Budget 2016 – Corporation Tax

George Osborne announced that today’s Budget was “a Budget which gets rid of loopholes for multinationals and gets rid of tax for small businesses”.

With that leading statement he introduced a number of surprise measures for the corporation tax system;

Corporation Tax cut again to 17% in 2020

Between 2010 and 2015 the main rate of Corporation Tax has been cut from 28% to 20%.  It was set to decrease to 18% from 1 April 2020 but the Chancellor produced a small “rabbit” from his hat today and announced that it will instead decrease to 17% in 2020.

Corporation tax: tightening up on multinationals

The government has published a policy paper setting out its plans for a Business Tax road map.  The Chancellor announced today that this is a new approach to business tax which will tackle avoidance issues relating to multinational corporations, including interest deductibility, hybrid mismatches, and withholding tax on overseas royalty payments.

He noted that some large companies use excessive interest payments to reduce the tax they pay on their profits in the UK. Relief on interest payments will now be capped at 30% of UK earnings, with exceptions for groups with legitimately high interest payments. There will be a group de minimis threshold of £2m of net UK interest expense, so the change will affect only those companies with the largest amount of borrowings.

Rules will also be clarified to ensure that offshore property developers are taxed on their UK profits.  In addition the Substantial Shareholdings Exemption (SSE) will be reviewed.

A particular measure on “anti hybrids” was introduced.  This applies to large multinational groups with UK parent or subsidiary companies involved in cross-border or domestic transactions where there is a “mismatch” in the tax treatment within the UK or between the UK and another jurisdiction. Such mismatches can involve either double deductions for the same expense, or deductions for an expense without any corresponding receipt being taxable, thereby leading to a tax advantage.  The measure aims to encourage businesses to use less complicated cross-border structures by eliminating the tax advantages currently available on mismatches.

Loss relief flexibility…and restrictions

George Osborne also announced that the treatment of corporate tax losses will also be modernised, so that they can be used more flexibly.

For losses incurred on or after 1 April 2017, businesses will be able to use carried forward losses against profits from other income streams or from other companies within a group.  This adds a great deal of flexibility to the system.  However, the quid pro quo for such flexibility is that large companies (those with profits over £5 million) will only be able to use brought forward losses against 50% of their profits generated each year, to ensure that they continue to pay some amount of tax.  The majority of companies will be unaffected by this restriction.

Consultation on the design of the reforms will take place in 2016 and will be legislated in 2017.

For banks, there is already a 50% loss restriction in force and this will be further reduced to 25%.

Increase in tax on “loans to participators”

A big surprise was the change to the rate of tax charged on loans made by close companies to their “participators” (essentially by owner managed businesses to their owners / by director controlled businesses to their directors).  This tax is known as “Section 455” tax and has been charged at the rate of 25% of the outstanding loan balance at the year end, if the loan is not repaid within 9 months.  The rate of s.455 tax will now increase to 32.5% from 1 April 2016.  There is method to this measure, as it ensures that the s.455 tax rate matches the new dividend tax rate for higher rate taxpayers  – so means that it will not be cheaper to take a company loan than to take a dividend.

The new rates will apply to loans made by close companies on or after 6 April 2016. For accounting periods which straddle 6 April 2016 different rates will be applied to separate loans made before, and on or after, 6 April 2016.

Quarterly Tax instalments for the “largest” companies

In last year’s budget, the government announced that corporation tax payment dates for the largest companies – those with profits in excess of £20 million – would be brought forward so payment dates fall into the third, sixth, ninth and twelfth months of their accounting period.  These new quarterly instalment dates will now be deferred and will only apply to accounting periods starting on or after 1 April 2019.  This will give affected businesses more time to prepare for the transition to the new payment schedule.

 

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Nov 25

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