Corporation tax down to 20% from 2015 and tax and procurement rules modified in the Budget

Eloise Walker, a tax expert at Pinsent Masons , the law firm behind Out-law said “The reduction in the main corporation tax rate to 20% from 2015 is welcome, although other nations may have something to say about it – it may for example make the UK a tax haven for Japanese anti-avoidance rules”

The rate of corporation tax is currently 24%. It is due to reduce to 23% from 1 April this year.

In addition HM Revenue & Customs (HMRC) has announced significant changes to the proposals for those bidding for certain Government contracts to be forced to self-certify that they have not been involved in certain types of tax avoidance. The original proposal was that the rules would come into force on 1 April 2013 and the disclosure requirements would cover the previous ten years.

"Thankfully, the Budget represents a substantial climb down by HMRC which has rightly recognised that the measure did more than necessary to achieve the policy aim.  The measure will now only apply to planning featuring in returns filed on or after 1 October 2012 - and not any legacy positions." said Jason Collins of Pinsent Masons. 

 Jason Collins said that the rules has also been narrowed to schemes caught by the General Anti-Abuse Rule (GAAR) and the Disclosure of Tax Avoidance Schemes regime – "and not the many 'Targeted Anti-Avoidance Rules' littered throughout the tax code."  

"The threshold for relevant contracts has been raised to £5m - which is good for keeping smaller businesses out of the treacle, but contracting authorities now have an extra control to think about when preparing a PQQ." Collins said. 

He said that there is also more clarity about the definition of the "supplier", which will follow procurement law and apply to the 'economic operator', not the worldwide group.  Collins said that in practice, most contracting authorities regard the 'economic operator' as being the bidding entity, plus any entity providing technical or financial assistance.  Significant subcontractors will still need to certify but independently from the main contractor, he said. "This still leaves risk because each has no control over whether the other party will breach the measure during the contract, leaving the contract open to termination.   The same goes for companies which form a JV to bid for a contract."

"Overall, the new rules are much more proportionate and easier for bidders to manage." Collins said "However, protest groups might argue that, by restricting it to new planning, HMRC has potentially missed an opportunity to leverage bidders to settle existing planning and pay more tax.  This could prove embarrassing for the Government if a supplier on a major contract loses a high profile Court case, or discloses a major settlement, in the future.  Will the public understand that the planning pre-dated the measure but was only settled after it?"

The changes were announced in a summary of responses to the two week consultation held in February on the proposals.

The Chancellor confirmed in the Budget that the GAAR will be introduced, as planned, from Royal Assent to the Finance Bill. He also announced that some corporate tax schemes would be blocked with immediate effect and anti avoidance rules would be tightened, with a particular focus on  corporate loss–buying.

"It is not a surprise that we are getting the GAAR.   But we are also getting a wide range of complex new anti-avoidance rules, particularly on corporate loss planning."  said Heather Self of Pinsent Masons. "Is this really necessary, or is it a sign that HMRC are worried that the GAAR will not hit its target?"

The Chancellor did not make any announcements in relation to transfer pricing. Heather Self said "No news is good news on Transfer Pricing.   George Osborne managed to resist the temptation for unilateral action and will wait for the OECD to propose broader international solutions."

The Chancellor also announced that stamp duty will be abolished on shares in companies quoted on growth markets such as the Alternative Investment Market and the ISDX Growth Market.

There will also be a consultation on proposals to "modernise" the corporation tax rules governing the taxation of corporate debt, according to the Budget document.

John Christian of Pinsent Masons said “Business may be surprised at the announcement of what sounds to be a wide review of the loan relationships and derivatives rules which is a cornerstone of the corporation tax regime. It would be helpful to know as soon as possible what areas the review will cover so business can be clear on what aspects may change.”

 Anti avoidance rules were also announced in relation to loans to participators in close companies. At the same time the Government said that it will consult on options to reform the structure and operation of the tax charge on loans from close companies "to make the rules fairer and simpler".