The new 'diverted profits tax' announced in the UK chancellor's Autumn Statement will apply to "business activities between connected entities that are set up in order to achieve an unfair tax advantage". The tax will be applied using a rate of 25% from 1 April 2015. The new tax was trailed by George Osborne at the Conservative party conference in September.
Tax expert Heather Self of Pinsent Masons, the law firm behind Out-law.com, said: “The diverted profits tax will be very complex and could encourage retaliation against UK businesses trading overseas. The expected yield of around £1 billion could be far outweighed by the harm done to UK businesses seeking to expand internationally”.
The chancellor also announced that companies will no longer be able avoid stamp duty on takeovers by structuring the transaction as a "scheme of arrangement". Regulations will be brought forward by early 2015 to prevent this practice. In addition the chancellor announced that 'B share schemes', where shareholders are given a choice of income or capital treatment on a return of capital, will be blocked.
Changes to legislation will also prevent individuals and partnerships from claiming corporation tax relief under the intangibles regime where goodwill is transferred from individuals or a partnership to a company which they control. In addition entrepreneurs' relief from capital gains tax will no longer be available in respect of goodwill where a business is transferred to a company in these circumstances.
On loan relationships, the chancellor announced the repeal of the late paid interest rules which mean that, in some circumstances, tax relief is not available for interest payments until the interest is paid. The rules were designed to counter avoidance, but have been exploited by some groups. The repeals will apply to new loans entered into one or after 3 December 2014 and for existing loans the repeals will have effect in respect of interest accruing on or after 1 January 2016, unless material changes are made to the loan before then.
The chancellor has also announced that research and development (R&D) tax credits will increase. From 1 April 2015, for large companies, the above the line credit will increase from 10% to 11% and for small and medium companies the rate will increase from 225% to 230%.
As expected, a consultation has been launched on the implementation of the Organisation for Economic Co-operation and Development (OECD)'s new rules to prevent the use of 'hybrid mismatches'. Legislation will not be introduced until at least 2016, after the conclusion of the OECD's base erosion and profit shifting (BEPS) project.
BEPS refers to the shifting of profits of multinational groups to low tax jurisdictions and the exploitation of mismatches between different tax systems so that little or no tax is paid. Following international recognition that the international tax system needs to be reformed to prevent BEPS, the G20 asked the OECD to recommend possible solutions.
Hybrid mismatch arrangements allow companies to exploit differences between countries' tax rules to avoid paying tax in either country, or to obtain more tax relief against profits than they are entitled to. Under the OECD's proposals, published in September, companies would be prevented from entering into these arrangements without reporting a corresponding taxable profit and would be prevented from using the reliefs set out in various international double taxation agreements if their principal reason for doing so was to avoid tax.
In another BEPS related announcement the government committed to moving forward with requirements for country-by-country reporting.
UK companies will be required to report to tax authorities on profits earned and taxes paid on a country-by-country basis. This information is designed to help tax authorities to gather information on the global activities, profits and taxes of multinational companies to help tax authorities to better assess where risks lie and where their efforts to discourage tax avoidance should be focused.
Heather Self said: "Companies need to start to plan for the compliance and reporting obligations which will follow”.
Country-by-country reporting was one of a number of proposals issued by the OECD in September as part of its project to create a single set of international tax rules and prevent multinationals from artificially shifting profits to low-tax jurisdictions.
For businesses operating in Northern Ireland, a corporation tax reduction may be forthcoming.. The chancellor announced that the government "recognises the strongly held arguments for devolving corporation tax rate setting powers to Northern Ireland and has concluded that this could be implemented, with legislation being brought forward in this parliament, provided that the Northern Ireland Executive "is able to manage the financial implications".
Retailers and manufacturers have called on the government to re-examine the effect of business rates on their businesses. Retailers say the regime disadvantages traditional shop owners compared to their online retail counterparts and manufacturers say the fact that plant and machinery is taken into account in property valuations, deters them from improving their premises.
In the short term, the chancellor has announced the doubling of small business rate relief for another year and a further capping the inflation-linked increase in business rates at 2%. As a longer term measure he announced a full review of the structure of business rates.
For banks and building societies a wide ranging measure was announced to limit the use of brought losses. From 1 April 2015 banks and building societies will only be able to set their brought-forward losses against 50% of their profits in any one year. The measure will apply to any carried forward trading losses, non-trading loan relationship deficits and management expenses accruing prior to 1 April 2015.
Eloise Walker, another tax expert at Pinsent Masons, said "Given the still-shaky state of the world economy, though, and the UK's dependence on the financial sector as one of our largest industries, it does have to be asked whether right now is the best time to restrict the use of legitimate economic losses to offset taxable profits – it's a good money spinner for HM Treasury, but remember that the cake is only so big, and the money that goes to HMRC isn't going into new high-street branches or loans to small businesses".