Spring Budget 2017: Corporate and Business Tax
As far as corporate and business tax is concerned, the most significant measures – the cap on interest relief for corporate borrowing and the changes to the corporation tax loss regime – were those that had already been announced. No change was announced to the downward trajectory of Corporation Tax rates, although the cost of these to the Exchequer will be mitigated somewhat by the changes referred to above.
Making Tax Digital
The Chancellor announced that the introduction of quarterly reporting under the Making Tax Digital regime will be delayed by one year for businesses with turnover below the VAT threshold, currently £83,000, meaning these small businesses will not begin quarterly reporting until April 2019.
Delaying quarterly reporting for some businesses is a welcome outcome and will allow more time for some businesses to prepare. Many unincorporated businesses will still, however, come into the regime from next April.
The Chancellor has announced that the threshold for unincorporated businesses to use cash accounting will increase to £150,000. This regime will also be extended to unincorporated landlords, and there will be various further simplifications to the rules for tax deductible expenditure.
These measures will be welcomed by a number of self-employed individuals, partnership businesses, and those with rental portfolios from 6 April 2017, and may make the introduction of Making Tax Digital slightly less burdensome.
Research and development (R&D) tax review
The Chancellor has announced that the Government will make changes to the administration relating to R&D tax credits, following a review of the tax environment for R&D. It is suggested that this will increase the certainty and simplicity around claims.
It is clear that the government believes that our current system for R&D is generous enough in terms of tax relief.
For SMEs, tax relief is available at a rate of 230% of the qualifying spend on R&D. So, for example, if a company spends £50,000 on qualifying R&D it will be entitled to a corporation tax deduction of £115,000.
There was hope that the scope of R&D would be expanded, but this does not appear to be on the immediate agenda. However, any simplification to the administration of the relief will be most welcome as it will help contain the costs of making a claim.
Patient capital review
The Chancellor has announced a review of “patient capital”, which will aim to ensure that high growth businesses can access the long-term capital that they need to fund productivity-enhancing investment.
While it is not certain where this review will go, it is clear that there is a perception that equity investors in businesses are looking for a relatively short-term return on their investment. That is certainly the case with private equity investment. Reliefs such as EIS and SEIS, which are designed to encourage equity investment, have a three-year qualifying period, and often the investors will be looking for an exit shortly after that period has ended.
Businesses often need longer-term investors, and perhaps this review will lead to a new tax incentive to attract them.
Clarification of share conversion rights for EIS and SEIS
The EIS and SEIS implications of converting from one class of shares to another will be amended for shares issued on or after 5 December 2016.
EIS and SEIS are attractive tax incentives, but are riddled with complex provisions designed to prevent perceived abuses. Often, the rules give difficulties with actions that are contemplated for purely commercial reasons. Share conversions is one such area, so any relaxation of the rules relating to this is welcomed.
Withholding tax on interest
A consultation has been announced, to start on 20 March, on the further simplification of the withholding tax regime for payments of interest to overseas lenders. The proposals will include the renewal and extension of the Double Taxation Treaty passport scheme, which circumvents much of the bureaucracy relating to the use of reduced (or possibly zero) rates provided for in particular tax. The consultation will also consider exemption from withholding tax altogether for interest on debt traded on a Multilateral Trading Facility (MTF).
Removing the requirement for borrowers to account for withholding tax on MTF traded debt instruments will assist further development in the UK debt market, and is to be welcomed.
Below is a summary of the measures previously announced:
Corporation Tax rates
The main rate for the current financial year (2016) is 20%, and this will reduce to 19% for the years 2017 to 2019, and to 17% for 2020.
If the US reduces its rate to 15%, it is possible that the UK will follow suit to keep our status as competitive with the G20 group of countries.
Reform of Substantial Shareholdings Exemption (SSE)
New rules will be introduced from 1 April 2017 to improve and simplify the Substantial Shareholdings Exemption, which provides an exemption from Corporation Tax where one company sells shares in another.
The changes to this relief from 1 April 2017 are:
- The availability of the relief will no longer depend on whether the company making the disposal (or its group) is “trading”;
- It will now be easier for a company to qualify for the relief when they sell their shareholding in multiple tranches;
- It will no longer matter whether the company whose shares are being sold is “trading” immediately after disposal;
- There will be a broader exemption for companies owned by qualifying institutional investors.
Tax deductibility of corporate interest expense and reform of loss relief
There will be a major change to the way in which UK resident companies obtain tax relief for interest expense from 1 April 2017.
Companies and groups affected by the change will be those incurring annual net interest expense (interest expense less interest income) over £2 million. Broadly, the restrictions will allow all groups to deduct up to £2 million of “aggregate net tax-interest expense”. Beyond the £2 million de-minimis, the rules allow for an aggregate deduction for the group at a percentage of profits before interest, tax and depreciation. The percentage is the higher of 30%, and the proportion that the worldwide group interest expense bears to the group profit.
Losses of whatever category arising from 1 April 2017, and carried forward to subsequent accounting periods, will be available for offset against the total taxable profits of the loss-making company and members of the same 75% group. The quid pro quo is that, to the extent that the total profits of the company or group exceed £5 million in an accounting period, losses can only be set against 50% of the excess, leaving the remaining 50% in charge to tax.
Losses accumulated at 31 March 2017 will not benefit from the increased flexibility of setoff so, for example, “old” trading losses can only be set against future profits arising from the same trade. Such losses will, however, be subject to the £5 million annual “allowance” described above.
The legislation does not affect the treatment of capital losses.
Patent Box rules
Changes will be made to the Patent Box rules for accounting periods commencing on or after 1 April 2017. These will cover situations where the associated Research and Development was undertaken by two or more companies under a ‘cost-sharing agreement’, and will ensure that companies participating in such arrangements are neither penalised nor advantaged by such arrangements.