred tax Preparing for change SSE reforms Q&A Background Drivers for change Possible options for reform Next steps Other developments Page 3

4 Corporation tax loss relief reforms Page 4

5 Background Loss reform drivers per Business Tax Road Map: Current system inconsistent with international best practice: Majority of G7 restrict amount of profit that can be offset by brought forward losses Streaming of loss types out of step with the way business operates Winners and losers Government estimates that <1% will be adversely affected and many more will benefit Estimated to raise 1.4b over 4 years Consultation published 26 May Responses by 18 August Draft Finance Bill 2017 legislation in Autumn Statement Page 5

6 Summary of proposals Proposed changes Carried forward losses arising from 1 April 2017 can be offset against all profits of company and group From 1 April 2017, use of losses brought forward restricted to 50% of profits Subject to 5m allowance per group Applies to: Trading losses Non-trading loan relationship deficits (NTDs) Management expenses UK property losses Non-trading losses on intangible fixed assets (NTLIFAs) Page 6

7 Detailed proposals Losses will: Continue to be carried forward in different pools e.g., trading, nontrading loan relationship deficits etc. Remain in company where generated (i.e., no group pool) 5m allowance to be allocated as company/group sees fit Current year loss relief (including group relief) applied before brought forward losses Pre-April 2017 losses used before post-april 2017 losses Carried back losses applied to remaining profits at end Three step process to determine order of set-off Page 7

8 Three step process Step 1: calculate profit to which 50% restriction applies LESS LESS Trading profits Total profits before any loss reliefs Non-trading profits 6/8 = 75% 2/8 = 25% Trading proportion of NTD offset Remaining trading profits 6m 0.8m x 75% = 0.6m 5m allowance Choice of how to allocate Non-trading proportion of NTD offset 0.8m x 25% = 0.2m 2m Remaining non-trading profits Example Current Year (CY) trading profits = 6m CY non-trading profits = 2m CY non-trading deficit (NTD) = 0.8m B/f pre 4/17 trading loss = 10m B/f pre 4/17 NTD = 0.6m = Relevant Total Profits 6m - 0.6m - 5m = 0.4m 2m- 0.2m = 1.8m 0.4m + 1.8m = 2.2m Page 8

9 Three step process Step 2: relieve profits with pre-april 2017 losses Remaining trading profits x 50% Remaining non-trading profits x 50% 0.4m x 50% = 0.2m Pre April 2017 trading losses b/f 10m - 5m already used LESS Remaining trading profits 1.8m x 50% = 0.9m Pre April 2017 NTDs b/f 0.6m Remaining non-trading profits Loss capacity for step 2 = Relevant Total Profits x 50% 2.2m x 50% = 1.1m Pre April 2017 trading losses c/f 4.8m 0.2m Remaining relevant total profits 1.4m LESS 1.2m Up to 0.3m as capacity was 1.1m and ( 0.2m + 0.6m) already used Pre April 2017 management expenses, UK property losses, non-trading intangible fixed asset losses Page 9

10 Three step process Step 3: relieve profits with post-april 2017 losses Remaining relevant total profits 1.4m LESS: Post April 2017 losses of company Remaining capacity for loss offset ( 0.3m) 1 2 Post April 2017 losses of group Any excess c/f post April 17 losses can be group relieved Page 10

11 Potential impact on group relief Example Company A has brought forward pre April 2017 trading loss of 1,000, current year trading profit of 100 and current year non-trading deficit of 30. Group company B has current year profit of 50 Option A use NTD in same company Option B group relieve NTD A B CY trading profit CY NTD (30) 0 Profit Loss b/f (35) 0 Remaining profit A B CY trading profit CY NTD (30) 0 Group relief 30 (30) Profit Loss b/f (50) 0 Remaining profit Page 11

12 50% restriction applies on income stream basis if losses are pre-17 trading or NTLRD Example Current year Trading profit 45m Capital gain 40m Net profit 85m Brought forward trading loss of 50m Expected restriction? Allowance 5m Further loss relief 50% x ( 85m- 5m) = 40m Total losses allowed 45m Remaining taxable profits 40m Position under proposed mechanics Trading Non-trading Total CY profits Offset of 5m allowance (5) 0 (5) Remaining profit Maximum 50% further offset (20) - (20) Remaining taxable profit Additional 20m taxable compared to expected outcome Arises as 50% restriction calculated for each profit type rather than combined total if offsetting pre April 2017 trading losses or non trading loan relationship deficits Page 12

13 Issues with mechanical rules - example Example Current year Trading profit 30m Capital gain 20m Non-trading deficit ( 20m) Net profit 30m Brought forward trading loss of 40m Expected restriction Allowance 5m Further loss relief 50% x ( 30m- 5m) = 12.5m Total losses allowed 17.5m Remaining taxable profits 12.5m Position under proposed mechanics Trading Non-trading Total CY profits Percentage 60% 40% 100% Offset of current year NTD (12) (8) (20) Offset of 5m allowance (5) 0 (5) Remaining profit Trading loss b/f (6.5) 0 (6.5) Remaining profit Additional 6m taxable compared to expected outcome Arises due to the need to allocate CY losses across all profit streams Page 13

14 Detailed proposals Groups/consortia Use group relief definition of group for purposes of surrendering carried forward losses Group definition for 5m allowance based on control, possibly based on IFRS 10 Consortia: Surrender to or claim from members of a consortium, carried forward post April 2017 losses Loss surrender to member based on entitlement when loss arose. Create loss pool per member to track entitlement If member disposes of interest, then loss remains in consortium company Page 14

15 Change of ownership/cessations Carried forward losses stay with company leaving group Vendor group cannot access losses post-sale Acquirer group: Government seeking views on interaction of MCINOCOT rules with widening of carried forward loss rules Also seeking views on whether carried forward losses in acquirer group should be available against profitable companies acquired Carried forward losses expire on business/trade cessation Possibly also expire if no possibility of being used e.g., if company goes into liquidation Page 15

16 Impact on capex Defers relief for capital investment in some cases Adversely impacts company that claimed capital allowances (CAs) so generating c/f losses that are now restricted over one that disclaimed allowances There are amendments Government could make to alleviate issue Consider Disclaiming capital allowances (if time) Future investment structuring Making representations Page 16

17 Impact on capital gains Capital losses not impacted by the proposals However, offset of non-trading deficits and management expenses against capital gain restricted Page 17

18 Deferred tax Under IFRS normally only take into account tax rate and law changes substantively enacted at balance sheet date Changes unlikely to be substantively enacted before July 2017 (except some of the bank changes) Disclose with quantification, where material, any announcement that may impact the balance sheet Solvency II impact for insurance companies Page 18

19 Preparing for change A number of matters should be considered in anticipation of the new regime e.g., Modelling the impact Disallowance of capital allowances Use of losses before new regime comes in Structure of the group Interaction with interest restrictions Deferred tax position Making representations However, need watch anti-avoidance provisions Page 19

20 Anti-avoidance Existing loss refreshing rules Currently applies to brought forward trading losses, management expenses and NTDs To be expanded to include UK property losses and non trading losses on intangible fixed assets Existing anti-avoidance on transfer of profits General Anti-Abuse Rule Unallowable purpose of loan relationship Change in ownership rules Possibility of new TAAR to prevent profit-shifting designed to accelerate carried forward loss use Page 20

21 Substantial shareholding exemption reform Page 21

22 Background Objectives: Consider extent to which SSE still delivering on original policy objective Possible design changes to increase simplicity, coherence and international competitiveness EY in discussions with Government for some time on reforming SSE to improve UK holding company regime Consultation published 26 May Responses by 18 August Possible legislation in Finance Bill 2017 Page 22

23 Drivers for change Simplicity: Complexity of current regime may be a deterrent Competitiveness Restrictions within current regime may be a deterrent Coherence BEPS Inconsistency with full dividend exemption and territorial system Alignment of management functions and holding structure presents risk and opportunity for the UK But looking for evidence of economic benefits of attracting holding companies to UK to justify reforms Page 23

24 Possible options for reform Five non mutually exclusive options being considered Option 1 comprehensive exemption Government willing to explore case in order to remain competitive against regimes with wider exemptions But concerned with tax avoidance possibilities (e.g., passive asset enveloping) Option 2 removing investor trading test Significant simplification Allow SSE where investor has significant non-trading assets (e.g., some sovereign wealth funds) Page 24

25 Possible options for reform (cont d) Option 3 changes to investee test other than trading Possible expansions could include: Active business activities (not defined) Any business, or Activities specifically defined in legislation Option 4 amending investor and investee trading tests Options 1 to 3 seen as fundamental and requiring material benefits to be demonstrated. Possible smaller scale changes: Option 3 style changes to both investor and investee (e.g., nonqualifying activities have to be both non-trading and passive) Applying trading tests just to companies involved in transaction Page 25

26 Possible options for reform (cont d) Option 5 reducing substantial shareholding requirement Generally sceptical about merits of reducing 10% threshold Looking for evidence, e.g., infrastructure project where <10% investment may still represent multiple billions Also possibility of specific exemption for funds Certain funds (e.g., sovereign wealth funds, pension funds) have substantial non-trading activities Widely owned funds that are regulated, with minimum distribution requirements, seen as reduced avoidance risk Possibility of targeted exemption but exploring case for reform Page 26

27 Other areas Some specific aspects of current regime being addressed in addition to the more fundamental reforms, including: Impact of partnerships on SSE groups Legally partners own interest in partnership assets rather than outright ownership Creates technical difficulty in meeting 51% subsidiary test Entities without share capital Entities without share capital also cannot be 51% subsidiaries HMRC Brief 29/11 sets out HMRCs view Page 27

28 Other areas (cont d) Substantial shareholding holding period Current requirement is 12 months within previous 2 years Possible increase from 2 to 6 years to allow more time for piecemeal disposals May prevent avoidance Post-sale trading requirement Open ended question on whether this requirement creates issues (e.g., on liquidation of investee or sale of only trading company) Page 28

29 Next steps Comprehensive exemption would significantly increase attractiveness of UK as holding company location But will not happen unless sufficient evidence Of materiality of issues Of comparative position with other territories Of impact e.g., where to locate activities Economic benefits of change such as increased employment, investment, tax receipts Representations due 18 August 2016 Page 29

30 Any questions? Page 30

31 Other developments EU Referendum Web seminar recording Finance Bill 2016 progress Royalties Changes released effective from 28 June 2016 Changes to definitions of royalties for WHT purposes and source rules Other UK consultations e.g., Interest Hybrids Transfer pricing compensating adjustments Page 31

32 Other developments EU Anti-Tax Avoidance Directive Applicability post referendum? Interest restrictions Hybrid rules CFC rules Exit taxes General anti-abuse rule No switch over clause Page 32

33 Presenters Claire Hooper Partner, EY Phone: Mandy Pachol Associate Partner, EY Phone: Page 33

34 Thank you

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