On November 22, Philip Hammond delivered his second budget as Chancellor of the Exchequer, against a backdrop of falling growth figures and increasingly tense Brexit negotiations.
The number one request from businesses was for certainty and stability. In the main, the Chancellor delivered. The key theme that ‘the government was looking to the future’ was repeated throughout, with policies focusing on the opportunities ahead, further innovation and investment in the UK. Investment in research and development, the digital economy and driverless cars were all prominently featured. However, there were few giveaways, except for younger voters who saw stamp duty cuts for first time buyers, and the extension of the young persons’ railcard.
In partial response to the ‘Paradise Papers’, a 37-page document was published detailing more than 100 measures the government has taken since Summer 2010 to tackle tax avoidance, evasion and non-compliance. Notable recent measures have included the increase of sanctions and deterrents for enablers of tax evasion and businesses who do not take reasonable care to prevent facilitation of tax evasion.
The government announced they will publish a new long-term strategy to ensure the continued benefit of the UK asset management industry to investors and the UK economy. This is particularly welcome considering the wide-ranging tax changes such as Disguised Investment Management Fees, carried interest rules and regulatory changes such as MiFID II. All of which have had and will have sizeable impact on asset management firms. The focus of this strategy will be on skills, harnessing financial technology solutions, mainstreaming innovative investment strategies and international engagement rather than easing any tax burden.
Further detail of the legislative changes will be in Finance Bill 2017 – 2018. This is due to be released on December 1, 2017.
A summary of the key tax proposals as they impact the asset management and wider financial services industries can be found below.
In a clear signal to business and inward investment, the government maintained its pledge to operate a low corporate tax base. Corporation tax rates will remain at 19% for 2018/19 and 2019/2020, falling to 17% for the year starting April 1, 2020.
The indexation allowance will be frozen on corporate chargeable gains for disposals on and after 1 January 2018. The allowance for subsequent disposals will be frozen at the amount that would be due based on the Retail Price Index for December 2017. This has been undertaken to reduce the differences between personal and corporate tax rates, and could have a material impact on the calculation of future chargeable gains accruing to companies.
Corporate Interest Restrictions
From April 1, 2017, the UK introduced the corporate interest restriction (CIR) rules to limit tax deductions for interest expense and other similar financing costs. The CIR rules impacted large businesses within the charge to corporation tax which incur net interest expense above £2m per annum. The aim of the CIR rules was to align deductions with the economic activities undertaken in the UK.
It was announced in the Autumn Budget that legislation will be introduced in Finance Bill 2017-18 and Finance Bill 2018-19 to make technical amendments to ensure the rules operate as intended.
Amendments will be made to:
Some of these amendments are treated as having effect from April 1, 2017 when the CIR rules commenced. The remainder of the amendments have effect from January 1, 2018.
The government announced a package of changes to the hybrid and other mismatches regimes introduced by Finance Act 2016. Legislation will be introduced in Finance Bill 2017-18 to:
- Amend the definition of ‘tax’ to make it clear that withholding taxes and taxes charged at a nil rate are to be ignored
Ensure that capital taxes can be taken into account in relation to hybrid instruments, hybrid transfers and CFCs
Clarify the treatment of entities which are seen as hybrids by some investors, but as transparent by others
Clarify the scope of the legislation in relation to multinational companies
Take account of certain transactions which do not generate a tax deduction for the payer, but give rise to a taxable receipt for the payee
Confirm that dual inclusion income can be taken into account when applying the imported mismatch rules
- Consider certain accounting adjustments which effectively reverse, or partially reverse, hybrid mismatches in earlier periods
Both the changes in relation to taxes charged at a nil rate and the change in relation to multinational companies will have effect from January 1, 2018. The remaining changes will have effect from January 1, 2017, which was the original commencement date of the regime.
The government announced a measure to give full effect for the provisions of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (BEPS) which it signed on June 7, 2017. The BEPS project included several recommendations for changes to double taxation agreements (DTAs). These included minimum standards agreed by countries participating in the BEPS project in relation to preventing treaty abuse and improving dispute resolution. To ensure that these changes are made to DTAs as soon as possible, a group of over 100 jurisdictions together agreed upon a Multilateral Instrument (MLI). The text of the MLI was adopted in November 2016 and has now been signed by over 70 countries, including the UK. The measure will take effect on the date of Royal Assent to Finance Bill 2017-18.
Additionally, from November 22, 2017 new rules have been introduced that seek to limit the amount of double taxation relief available to a UK company with an overseas permanent establishment (PE) for foreign tax paid on income where losses from that PE have been relieved against income not arising from that PE. Where applicable, the interaction of these rules with the complex hybrid rules should be considered.
The government maintained its strong stance on tax avoidance highlighting its track record. In terms of results the tax gap, the difference between what is owed and what is paid, is now 6% which is the lowest on record and one of the lowest globally. The government also announced that they will continue to take forward the consultation on the proposed requirement for designers of offshore structures that could be used to evade taxes, to notify HMRC of the structures and their users and to consult to extend assessment time limits for non-deliberate offshore tax non-compliance to 12 years which is a huge extension of HMRC powers.
The government published a position paper in which it recognises the benefits of the digital economy and is committed to supporting the continued growth and success of the UK tech sector. However, it also recognises that it is essential for international corporate tax rules to ensure that their UK corporation tax payments are commensurate with the value they generate from the UK market and specifically the participation of UK users. The paper sets out how the government intends to change this whilst also introducing some immediate changes to current legislation.
In term of immediate changes, online marketplaces will be held jointly and severely liable for future unpaid VAT of a UK business from sales of goods originating from that UK online marketplace. Furthermore, the relevant online marketplaces are all required to display a valid VAT number on their platform for all their sellers, and ensuring that their website displays a valid VAT number. These measures will be effective following Royal Assent to Finance Bill 2017-18.
Additionally, royalty payments made to low tax jurisdictions in relation to sales to UK customers will incur withholding tax at income tax rates from April 2019. As a result, multinationals with UK based customers will need to review their internal pricing arrangements for such royalty payments.
Research & Development (R&D)
As part of an overall focus on innovation, and to increase the amount of Research and Development (R&D) undertaken in the UK, the R&D tax credit for large companies will increase from 11% to 12%, having effect for expenditure incurred on or after 1 January 2018. R&D relief for companies that are small and medium enterprises has not been impacted and continues to be extremely valuable.
Making Tax Digital (MTD)
As previously announced in July and legislated for in the Finance (No. 2) Act 2017, no business will be mandated to use MTD until April 2019. Only those with turnover above the VAT threshold will be required to use MTD at that point, and even then, only in respect of VAT obligations.
Venture Capital Trust (VCT) and Enterprise Investment Scheme (EIS)
As part of the policy to unlock patient capital investment, the annual investment that knowledge-intensive companies can receive through the EIS and VCT scheme has been doubled to £10m. This doubling of benefit has also been made available to individual investors, whereby up to £2m can be invested by an individual in an EIS, provided the additional £1m is invested in a knowledge-intensive company.
In light of some abuse of the tax relief available through EIS or VCTs, Finance Bill 2017 - 2018 will include a new ‘risk to capital’ test, which will make sure the investee company is a genuine growth company and there is a serious risk of investors losing money.
Capital Gains Tax: non-UK residents (CGT)
The government have released a consultation as to the tax treatment of gains accruing on disposals of interests in UK immovable property by non-residents. The new measures target certain disposals of UK property, which have been so far escaping capital gain charges and intend to expand the tax base of both the corporation tax and the capital gains regimes.
Under the current CGT regime, the disposal of non-residential property by non-residents is not chargeable to capital gains tax. From April 2019, tax will be charged on gains made by non-residents on disposals of all types of UK immovable property, such as offices, factories, warehouses, shops, hotels, leisure facilities, and agricultural land located in the UK.
The government has announced further legislation necessary to implement the package of changes announced at Budget 2016 to tackle existing and prevent future use of disguised remuneration (DR) avoidance schemes. A technical note detailing this change and other changes to the DR rules will be published on 1 December 2017.
Legislation will be introduced in Finance Bill 2017-18 to:
These further developments come only a week after the first raft of proposals were given Royal Assent on November 16, 2017.
Capital Gains Tax: carried interest
With immediate effect, the government has removed transitional rules in relation to the carried interest legislation which took effect from July 8, 2015. The transitional rules relate to:
- The exclusion of carried interest arising to an investment manager on or after July 8, 2015 in connection with a disposal of partnership assets before that date
- The application of provisions in the disguised investment management fee rules which determine the time at which amounts of carried interest arise to a manager, including where the right to carried interest has been assigned to someone else
The government’s stated aim is to make the tax system fairer by preventing the limited transitional exceptions provided in the commencement provisions for the carried interest rules from being manipulated to unfairly reduce the tax payable in circumstances not intended by the original legislation.
Income and NICs
The personal allowance will be increased from £11,500 to £11,850 in 2018/19, whilst the basic rate limit will increase from £33,500 to £34,500 in 2018/19. Dividend rates remain unchanged however the dividend allowance will drop from £5,000 to £2,000 in 2018/19.
Furthermore, as previously reported, the NICs Bill will be introduced in 2018 but will come into effect a year later than expected in April 2019. This includes the abolition of Class 2 NICs and reforms to the NICs treatment of termination payments.
Stamp Duty Land Tax (SDLT)
From November 22, 2017, first-time buyers will no longer pay SDLT on homes costing up to £300,000. To ensure that this relief also helps first time buyers in expensive areas, it will also be available on the first £300,000 of a home up to £500,000. They will pay the existing rates of SDLT on the price above that.
An individual who has never owned an interest in a residential property in the UK or anywhere else in the world will be considered a first-time buyer.
Not mentioned in the budget but forming part of Finance Bill 2017 - 2018 are the anti-avoidance rules to ensure that benefits provided to close family members of UK resident settlors are taxed as if they were received by the settlor. Additionally, a trust distribution made to a beneficiary who does not pay UK tax but who later makes an onward gift to a UK resident will give rise to a tax liability on the UK resident.
A consultation will be published in 2018 to simplify the taxation of trusts and generally make the taxation regime for trusts fairer and more transparent.