No increase in corporation tax rates in Autumn Statement, anti-avoidance dominates measures announced

Out-Law News | 05 Dec 2013 | 5:34 pm | 4 min. read

There will be no increase in corporation tax rates, Chancellor George Osborne announced in his Autumn Statement today. The majority of the corporate tax measures that were announced were in the field of anti-avoidance. 

New or improved tax reliefs were proposed in the field of film and theatre productions and a new onshore allowance in the UK oil and gas fiscal regime was announced.

In the field of partnerships, the Government has recently been consulting on the use of corporate members in partnerships to get tax advantages. According to HMRC's announcement the changes to these rules "make the tax system fairer by preventing tax-motivated allocations of business profits and losses in mixed membership partnerships, including Limited Liability Partnerships". The changes will take effect from 6 April 2014 with the exception of anti-avoidance rules concerning tax-motivated profit allocations which will come into force from 5 December 2013.

"The original plan was for the changes to take effect from 6 April 2014," said Eloise Walker, tax expert at Pinsent Masons, the law firm behind Out-Law.com. "Now, however, the anti-avoidance rules around tax-motivated profit diversion will instead come into effect on 5 December, which is pretty shocking from a public policy and legitimate taxpayer expectation perspective - although maybe not so unsurprising given HMRC's fixation on tax revenues at the moment."

The four other corporate tax avoidance measures announced were "specific and very technical", according to Heather Self, tax expert at Pinsent Masons, the law firm behind Out-Law.com. "None of these is a significant revenue-raiser: the main focus is on clarifying existing rules or closing down specific schemes," she said.

The first measure involves the debt cap which prevents UK members of large groups from deducting finance costs in excess of the external amount borne by the world-wide group. A technical change will ensure that entities without ordinary share capital will still be included in the group, ensuring that the group cannot be broken artificially.

The group mismatch rules will also be tightened, to prevent a deduction for a payment under a total return swap where the corresponding income is not taxed in a related entity. Changes will be made to the rules for double tax relief, to ensure that UK credit is only given where foreign tax has been paid. The changes apply to credits on loan relationships or intangible assets, and to arrangements where a repayment by a foreign tax authority is made to a person other than the taxpayer.

The last corporate tax anti-avoidance measure relates to the calculation of the "Finance Company Partial Exemption" (FCPE) in the Controlled Foreign Company rules. This allows an offshore finance company to reduce its effective tax rate to 5% from 2015 where its income arises from qualifying loans, which broadly means loans to overseas trading companies.

Loans will not qualify for FCPE, and so will be fully taxed, where there are arrangements with a main purpose of transferring profits from existing lending out of the UK. For example if a UK company has lent £100m to its US subsidiary, and that loan is then transferred to an offshore finance company in exchange for shares, the profits on the loan will continue to be fully taxable in the UK. There is a further change which applies to loans used to refinance third party non-UK debt with UK debt.

Self said that "the FCPE was a relatively generous relief provided within the new CFC rules, and fears had been expressed that it might be exploited. However, it was intended, according to HMRC, to be a competitive and pragmatic approach by the Government to the issues raised by the fungibility of monetary assets, avoiding the need for complex tracing rules. Introducing an anti-avoidance rule which requires the purpose of each loan to be examined takes away much of the pragmatism of the original measure".

"It is reassuring that there have been no more radical changes to the taxation of interest, particularly following the review of the taxation of financial instruments earlier this year, but it is likely that the Chancellor will return to this topic within the next 12 to 18 months, once the OECD BEPS [Base Erosion and Profit-Shifting] project has reached its conclusions," said Self.

Self said that "a sensible improvement will be made to the targeted anti-avoidance rules relating to the carry forward of corporation tax losses".

For many years, there have been rules preventing the carry-forward of corporation tax losses where there is both a change of ownership and a major change in the activities of the company, within a three-year period. Today's announcement confirmed that the rules are to be relaxed in two ways: firstly, by allowing a holding company to be inserted at the top of a group of companies, and secondly by relaxing the definition of a "significant increase in capital".

Under the current rules, a company with investment business, such as an insurance company, automatically falls within the anti-avoidance rules if it has a change in ownership and its capital increases by £1million. The limit will be changed to the higher of £1million and 25% of the previous capital.

There will also be improvements to the Film Tax Relief regime which provides film production companies with corporation tax relief for its expenditure if certain conditions are met. This will be subject to State aid approval, from April 2014.

The rate of the film tax credit for surrenderable losses will be increased to 25% on the first £20 million of qualifying core expenditure, subject to a maximum of 80% of qualifying core expenditure, and 20% thereafter, to a maximum of 80% qualifying core expenditure. The minimum UK expenditure qualification will also reduce from 25% to 10%.

A consultation will also be launched in Spring 2014 on the introduction of a limited corporation tax relief for commercial theatre productions and a targeted relief for theatres investing in new writings or touring productions to regional theatres.

A new onshore allowance was also announced in the UK oil and gas fiscal regime which reduces the amount of adjusted ring fence profits subject to the supplementary charge and means that companies can start generating entitlement to relief on any site authorised for development from today.

Tom Cartwright, tax expert at Pinsent Masons, said that "this is a key incentive to encourage offshore licensees to move into exploration and development of unconventional gas. Many of the industry's concerns have been listened to in framing the new onshore allowance, which will apply to all onshore extractive activities, not just unconventional gas. In particular, the ability to transfer allowances by reference to capital expenditure incurred on sites which are unsuccessful will be welcomed. The definition of what constitutes capital expenditure by reference to which the onshore allowance is given is more generous than may have been anticipated."