Out-Law News | 19 Mar 2014 | 5:17 pm | 4 min. read
A new anti-avoidance rule will be introduced in this year's Finance Bill to prevent companies from obtaining a corporation tax advantage by transferring profits between companies within a group. The legislation will provide that where, as part of tax avoidance arrangements, a company transfers all or a significant part of its profits to another group member, then the company’s profits will be taxed as though the transfer had not occurred. These changes will have effect for any transfer of profits made on or after 19 March 2014.
“The key problem with this new anti-avoidance rule is that whilst the initial target is a specific avoidance scheme HMRC are wielding a very very big hammer to crack a very small nut – the rule is ridiculously wide in its drafting, and the explanatory rules are then full of commercial arrangements which “mostly” shouldn’t be caught – not only is this an example of legislation gone mad, they don’t seem to have thought through any implications such as how this is to interact with the transfer pricing rules” said Eloise Walker, tax expert at Pinsent Masons, the law firm behind Out-Law.com.
“This has certainly come from left field. Given that HMRC has been bending over backwards in recent years to encourage groups to engage in as much de facto fiscal consolidation as the separate entity rule will allow – group relief, intra-group no gain/no loss transfers and group payments arrangements being but three long-standing examples - this looks like an interesting volte-face: at first glance it looks ridiculously wide, and likely to catch any number of commercial scenarios,” she said.
In the arena of loan relationships and derivative contracts, following consultation, the Government will shortly issue a technical note setting out proposed changes which are aimed at making the corporation tax rules on loan relationships and derivative contracts "simpler, more certain and more robust against avoidance". Legislation, previously intended for inclusion in Finance Bill 2014, to clarify and rationalise the taxation of loan relationships and derivative contracts held by a partnership will now be deferred to 2015.
In the arena of international tax avoidance and the BEPS (Base Erosion and Profit Shifting) project, the Government has published a detailed summary of its priorities as part of Budget 2014 and it has shown its clear support for the work of the OECD in tackling international tax avoidance.
"The Government has resisted the temptation to make major changes to transfer pricing or other international tax rules," said Heather Self, tax expert at Pinsent Masons. "Instead, it has set out in detail its support for the OECD's work on tackling aggressive tax planning in the global economy, recognising that global problems need multinational solutions. But it is clear that major changes to international tax rules are in the pipeline, including measures on further transparency (country-by-country reporting) and dealing with the problem of complex structures which escape tax altogether."
"The UK's response to the OECD proposals on CFCs and on interest deductibility can best be described as "smug", with the UK not seeing a need for further major change. However, there is a worrying hint that they may weaken this view on interest, with a comment that the UK "looks forward" to the identification of best practice in relation to interest," she said.
Today's Budget also introduced further support for the North Sea's oil and gas industry with the Chancellor confirming that the Government would "take forward all recommendations of the Wood report. And we will review the whole tax regime to make sure it is fit for the purpose of extracting every drop of oil we can".
Amongst the proposed package of measures is the introduction (in Finance Bill 2015, following a period of consultation) of a new ultra high pressure high temperature cluster allowance to replace the existing ultra high pressure high temperature field allowance. The allowance will remove an amount equal to at least 62.5 per cent of qualifying capital expenditure incurred by a company from its adjusted ring fence profits for the purposes of supplementary charge.
"The Chancellor's announcement of a wholesale review of the tax regime for the UK Continental Shelf in support of the recommendations of the Wood Review has the potential to be a game changer," said Tom Cartwright, tax expert at Pinsent Masons. "Government policy has to date been inconsistent for the North Sea and it has to be hoped that this will provide the basis to encourage investment. The announcement of a new ultra-high pressure, high temperature allowance continues Government policy to encourage development of more difficult fields, to ensure reserves are not left untapped"
However, sounding a note of caution, he added that "the announcement that the controversial tax changes to Bareboat Chartering arrangements which were proposed in Autumn Statement 2013 will dismay many in the industry. It is to be welcomed that many vessels will now be excluded from the rules, but the continued application to drilling rigs could impact their availability in the North Sea, where there is already a shortage", he said.
On a more positive note, as already announced, the main rate of corporation tax will fall to 21% in April 2014 and then to 20% in April 2015 (aligning it with the small profits rate).
Other measures announced in the Budget designed to stimulate business investment in the economy included: increasing the current temporary maximum of the Annual Investment Allowance for businesses investing in plant or machinery from £250,000 to £500,000; extending the period (which was due to end in 2017) for companies investing in plant or machinery in designated enhanced capital allowance sites in Enterprise Zones for a further three years to 2020.
A new corporation tax relief for theatrical productions and touring theatrical productions will also be introduced during the passage of Finance Bill 2014, with the Government consulting on the design of the relief shortly after the Budget.