Budget Alert Autumn 2017
Autumn Budget alert 2017 Introduction Whilst this Autumn Budget is the Chancellor s second Budget of 2017, it is the first one in the Government s new legislative timetable and, against a backdrop of heightened uncertainty, the first Autumn Budget in two decades. The Chancellor presented his proposals to look forwards, to embrace change, to meet challenges head on, and to seize opportunities for Britain. Faced with challenges, the expectations on the Budget were few. In a Budget replete with 35 tax measures, the Chancellor gave away 25bn, of which 7bn was in the tax area. Whilst the largest tax giveaway, being the freezing of fuel duty, is likely to pass by unremarked, some of the other changes and some of the policy areas now open for consultation will draw attention. Ahead of the Budget we highlighted five areas upon which the Chancellor was likely to focus and, in setting out his vision for a Global Britain, which he described as an outward looking, freetrading nation, the Chancellor was clearly thinking along the same lines. Stability for business In an environment where business wants certainty, the net effect of the Chancellor s many measures appears to have avoided creating much negative disruption whilst nevertheless providing some good news. Bringing the move from RPI to the (lower) CPI indexation forward from 2020 to 2018 is a welcome move for those businesses facing the burden of business rates. The Chancellor also reiterated his commitment to a competitive corporation tax rate, with no reversal of the cut to 17% planned from 1 April 2020. Digital and innovation The Chancellor wanted the Budget to be about the future and, on the tax side, this was represented both by the one percentage point increase in the Research and Development (R&D) expenditure credit and the announcement of a consultation on making sure that the UK s intellectual property regime, designed at the turn of the millennium, is still fit for purpose. Increasing R&D expenditure credit to 12% delivers the highest rate for large companies since the introduction of the R&D tax credits regime and reinforces the UK s message that it wants to be the home for innovation. With respect to the digital economy, the Government s position paper on corporate tax and the digital economy, which was released alongside the Budget, noted that it is essential that the international corporate tax rules ensure that the UK corporation tax payments of the digital economy are commensurate with the value they generate from the UK market and specifically the value generated by the participation of UK users. While noting the Government was willing to act unilaterally, it recognises the need to work with other countries to minimise business burdens and distortion and picks up the topic currently being hotly debated in the EU and at the OECD. Focus on learning There was considerable focus on investment in skills as the Government continues to work with employers on supporting the apprenticeship levy. The Chancellor announced its support for maths with an investment of 40mn to train maths teachers and a commitment to computer science with up to 83mn to upskill computer science teachers. Housing Whilst the main news on housing was on the spending side, the Chancellor did introduce a new permanent relief for first time buyers on transactions on or after Budget day. This removes all Stamp Duty Land Tax (SDLT) on properties up to 300,000 for first-time buyers, retaining this exemption even as the price rises to 500,000. This is slightly surprising as it marks a return to the slab system of SDLT, at least for some first time buyers, removing one of the simplifications of the shift delivered by his predecessor. As well as reducing the tax costs on sales to first time buyers, the Chancellor also proposed a number of measures to stimulate housing including giving local authorities power to charge 100% council tax premiums on empty properties. Employment As predicted, the Chancellor heralded a consultation on the taxation of the off-payroll workers, with the express consideration of extending the rules currently applied just to public sector bodies, to all companies. With the current rules facing particular operational challenges, it will be important that the rules are fully reviewed before being rolled out more widely. So, the Budget was a veritable smorgasbord of measures, focused on a range of issues and objectives. If this is truly the foundation Budget for the future, the tax measures announced in this Budget should help Britain meet the forthcoming challenges head on and provide the necessary groundwork to weather the changes to come. Do they? Read this alert which explores the detail and give us your views. 1
EY ITEM Club There are pretty dramatic downgrades to the UK GDP growth forecasts by the Office for Budget Responsibility (OBR) in the Budget. The 2017 GDP growth forecast has been cut from 2.0% to 1.5% (which is largely baked-in given that data has been released for the first three quarters) while the 2018 projection has been cut from 1.6% to 1.4%. These new forecasts match the current EY ITEM Club projections. It seems that the OBR may now be erring on the side of caution on UK productivity growth, having been repeatedly over-optimistic in recent years. Obviously, the longer-term UK GDP growth forecasts will be substantially influenced by Brexit developments. However the productivity expectations may now be overly pessimistic. Specifically, the OBR has cut forecast UK GDP growth to just 1.3% in both 2019 and 2020, rising to 1.5% in 2021 and 1.6% in 2022. This means that at no stage over the period through to 2022 does the UK see growth of 2.0% indeed it struggles to grow by more than 1.5%. Previously, the OBR had expected growth to be 1.7% in 2019, 1.9% in 2020 and 2.0% in 2021. The OBR has repeatedly assumed in recent years that there will be a marked pick-up in the UK s productivity performance, but this has failed to materialise. Consequently, the OBR has now come to the conclusion that some of the temporary factors that it believed were holding back productivity are having a permanent impact. Back in March, the OBR forecast that productivity growth (output per hour worked) would rise from 1.4% in 2017 to 1.5% in 2018 and then get up to 1.8% in 2020 and 2021. Now the OBR expects productivity growth to be just 0.9% in 2017 dipping to 0.7% in 2018 before rising gradually to 1.1% in 2021 and 1.2% in 2022. These forecasts look very cautious to us. The marked downward revisions to productivity growth are also only modestly countered by the OBR cutting its estimation of the UK s equilibrium unemployment rate from 5.0% to 4.5%. As a consequence of the lower GDP forecasts over the mediumterm, the expected budget shortfalls (Public Sector Net Borrowing excluding banks PSNBex) have been revised up significantly. This is despite the near-term PSNBex projections being cut due to the much lower-than-expected shortfalls over the first seven months of fiscal year 2017/18. Specifically, PSNBex in 2017/18 is now expected to come in at 49.9bn rather than 58.3bn a reduction of 8.4bn. The expected shortfall in 2019/20 has also been edged down to 39.5bn from 40.8bn. However, with the longer-term GDP growth forecasts cut markedly, the Chancellor is now expected to have a budget deficit of 32.8bn instead of 20.6bn in 2020/21. It is still expected to be as high as 25.6bn in 2022/23. This means that the Chancellor would still achieve his target of getting the cyclicallyadjusted budget deficit below 2.0% of GDP in 2021/22, although he would have a buffer of around 13bn instead of 26bn. With an expected budget deficit of 25.6bn in 2022/23, it looks increasingly questionable as to whether the Chancellor will be able to get the budget into balance by the middle of the next decade. In terms of the overall fiscal stance, the Budget is stimulative in the near-term. Specifically, the OBR observes that the Government s measures add 2.7bn to borrowing next year and a larger 9.2bn (0.4 per cent of GDP) in 2019/20. The Chancellor has stuck to his fiscal targets and delivered a pretty low-key Budget overall. Given the major uncertainties facing the economy, the Chancellor is clearly concerned that investor confidence in the UK could be damaged if he abandons the fiscal framework that was adopted only a year ago. It is also likely that the Chancellor wants to keep some room for manoeuvre should the economy suffer a slowdown over the coming years as the Brexit process develops. 2
Employment tax Taxation of employee business expenses Following HM Treasury s call for evidence on the taxation of employee business expenses, published on 20 March 2017, the Government has introduced the following changes in areas where concerns were raised: Abolition of receipt checking for subsistence benchmark scale rates From April 2019, employers will no longer be required to check receipts when making payments to employees for subsistence using benchmark scale rates. Currently employers who wish to reimburse employee subsistence expenses using the benchmark scale rates must ensure that a cost is incurred (i.e. by checking receipts). This change will not apply to bespoke rates or industry rates. Legislation for existing overseas scale rates for accommodation and subsistence Existing concessionary overseas scale rates for accommodation and subsistence are to be put on a statutory footing. The Government will legislate in Finance Bill 2018/19 so that the status of the existing overseas scale rates is put on a statutory footing. Improved guidance on employee expenses Following the call for evidence HMRC is committed to improving guidance around the taxation of employee expenses as well as enhancing the online process for claiming tax relief on non-reimbursed expenses. HMRC is committed to improving the published guidance in respect of employee expenses, in particular travel and subsistence claims, to raise awareness of the rules. The improvements will extend to simplifying the online process for claiming tax relief on employment related expenses. HMRC will seek consultation with external stakeholders in order to implement these improvements. Self-funded training The Government is to consult on extending the scope of tax relief for costs incurred by employees and self-employed individuals on self-funded training We welcome the commitment by HMRC to reduce the administrative burden of employers and improving their published guidance. Electric cars The Chancellor has confirmed that legislation will be introduced in the 2018/19 Finance Bill to exempt employer-provided electricity from being taxed as a benefit in kind from April 2018. This change will apply to electric provided in workplace charging points for electric or hybrid cars owned by employees. This confirmation will give clarity to employers and employees and is a welcome move by the Government which aims to encourage the use of electric cars. Ability to pause Save-As-You-Earn (SAYE) contributions Employees on maternity and parental leave will be able to pause their SAYE contributions for up to 12 months from 6 April 2018. Previously employees could only pause their contributions for a period of 6 months. This is a welcome increase which outlines the Governments understanding that employees may take leave for longer than six months. Reform to the intermediaries legislation for private sector engagements Following on from the changes introduced for public sector engagements from 6 April 2017, the Government has announced its intention to consult on extending these rules into the private sector. The current rules for workers providing their services to a public sector body via a personal service limited company (PSC) passes the responsibility for paying the correct employment taxes to the public sector body or agency paying the company. Different rules apply where the engager is a private sector business. Currently, where a worker provides services to a private sector business through their PSC, that individual is responsible for deciding whether the intermediary legislation (commonly referred to as IR35) applies. The consultation will consider whether that responsibility should pass to the private sector employer, agency or other third parties who pays the PSC to match the rules in the public sector. The consultation will be issued early in 2018 and so any implementation is unlikely to take place before April 2019, particularly as engagers have already expressed concerns over the rules being extended into the private sector. 3
Employment tax Employment status consultation The Government has announced that it will shortly publish a consultation as part of its response to Matthew Taylor s review of modern working practices which will consider options for reform to make the employment status tests for both employment rights and tax clearer. This is a far ranging and complex area of law and is likely to be a lengthy process. No date for the consultation has yet been announced, but we expect that a response could be issued in the next few weeks. Tackling disguised remuneration avoidance schemes The Chancellor has announced further legislation to tackle the existing and future use of disguised remuneration tax avoidance schemes. The Part 7A disguised remuneration legislation will now apply regardless of whether contributions to disguised remuneration avoidance schemes should previously have been taxed as employment income. This change takes effect from 22 November 2017. In addition Part 7A will be amended to ensure that liabilities arising from the loan charge are collected from an appropriate person where the employer is located offshore. This change will have effect from the date of Royal Assent for the Winter Finance Bill. Following the original announcement in the 2015 Autumn Statement a package of measures had been introduced in the 2016 Budget and 2017 Spring Budget. This was followed by further draft legislation published on 13 September 2017, to be included in the Winter Finance Bill, to be published on 1 December 2017. This introduced a close companies gateway with effect from 6 April 2017 and required all employees and self-employed individuals who have received a disguised remuneration loan to provide information to HMRC by 1 October 2019. The Government s commitment to tackle specific perceived tax avoidance schemes continues with additional legislative measures. However, in the absence of further details, scrutiny of the Winter Finance Bill clauses will be needed when these are published on 1 December 2017. Changes to company cars and vans From April 2018 the existing diesel supplement on company car tax will be increased from 3% to 4%. Carbon dioxide figures compatible with the current New European Driving Cycle test procedure will be used by HMRC for the purposes of determining the company car tax charge until April 2020. The van benefit charge and fuel benefit charge for cars and vans will increase by the RPI. National insurance contributions (NICs) The Budget confirms that the implementation of measures affecting NICs which were previously announced in the last Budget, including the abolition of class 2 NICs, reforms to the NICs treatment of termination payments (excluding the changes to the payments in lieu of notice rules which will apply from 6 April 2018) and changes to the NICs treatment of sporting testimonials, has been delayed until 2019. The Government has indicated that some employees have abused the NIC employment allowance and avoided paying the correct amount of NIC, often using offshore arrangements. From an unspecified date in 2018 (it is not clear whether this will be from April 2018), HMRC has said that employers with a history of avoiding paying NIC in this way will be required to provide upfront security. Termination Payments Foreign service relief As announced previously, the reform of foreign service relief for termination payments will come into effect where the date of the employees termination is on or after 6 April 2018 and the payment or benefit is received after 13 September 2017. The changes mean that employees who are UK resident in the tax year their employment is terminated will not be eligible for foreign service relief on their termination payments. 4
Personal tax Rates and allowances The personal tax allowances and capital gains tax annual exemption figures have been announced for the tax year 2018/19. The Government will increase the personal allowance to 11,850 from 6 April 2018. The income tax basic rate limit for 2018/19 will increase to 34,500, so most individuals will begin paying higher rate tax on income above 46,350 (but see below for Scotland). There are no changes to the personal income tax and capital gains tax rates for 2018/19. The capital gains tax annual exemption for individuals has increased to 11,700. As previously announced, the dividend allowance for 2018/19 will reduce from 5,000 to 2,000 from 6 April 2018. However, the starting rate for savings income is unchanged at 0% and the starting rate limit for savings will remain at its current level of 5,000 for 2018/19. From April 2017, powers to vary the tax rates and thresholds of non-savings and non-dividend income for Scottish taxpayers were devolved to the Scottish Parliament. The Scottish draft Budget 2018/19 is scheduled for 14 December 2017. The total amount that individuals can save each year into all ISAs from 6 April 2018 will remain at 20,000 which includes limit of 4,000 for savings into a Lifetime ISA. The annual subscription limits for Junior ISAs and Child Trust Funds for the tax year 2018/19 have been increased to 4,260. The increase to the personal allowance is not as generous as it might first appear, since it has only risen by inflation. The reduction in the dividend allowance will increase the number of people who need to pay tax on dividend income. Reform of the domicile rules and offshore trusts No further amendments were announced to the new deemed domicile and offshore trust rules. However, previously announced changes to the taxation of offshore trusts will be included in the Winter Finance Bill to take effect from 6 April 2018. The Government confirmed that legislation will introduce additional anti-avoidance rules, to take effect from 6 April 2018, in relation to the taxation of income and gains arising to offshore trusts. Draft legislation was published on 13 September 2017, which included: A benefits charge for settlors and close family members that will largely impact settlor interested trusts, where benefits would otherwise not be taxable under certain existing income tax anti-avoidance rules. A provision stating that capital payments to non-residents and to migrating beneficiaries may be disregarded when attributing capital gains of offshore trusts. The attribution for certain income and gains charges to a settlor where benefits are received by close family members; and the attribution of capital gains and of deemed income to recipients of onward gifts. These measures follow the broader changes to the taxation of non-uk domiciled individuals included in Finance (No. 2) Act 2017 which introduced the concept of deemed domicile for income tax and capital gains tax as well as inheritance tax purposes. Venture Capital Schemes A raft of measures are to be introduced to encourage and target investment in high-growth, innovative firms under the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs) while restricting relief where the purpose of the business is to preserve capital rather than grow. Following the consultation issued by the Government in response to the Patient Capital Review, it was acknowledged that highgrowth, innovative businesses require high levels of capital upfront to succeed while the risk of loss to the investor is higher. Knowledge intensive companies Legislation is to be introduced to further encourage investment in via EIS and VCT. From 6 April 2018: 5
Personal tax The annual allowance for an individual investment in EIS will increase from 1mn to 2mn The annual investment that can be raised through EIS and VCT will increase from 5mn to 10mn There will be increased flexibility in how the 10 year maximum age test is applied. These add to the incentives already available to knowledgeintensive companies. High Growth companies Encouraging investment in knowledge-intensive companies seeks to redirect capital away from low-risk EIS and VCT qualifying investments. The Government will legislate to tackle perceived capital preservation investments currently qualifying for tax reliefs. From 6 April 2018, a risk-to-capital condition will be introduced for new investments. This will form two parts and will ask whether: The company has objectives to grow and develop (mirroring an existing test), and There is a significant risk of loss of capital for the investor which could exceed the net return of the investor. VCTs Further measures specific to VCTs will be introduced including: From 6 April 2018, 30% of funds raised in a period must be invested in qualifying investments within one year of the end of the accounting period From 6 April 2019, the time limit for VCTs to reinvest investment gains will be doubled from 6 to 12 months The VCT must hold at least 80% of funds in qualifying investments, increased from 70%. Pension funds To further unlock the opportunities of fast growth, long term, venture capital investments, the Pension Regulator will clarify guidance on how trustees can access such investments while the Treasury will seek to remove barriers restricting illiquid investments being held in pensions. The Government is promoting investment in innovation and is extending the tax reliefs for entrepreneurial investment. However, there is a clear desire to restrict tax reliefs on low risk venture capital investments. Pensions Contrary to some speculation prior to the Budget, no major changes have been announced to the existing limits on tax relief for pension savings or to the taxation of pension withdrawals. The lifetime allowance for pension savings will rise from 1,000,000 to 1,030,000 with effect from 6 April 2018. This is in line with the Government s announcement in the 2015 March Budget that the lifetime allowance would increase in line with the Consumer Price Index from 2018/19. The Government will legislate to allow tax relief on employer premiums paid into life assurance products and certain overseas pension schemes where an employee nominates an individual or registered charity as a beneficiary. This change will be effective from 6 April 2019. Following a number of years of significant changes to the pension tax regime, pension savers and pension schemes will welcome a Budget without significant announcements. The adjustment to the treatment of life assurance and overseas pension premiums is a positive change as it will remove a perceived anomaly in the existing legislation which means that current premiums for employer funded death benefits in un-registered schemes may not be eligible for tax relief. Taxation of trusts In 2018, the Government will publish a consultation on how to make the taxation of trusts simpler, fairer and more transparent. We do not have further details at this stage but the consultation may cover the taxation of both UK and non-uk trusts. 6
Indirect taxes Indirect tax consultations VAT registration and deregistration thresholds The VAT registration and deregistration thresholds will remain at 85,000 and 83,000 respectively for a two year period, ending on 31 March 2020. The Government will consult on the design of the VAT registration threshold. The increase in VAT registration and deregistration thresholds year on year has become a familiar feature of the Budget. However, following the recent publication of the Office of Tax (OTS) Simplification s review of the VAT system, which proposed the need to review the threshold and the fact that the UK s VAT registration threshold is the highest in the EU, it is no great surprise that the Government has decided to defer any increase and consult before making further changes. The possibility of a reduction in the threshold as proposed by the OTS remains a future possibility therefore. VAT grouping At Autumn Statement 2016, the Government launched a consultation on potential changes to the UK VAT grouping provisions. The Government will publish a summary of responses on 1 December 2017. It will then consider whether any changes are required to the current UK VAT grouping regime. The consultation follows recent European case law. As part of the consultation, HMRC is reviewing certain aspects of VAT grouping such as eligibility for membership, the VAT treatment of cross-border supplies involving branches and the interaction between VAT grouping and the cost sharing exemption. VAT fraud on the provision of labour in the construction sector Aimed at combatting perceived VAT fraud on the provision of labour in the construction sector, the Government will publish a technical consultation on draft legislation for a VAT reverse charge in spring 2018, with a final draft of the legislation and guidance to be published by October 2018. This follows the conclusion of the consultation announced at Spring Budget 2017. The changes will take effect on or after 1 October 2019. Reverse charge accounting is increasingly the default response to supply chain fraud as it places the onus for accounting for VAT on the recipient of the supply. The long lead time will be welcomed by businesses preparing for the changes. VAT and vouchers The Government will implement changes in the VAT treatment of vouchers with effect from 1 January 2019. These will simplify the VAT treatment of vouchers, including the point at which they will become subject to VAT, and in some cases their value for taxation. A consultation paper will be published on 1 December 2017. The proposed changes in the UK VAT legislation on vouchers are expected to be consistent with the new EU rules which were announced last year. The current UK rules on vouchers are complex, having developed over a number of years. Any increase in clarity is likely to be welcomed by businesses. Businesses involved in the provision or redemption of vouchers may wish to review the impact of future developments. Other indirect tax consultations and calls for evidence The Government will also publish: A consultation in early 2018 on gaming duty return periods to seek views on bringing the administration of gaming duty by casinos more into line with the other gambling duties. It will also seek views on the removal of the requirement to make payments on account. A call for evidence in early 2018 on how the tax system or charges could help to reduce the amount of single-use plastic waste. VAT: Postponed accounting for VAT following Brexit The Government recognises that businesses currently benefit from postponed accounting for VAT when importing goods from the EU. This provides an important cash flow advantage for businesses as they account for VAT through the VAT return and do not make a payment at the time goods arrive in the UK from the EU. The Government will take this into account when considering potential changes following Brexit and will look at options to mitigate any cash-flow impacts for businesses that a border between the UK and EU might create. Businesses importing goods from the EU using postponed accounting will welcome this consideration of the mitigation of VAT cash-flow impacts following Brexit although customs duties and tariffs on trade into the EU will still be a significant concern. VAT: Split payment for on-line sales Building on the measures introduced in Budget 2016, to combat perceived avoidance on 1 December 2017, the Government will publish, a response document to the call for evidence to develop a split payment model for on-line sales. 7
Indirect taxes This is a measure to tackle the non-payment of VAT by some overseas businesses trading on-line with UK customers. A split payment mechanism allows VAT to be extracted from on-line payments in real time. The Government has reported that the responses to the call for evidence were broadly positive about the concept but highlighted the complexities of implementation. The response document will set out plans for further engagement with external stakeholders, in preparation for a full consultation in 2018. Usually VAT is collected and paid by the taxpayer on the basis of transactions performed during the reporting period. The split payment mechanism changes this approach in that the purchaser pays the net price to the supplier and any VAT due is paid direct to HMRC or an appointed third party. Whilst this would be yet another change for online marketplaces to manage, this measure is intended to reduce their underlying risk, as they can currently be held jointly and severally liable for any UK VAT under-declared by traders operating on their platforms. VAT: Extension of joint and several liability on the online marketplaces and further measures to encourage compliance by users of digital platforms The Government has announced that it will legislate in the Winter Finance Bill to hold online marketplaces jointly and severally liable for the UK VAT liabilities of businesses selling goods through their platforms. The Government will extend the scope of existing joint and several liability rules to hold online marketplaces liable for: Any future VAT that a UK business selling goods via the online marketplace fails to account for after HMRC has issued a notice to the online marketplace, ensuring that all sellers are in scope; Any VAT that a non-uk business selling goods via the online marketplace fails to account for, where the business was not registered for VAT in the UK and where the online marketplace knew or should have known that the non-uk business should be registered for VAT in the UK. The Government will also legislate to require online marketplaces to verify the VAT numbers of third party sellers on their websites. The changes will have effect on and after Royal Assent to the Winter Finance Bill. The Government also intends to explore with digital platforms opportunities to promote better tax compliance by their users, before publishing a call for evidence in spring 2018 on what more digital platforms could do to prevent non-compliance. The proposed measure continues the Government s approach of making online marketplaces responsible for the VAT compliance of the sellers who trade through them. VAT: Refunds to combined authorities, fire and rescue authorities, the Scottish Fire and Rescue Service, and the Scottish Police The Government will legislate to include combined authorities and various emergency services in the current VAT provisions which allow for the recovery of VAT. Local authorities and other specified bodies are able to recover the VAT they incur when undertaking their statutory obligations. However, the definition of a local authority does not currently include a combined authority, which has resulted in these types of bodies having to be subject to specific Treasury Orders in order to ensure VAT recovery. Typically, a combined authority is a group of two or more bodies collaborating across boundaries. This measure will remove the need for individual Treasury Orders and will extend the current VAT recovery mechanism to combined authorities, including the Scottish Fire and Rescue Service and the Scottish Police Authority. The measure will have effect on and after the date of Royal Assent to the Winter Finance Bill. The Government s change in policy will introduce significant savings for the emergency services involved. There will however be no refund of VAT, which was not recoverable by these authorities in previous years. Air passenger duty The air passenger duty long-haul standard rate will rise to 172 and the long-haul higher rate will rise to 515 from 1 April 2019. For tax year 2019/20, short-haul rates and the long-haul reduced rate for the economy passengers will be frozen at 2018/19 levels with tax rates for 2020/21 set out at Budget 2018. In early 2018, the Government will publish a call for evidence on the impact of VAT and air passenger duty on tourism in Northern Ireland, to be reported on at Budget 2018. 8
Indirect taxes The commitment to freeze rates for short-haul flights and long-haul economy flights should be welcomed after a period of sustained rate increases which the industry has consistently lobbied against. Carbon price support and climate change levy Revised indicative carbon price support rates were announced for tax year 2020/21 and minor amendments were made to climate change levy exemptions for energy used in mineralogical and metallurgical processes. Climate change levy (CCL) main rates for tax years 2017/18, 2018/19 and 2019/20 were announced in Budget 2016 and remain unchanged. The rates for liquefied petroleum gas will be frozen at the 2019/20 rate for the tax years 2020/21 and 2021/22 to level the playing field for the off grid market. All other rates for taxable commodities for 2020/21 and 2021/22 will be announced in Budget 2018. Revised indicative carbon price support (CPS) rates have been published for the tax year 2020/21, this is in line with the Government s policy announced in the Spring 2017 Budget to target a total carbon price with specific CPS rates set at a later date. Minor amendments to the exemptions from CCL for energy used in mineralogical and metallurgical processes will be made in the Finance Bill 2018/19. These amendments will take effect from spring 2019 and are aimed at ensuring the exemptions remain operable post-brexit. Landfill tax Legislative changes to the scope of landfill tax and an increase in the landfill tax rates will come into effect from 1 April 2018. Following consultations in 2016 and 2017, landfill tax legislation will be amended in the Winter Finance Bill taking effect from 1 April 2018. As set out in the September 2017 policy paper, the key changes are expected to be as follows: Landfill tax will be extended to include disposals made at sites without an environmental disposal permit in England and Northern Ireland. Non-compliance by those involved in or knowingly facilitating the disposal resulting in penalties or criminal prosecutions. Registration requirements will be extended to taxable persons making disposals at places other than permitted landfill sites. New exemptions will be implemented so that landfill tax is not charged at permitted sites on material currently outside the scope of the tax. From 1 April 2018, the standard and lower rates of landfill tax will rise in line with RPI to 88.95 per tonne and 2.80 per tonne respectively. The Landfill Communities Fund value for 2018/19 will be 33.9mn, with contributions by landfill site operators remaining capped at 5.3% of their landfill tax liability. These legislative changes come as no surprise and have previously been published by HMRC in a policy paper and draft legislation during Autumn 2017. They are in line with general policy measures aimed at tackling tax evasion and should be welcome by legitimate operators in the waste sector. Aggregates Levy: Continued rate freeze and no increase in exemptions As expected, aggregates levy will remain at 2 per tonne for 2018/19. The rate has been frozen since 2009 but the Government has announced an intention to return to index-linked rate increases in the longer term. Following consultation in 2016, current aggregates levy exemptions will not be extended to include aggregate produced from laying underground utility pipes. Tobacco duties Duty rates on all tobacco products will increase by 2% above RPI inflation, with the exception of hand-rolling tobacco which will increase by 3%. Also, the tobacco minimum excise tax will be set at 280.15 per 1,000 cigarettes. These changes come into effect from 6pm on 22 November 2017. The minimum excise tax (MET) will be set at 280.15 per 1,000 cigarettes which will target the cheapest cigarettes. This means that the total excise duty on a packet of cigarettes will be the higher of either the MET or the usual application of duties i.e., specific plus ad valorem duties at 16.5% of the retail price. This therefore increases the price of cigarettes from 4.15 to 4.34 per a 20 pack of cigarettes. Duty on hand-rolling tobacco will increase from 209.77/kg to 221.18/kg. 9
Indirect taxes Finally, the Autumn Budget 2017 also announced that tobacco duty rates will increase by a minimum of 2% above inflation until the end of this Parliament. Alcohol duties Duties on white ciders will increase from 1 February 2019. Duty rates on other beer, cider, wine, made-wine and spirit products have been frozen. The Government intends to introduce a new duty band for still cider of a strength of at least 6.9% but not exceeding 7.5% abv. Additionally, HMRC will be reviewing wine and made-wine dilution practices of businesses which are carried out after the excise duty has been calculated. The objective is to create consistency across all alcohol sectors regarding the calculation and payment of excise duty. Vehicle excise duties Vehicle Excise Duty (VED) rates for cars, vans and motorcycles registered before 1 April 2017 and first year rates for cars under the post-april 2017 VED system will increase by RPI with effect from 1 April 2018. The Government will also legislate for the rates on new diesel cars registered from 1 April 2018 to increase by one band. Fuel duty rates will remain frozen for the tax year 2018/19. The band increase will apply to all new diesel cars that do not meet the Real Driving Emissions step 2 (RDE2) standards. VED for HGVs and HGV levy rates remain frozen for the tax year 2018/19. The Government will also publish a call for evidence to update the existing HGV Road User Levy so that hauliers that plan their routes efficiently are incentivised in efforts to improve air quality. In addition, the Government will review whether existing fuel duty rates for alternatives to petrol and diesel are appropriate ahead of making decisions at Budget 2018. In the meantime, the Government will no longer be bound by the duty escalator policy for liquefied petroleum gas road fuel. Finally, zero-emission capable taxis will be exempt from the VED supplement that applies to expensive cars from April 2019. The Government will consult on how to define zero-emission capable taxis ahead of this date. Despite the VED increase for cars, vans and motorcycles, the rates freeze on HGV VED and Road User levy rates will be viewed as positive by hauliers and road freight operators. The increase in rates for new diesel cars is in line with the Government s actions on reducing carbon emissions. 10
Business taxes and administration Corporate tax and the digital economy The Government has announced its view on the challenges raised by the digital economy on the international corporate tax system and how the international community should go about tackling these. The Government considers that international agreement will be required to address the challenges effectively, but has stated that it will take unilateral action if necessary. A policy paper has been published setting out the Government s position, inviting comments by 31 January 2018. In the short term, the Government has announced that, subject to treaties, it will levy withholding tax on royalties made to a low/no tax jurisdiction in connection with UK sales, even if the payer does not have a UK taxable presence. This will come into effect from April 2019 following a consultation on the detailed implementation. There is widespread concern that the existing international tax framework is not sufficient to address the challenges of modern business practices, particularly digitalised businesses, and work is currently being undertaken by both the OECD and European Commission to identify ways to address these. The Government s policy paper emphasises that it supports the principle that profits should be taxed where the value is generated, although it notes that existing rules do not always capture value-generating activities. The paper sets out a number of different business models, identifying those where the Government considers problems arise with profit allocations under existing transfer pricing rules and those where the UK does not perceive issues. The Government wants to target the user-generated value in businesses where the participation of the user is central to the business model (and which is not captured under the existing international tax framework). The Government also considers that certain activities, which may be considered as routine functions for other businesses (such as market penetration and sustaining a user base) should be given more weight in the allocation of profits for digital platforms. The Government considers that longer term reform should focus on certain narrowly defined activities, giving countries the right to tax profits of foreign companies deriving value from user-generated material and an active user base within their jurisdiction, even where no permanent establishment is created currently. However, it considers that it may be appropriate to consider more pragmatic approaches to achieve the taxing objectives, such as allocating income using a user or marketbased metric. A tax on revenues that businesses generate from the provision of digital services to the UK market is favoured by the Government as the interim solution, though this would require careful design to target the relevant risks. As a more immediate action, the UK intends to take action against multinational groups who achieve low-tax outcomes by holding valuable intangible assets in low-tax jurisdictions where a royalty is paid in connection with UK sales. The Government has clearly set out its position and areas of concern which should help inform the international debate and work of the OECD and the European Commission. There remains a potential for business models that are not the target of the reforms to be adversely impacted but the UK s position paper should help more clearly focus the debate. Whilst there is still considerable detail to be thought through, businesses would be well advised to consider the potential impact of these reforms, together with other proposed changes in other territories, on their operating model. Amendments to corporate interest restriction and hybrid mismatch rules The Government has announced a number of technical changes to the recently introduced corporate interest restriction rules and rules targeting hybrid and other mismatches to allow these to operate as intended. The measures announced include: Corporate interest restriction rules Amending the treatment of derivatives hedging items in a non-banking financial trade so that debits and credits are not inappropriately excluded (derivatives hedging items unrelated to the capital structure of a company are typically excluded from calculations, although this default treatment is already adjusted for banking trades) Removing the effect of the above the line R&D credit from the calculation of the group earnings before interest, tax, depreciation and amortisation (EBITDA), to mirror the treatment for the calculation of taxable EBITDA Amending the public infrastructure rules to limit the impact of insignificant amounts of non-taxable income, allow the election into the rules to be made any time before the end of the period in which it is to first apply and to prevent the acquirer of an asset from a qualifying infrastructure company automatically being treated electing into the regime. Antiavoidance for related party debts is also to be introduced Amending the definition of a group to allow closer alignment with accounting standards and prevent otherwise unrelated businesses being grouped together as a result of asset managers 11
Business taxes and administration Requiring companies to amend tax returns where the interest restriction rules amend the tax position (currently returns are treated as if they were amended) Hybrid and other mismatch rules Clarifying withholding taxes should be ignored for the purposes of the definition of tax Amending the rules to disregard taxes charged at a nil rate Allow capital taxes to be taken into account in relation to hybrid instruments, hybrid transfers and controlled foreign companies Clarifying that a proportional counteraction will be applied where some investors in a hybrid entity do not treat it as a hybrid Clarifying the scope of the legislation in relation to multinational companies (those with an establishment in another territory) Allowing transactions generating taxable income in a payee but no deduction in a payer to be taken into account when quantifying certain mismatches Confirming certain income taxable in two jurisdictions (dual inclusion income) can be taken into account when applying the rules relating to imported mismatches Allowing the rules to take into account certain accounting adjustments which reverse prior period counteracted hybrid mismatches The rules restricting the tax deductibility of corporate interest expenses (in line with the G20/OECD s BEPS Action 4) were recently enacted as part of Finance (No. 2) Act 2017 and apply from 1 April 2017. Rules targeting hybrid and other mismatches (in line with BEPS Action 2) were introduced in Finance Act 2016 with effect from 1 January 2017. Whilst the underlying principles behind the corporate interest restriction rules are straight forward, the legislation to achieve these goals is complex, as is the legislation relating to hybrid and other mismatches. Although corrections to clarify and remove unintended consequences have already been made to both sets of rules, the complexity means that further inconsistencies continue to be identified, many of which are only apparent when working through the detail. The amendments announced as part of the Autumn Budget 2017 cover some, but not all, of the inconsistencies that have been raised with the Government. Given the complexity, companies will need to carefully look at the rules as applied to their facts and circumstances to ensure that they do not give rise to unexpected results and to take action where appropriate. Intangible fixed assets regime: Targeted anti-avoidance measures and 2018 consultation The Government has announced targeted changes to the treatment of intangible assets to close down what HMRC refers to as a specific related party step-up scheme and ensure consistency between cash and non-cash transactions, as well as announcing a wider consultation on the UK tax rules relating to intellectual property to take place in 2018. The Government changed the law in 2015 with regard to certain related party arrangements involving transfers of intangible assets (referred to as related party step-up schemes ). The announced changes involve the introduction of two measures which together broadly have the effect of extending the market value rule to the granting of a licence between related parties (as it applies to transfers) and amending the existing legislation defining proceeds of realisation to include the market value of any nonmonetary consideration received. Both changes take effect from 22 November 2017. The changes are a natural extension of those announced in 2015 and are in line with the Government s wider plans to continue to be tough on tax avoidance. There were no significant details released in respect of the proposed consultation into the intangible fixed asset regime, just that it will take place during 2018 and will consider whether there is an economic case for updates to the regime, so that it better supports UK companies investing in intellectual property. The changes announced are consistent with the general direction of travel of UK tax law over recent years, addressing the potential for tax inconsistencies in related party transactions relative to the underlying economics. Despite the way the changes were announced by HMRC, it is the change to the meaning of proceeds of realisation which ensures that related party step up schemes no longer lead to a one-sided tax result in the case of both transfers and licences of intangible fixed assets. The introduction of a market value rule for licences sits alongside the rule that has always been in place for related party transfers of assets, although, as currently drafted, there are some notable differences. The announcement of the consultation on the taxation of intellectual property is likely to be well received, as it is recognised that certain aspects of the intangible fixed asset regime are potentially outdated and that the changes to the treatment of goodwill and customer intangibles in 2015 may need reconsideration. The consultation into the regime is expected to focus on whether certain targeted changes to the regime could be made, such that the regime continues to encourage growth. 12
Business taxes and administration Double taxation relief: Permanent establishment losses From 22 November 2017, amendments will be made to the double taxation relief (DTR) legislation to restrict the amount of DTR available to a UK company for foreign tax paid on income of an overseas permanent establishment (PE) with losses. The DTR legislation provides credit relief for foreign tax paid on a company s qualifying income from a PE against corporation tax on the income. The changes will amend the DTR legislation to limit the amount of DTR available to a company for foreign tax paid on income of an overseas PE where losses of the PE have been relieved against income other than those of the PE in the foreign territory. The amount of DTR available will be determined by reference to the amount of foreign tax suffered by the overseas PE, less the amount of the reduction in foreign tax which results from the PE s losses being relieved against non PE profits in the foreign territory in the same or earlier periods. The measure affects companies with an overseas PE where the losses of the PE have been relieved against non-pe profits in the foreign jurisdiction. For companies with an accounting period that straddles 22 November 2017, the transitional rules will apply which may lead to computational complexities. Double taxation relief: Changes to targeted anti-avoidance rules The Government announced that two changes will be made to the double taxation relief targeted anti-avoidance rule (DTR TAAR). The DTR TAAR is an anti avoidance rule which applies if there is a scheme or arrangement where the main purpose or one of the main purposes is to obtain a credit for foreign tax and the scheme is a prescribed scheme that meets one or more of the descriptions as set out in the legislation. Where it applies, the existing legislation requires HMRC to issue a counteraction notice requiring the taxpayer to make such adjustments necessary to counteract the effect of the scheme. The first change removes the requirement for HMRC to issue a counteraction notice before the DTR TAAR applies and will have effect for returns with a filing date on or after 1 April 2018. The second change extends the scope of one of the categories of prescribed schemes to which the DTR TAAR applies to include tax payable by any connected persons. This change will have effect for payments of foreign tax made on or after 22 November 2017. The removal of the requirement for the counteraction notice will require companies to consider whether the DTR TAAR applies as part of the self-assessment process and aligns the DTR TAAR with more recent TAARs that do not include requirements for counteraction notices. The second change slightly widens the scope of schemes or arrangements to which the DTR TAAR can apply and businesses will need to look at the rules as applied to their facts to ensure that they take action where appropriate. Removal of time limit for depreciatory transactions The six year window that currently operates to determine whether a company, whose shares are being sold, has undertaken any depreciatory transaction, is being abolished for disposals on or after Budget day. Capital losses arising on the sale of shares can be reduced or eliminated if the company or group being sold has undertaken any depreciatory transactions within the previous six years, broadly any transaction with other group companies that result in a loss in its value, for instances transfers of assets at below market value. This six year time limit is being abolished for disposals on or after Budget day, reversing a change originally introduced in 2011. The need to consider depreciatory transactions can be a considerable compliance burden when calculating a capital loss arising on a disposal of shares (or on a negligible value claim), as potentially there is a need to examine every asset transfer in the underlying group being sold, whether arising in a UK or non UK company. The 2011 restriction to six years provided welcome relief to this, so whilst the Government s intention to tackle potential tax avoidance can be understood, in the vast majority of cases this rule simply increases an already onerous compliance burden. Postponed gains on foreign branch incorporations The Government has corrected an anomaly under which chargeable gains that have been deferred on the incorporation of a foreign trading branch can be brought back into charge on a subsequent reorganisation, even though the reorganisation itself may be tax exempt. Chargeable gains deferred on the incorporation of a foreign trading branch are brought into tax if there is a subsequent disposal of the subsidiary company s shares. Where those shares are subject to a further reorganisation this generally does not count as a disposal for these purposes. However where this reorganisation would also qualify as an exempt disposal under the substantial shareholdings exemption then this takes precedence over the reorganisation rules. The way the rules are currently drafted means that such a transaction is then viewed as a disposal for tax purposes, leading to the crystallisation of the deferred 13