Corporation tax emerged relatively untouched in this year’s Autumn Statement, with some changes coming around anti-avoidance measures and additional tax allowances for certain sectors.
We were already aware of the main announcements from the Autumn Statement, which covered the following:
- corporate tax changes
- amendments to associated company rules
- changes to loss relief
- CFC legislative changes
- extended anti-avoidance measures for double tax relief.
Corporation tax overview
As previously announced, the main rate for corporation tax will fall from 23% to 21% from April 2014. It is intended it will reach 20% in 2015. The small profits rate remains at 20%, meaning that from April 2015 the rates will be aligned.
Associated companies rules
On 10 December 2013, the government published draft legislation proposing the repeal of the ‘associated companies’ provisions, which treat companies in common ownership and control as a single entity for the purposes of corporation tax rates.
These changes are possible because the vast majority of companies will be subject to a single rate of corporation tax. These rules also prevent a tax advantage arising where companies divide.
The government proposes that the rules will be simplified in Finance Bill 2014 by replacing them with a 51% group test. The areas where the new rules based on a 51% group will apply are:
- for ring-fenced profits of oil and gas companies, where there will continue to be more than one rate of corporation tax
- for companies with profits below limits of £1m or £3m which can elect to use a simplified method in calculating Patent Box profits subject to tax at the 10% rate
- where capital allowances are restricted for assets with a useful life of 25 years or more (long life assets) where the expenditure exceeds a limit of £100,000
- for quarterly instalment tax payments, where regulations set an upper limit for profits above which a company must pay tax by instalments.
Loss relief changes
From 1 April 2014, companies with brought forward corporation tax trading losses will be able to have access to those trading losses if they subsequently change ownership.
Under the old legislation, if a company carrying on a trade, investment or property business was sold to another company not within the same ‘50% plus’ ownership, loss relief was restricted in any accounting period ending on or after the change in ownership:
- if there was a major change in the nature or conduct of the trade or business within three years of the change in ownership
- if, after the change in ownership, there was a significant revival of a trade or business that had become small or negligible
- if, after the change of ownership, there was a significant increase in the capital of an investment business.
Legislation will be introduced in Finance Bill 2014 to allow a holding company to be inserted at the top of a group of companies and the ‘change of ownership rules’ will not apply to the new holding company’s purchase of the previous top holding company. However, to prevent abuse of this easement, the rules will continue to apply to the shareholders of the holding company throughout the transaction.
If a change of ownership of an investment business company occurs in tandem with a significant increase in capital, loss restriction rules may apply. ‘Significant increase in capital’ means that the capital in the company after the ownership change will need to exceed the capital in the company before the change by £1m and at least 25%.
Controlled foreign companies (CFCs): profit shifting
Legislation will be introduced in Finance Bill 2014 to establish a new rule which prevents a creditor relationship of a CFC from being a qualifying loan relationship if it arises as a result of any arrangement which has the main purpose of transferring out of the UK profits from a loan made by a UK company connected with the CFC.
The measure switches off the partial exemption rules for loan relationship credits of a CFC that arise from an arrangement with a main purpose of transferring profits from existing intra-group lending out of the UK.
The measure also amends the anti-avoidance rule relating to the transfer of external debt to the UK to ensure that the rule works as intended.
Double tax relief changes
The government has introduced measures to extend anti-avoidance provisions in respect of double taxation schemes. Relief for foreign tax would only be available where income has actually suffered double tax in the UK and in another jurisdiction.
The double tax relief credit will also be restricted where a repayment has been made by a foreign tax authority and arrangements are in place such that another person can receive the repayment of foreign tax paid.
In summary, the Autumn Statement announced few changes to corporation tax, but some anti-avoidance measures which affect mainly multinationals. Also, business in certain sectors, such as performing arts and oil and gas, are to benefit through availability of additional tax allowances.
Article contributed by ACCA