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UK corporation tax
In 2015 the government announced reductions in the rates of UK corporation tax from the current rate of 20% to 19% in April 2017, and 18% in April 2020. In the Chancellor's annual budget statement on 16 March 2016 it was announced that the rate of UK corporation tax will fall to 17% in April 2020. The UK headline rate will soon be only marginally higher than the equivalent rates in Ireland, Cyprus and Hong Kong. Furthermore, the UK also offers tax exemptions for foreign dividends, and gains from substantial shareholdings.
Substantial shareholders exemption (SSE)
The government has announced it will carry out a review of the SSE. This exempts UK companies from UK corporation tax on capital gains realised from the sale of substantial shareholdings. The government will consult on simplifying the rules, in order to make them more competitive.
There is a design fault in the SSE (apart from its labyrinthine complexity) which is that exemption from UK corporation tax on the sale of substantial shareholdings requires the UK company claiming relief to be a trading company or a member of a "trading group". The definition of, for example, a trading group is "a group, one or more of whose members carry on trading activities, in which the activities of its members, taken together, do not include to a substantial extent, activities other than trading activities". This is a non-definition that creates uncertainty. Apart from that, in the case of multinational groups, the forensic accounting burdens in separating trading assets ("good assets") from non-trading assets ("bad assets") for the purposes of the SSE are onerous and off-putting. It is suggested that mitigating the "trading activity" requirements would be sufficient to propel the regime into "world-class" status 1 and get rid of a lot of the uncertainty and complexity surrounding the regime.
Carried forward loss relief
From 1 April 2017 the government will restrict to 50% the amount of profit that companies can set against losses carried forward. This restriction will only apply to profits exceeding £5million calculated on a group basis. Currently, companies in the UK can offset all their taxable profits against losses carried forward, so that often a company can pay no UK corporation tax at all in a year when it makes a substantial profit. However the £5,000,000 threshold means this will not affect the SME constituency of UK companies, so that 99% of UK companies will be unaffected by this restriction.
However, the new regime will create some added flexibilities, concerning the assignment of losses within a group of companies. The existing categorisation of losses will be abolished from 1 April 2017 allowing UK companies to utilise carried forward losses against all types of income arising in future periods, rather than having to "stream" losses against specific types of profit. The UK group relief rules will also be changed to allow brought forward losses of one group company to be offset against the profits of any other UK group company where the losses are incurred on or after 1 April 2017. This is a welcome improvement to the current rules that permit only current year losses to be surrendered to other group companies.
Profits from trading in and developing UK land
The use of offshore companies to protect trading profits arising from dealing in and developing UK real estate will cease with immediate effect.
It has in principle been possible to protect such profits from UK taxation on behalf of non-UK resident shareholders using Cyprus or Malta companies, relying on the business profits article of the UK's double tax treaties with these countries (see e.g. article 8 of the UK/Cyprus double tax treaty). It has not been possible to use such trading structures for UK residents since the passage of s130 Taxation (International and Other Provisions) Act 2010. It is clear from the budget announcement that the UK will adopt a source basis of taxation for real estate trades going forward in order to prevent non-UK resident investors from benefitting from such treaty protection. Arrangements have been put in place to cancel similar treaty planning involving Jersey, Guernsey and Isle of Man companies.
A targeted anti-avoidance provision will be effective from 16 March 2016 to Report Stage to prevent the transfer of land to a related person who is not the intended ultimate recipient of the land to stop the rebasing of land or property values to current market value.
As discussed in the last Focus issue, it is suggested that trades in UK real estate should now be conducted via UK companies for a variety of reasons on behalf of UK residents, and this will now be the default position for non-UK residents since 16th March 2016.
Long-term investment in UK real estate - particularly commercial property - can still be conducted via offshore companies with associated UK tax benefits (see further on this topic, in a separate article in this Focus issue).
The rates of ATED were not increased for the chargeable period beginning on 1 April 2016. However the rates of ATED for enveloped properties worth more than £2million were increased by more than 51% on 1 April 2015, so the government's forbearance in 2016 is a small mercy.
1 - For analysis of the SSE regime see Chapter 5 of International Tax Planning: UK companies and partnerships, 4th Edition, published by LexisNexis