UK Budget 2016: Key Implications for Financial Services
On Wednesday March 16, 2016, George Osborne delivered his eighth budget as the U.K.’s Chancellor of the Exchequer, which included a number of announcements that will be relevant to the financial services industry.
- Corporation tax: The current corporation tax rate of 20 percent, will be reduced to 19 percent from April 1, 2017. From April 1, 2020, the rate will now reduce to 17 percent (it was previously set to reduce to 18 percent from that date).
- Capital gains tax: The higher rate of capital gains tax will be reduced from 28 percent to 20 percent (and the basic rate from 18 percent to 10 percent), effective for chargeable gains accruing on or after April 6, 2016. The reduced rates will not apply to disposals of residential property or carried interest.
- Corporation tax on loans to participators: The rate of tax chargeable on loans made by close companies to their participators will increase from 25 percent to 32.5 percent.
- Stamp duty land tax (SDLT) rate changes for commercial and mixed property: With effect from March 17, 2016 (subject to transitional rules), the “slab” SDLT regime applicable to non-residential and mixed property will be replaced by a “slice” system (similar to that levied on residential property). This will result in a higher SDLT cost for purchases over £1,050,000.
- Oil tax: The rate of the supplementary charge will be reduced from 20 percent to 10 percent for accounting periods beginning on and after January 1, 2016. The rate of petroleum revenue tax is to be reduced to zero for chargeable periods ending after 31 December 31, 2015.
Fixed ratio cap on deductibility of interest
The U.K. will introduce a fixed ratio rule to limit corporation tax deductions for net interest expenses to 30 percent of a group’s U.K. Earnings Before Income Taxes Depreciation and Amortization (EBITDA). In addition, the U.K. will implement a group ratio rule based on the net interest to EBITDA ratio of the worldwide group. A de minimis group threshold of £2 million net of U.K. interest expenses will be included to avoid smaller groups being affected by the changes.
These rules will apply from April 2017 and will replace the existing worldwide debt cap rules. Further consultation on the design of these rules will follow.
Reform of corporation tax losses
The Government will consult on the following proposed changes to the treatment of corporation tax losses, which would be effective from April 1, 2017:
- allow corporation tax losses to be carried forward and set against profits from other income streams generated both by the loss-making company and by other companies within the same group (currently, a company’s brought forward U.K. tax losses can only be used against certain profits of the company and cannot be transferred to other companies in the same group); and
- limit relief for carried forward corporation tax losses to 50 percent of the profits of a company or group in excess of £5 million.
Base erosion and profit shifting (BEPS)
It was confirmed that the U.K. will legislate to implement the OECD’s BEPS proposals including:
- anti-hybrid mismatch rules, extended to cover hybrid mismatches arising from permanent establishments, which will come into effect from January 1, 2017; and
- modification of the U.K.’s Patent Box regime
The Government is also involved in developing the multilateral instrument to allow double tax treaties to be updated to take into account the BEPS recommendations and expects this instrument to be finalized by the end of 2016.
Extension of withholding tax on royalties
The Government will change the current withholding tax regime to bring all international royalty payments arising in the U.K. within the charge to U.K. income tax with effect from Royal Assent to the Finance Bill 2016. This will not apply if the U.K.’s taxing rights have been given up under a double tax agreement or the EU Interest and Royalties Directive. Other changes to the U.K.’s tax treatment of royalties will be to include a domestic anti-treaty abuse provision to prevent royalty payments being paid to tax havens without deduction of tax at source (with effect for payments made under tax avoidance arrangements from March 17, 2016).
Lifetime limits on employee shareholder status (ESS) exemption
The Government has announced a lifetime limit of £100,000 on gains which are exempt under the ESS regime. This will apply only to gains arising from disposals of shares acquired under employee shareholder agreements entered into from midnight on March 16, 2016.
Entrepreneurs’ relief has been extended to gains accruing on the disposal of ordinary shares in unlisted trading companies that were newly issued and purchased on or after March 17, 2016 and have been held for at least three years starting from April 6, 2016. This will be subject to a lifetime limit of £10 million of gains (which is separate from the existing £10 million limit for gains already qualifying for entrepreneurs’ relief).
Further changes will also be made to entrepreneurs’ relief to apply and/or extend its application as follows:
- a former partner incorporating an existing business will, subject to certain conditions, be entitled to claim entrepreneurs’ relief in relation to the goodwill of that business;
- entrepreneurs’ relief will be able to be claimed in some cases involving joint ventures and partnerships where the disposal of business assets does not meet the existing 5 percent holding conditions.
Taxation of non-domiciled individuals
The government has announced that the Finance Bill 2017 will legislate for a number of reforms to the taxation of non-U.K. domiciled individuals from April 2017. These measures will include the ability for individuals who become deemed domiciled under the new 15 out of 20 year rule to rebase the value of their non-U.K. assets as at April 6, 2017. Also, individuals who become deemed U.K. domiciled under the 15 out of 20 year rule will be subject to transitional provisions relating to offshore funds.
“Income-based carried interest” rules finalised
The rules to determine when asset managers pay capital gains tax rather than income tax on their carried interest have been finalized and will be included in the Finance Bill 2016. As previously announced, carried interest will be charged fully to income tax (rather than capital gains tax) unless the relevant fund holds its investments, on average, for more than three years.
Non-residents’ profits from trading in and developing U.K. land
Finance Bill 2016 will include measures to ensure that profits arising to non-U.K. residents from trading in or developing U.K. real estate are fully taxable in the U.K. (irrespective of whether the activity is carried on through a U.K. permanent establishment). A number of anti-avoidance rules will be introduced alongside this measure, including a targeted anti-avoidance rule (with effect from March 16, 2016) to prevent any attempt to rebase the land estate ahead of the new rules being implemented.
Publication of tax strategies and special measure regime
Following consultation, the draft Finance Bill 2016 legislation is being amended to include: (1) a requirement for large businesses to publish an annual tax strategy; and (2) a “special measures” regime which is aimed at businesses with an ongoing history of aggressive tax planning and/or refusing to engage with HM Revenue and Customs.
- Consultation on partnership taxation: The government will consult further this year on the taxation of partnerships. This consultation will focus on a number of issues, including the possibility of allowing partners to make personal claims for their allowable expenses from their share of partnership profits and the need to make express provision for partnerships in the U.K.’s double taxation treaties.
- Substantial shareholdings exemption (SSE): The government will consult on possible reform to the SSE. This consultation will consider whether changes could be made to increase its simplicity, coherence and international competitiveness.
- Review of double tax treaty passport scheme: The government will consult later this year on whether the U.K.’s double tax treaty passport scheme should be revised, including, in particular, whether the scheme should be extended to cover a wider range of investors such as sovereign wealth funds and partnerships.
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