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Budget 2017: Corporate tax announcements

R&D tax credits for large companies will be increased from 11% to 12% from January 2018, Chancellor of the Exchequer, Philip Hammond, announced in his Budget speech, as part of the government's strategy to "drive up R&D investment across the economy to 2.4% of GDP".22 Nov 2017

Although there had been speculation that the Chancellor would abolish the planned reduction of corporation tax to 17% in 2020, the Chancellor said that the government is "committed to maintaining Britain's competitive corporation tax rates".

However, indexation allowance on disposals of capital assets will be abolished for assets acquired from January 2018. For assets already owned, it will effectively be frozen at the amount that would be due based on the Retail Price Index for December 2017. This change brings the corporate system into line with personal capital gains tax.

According to a 'position paper' published by the Treasury on corporate tax and the digital economy, the government considers that, despite the steps that have been taken in accordance with the OECD base erosion and profit shifting project, there is still more that needs to be done in relation to the digital economy.

The paper sets out the government's thoughts and states that the government will push for reforms to the international tax framework, to ensure that the value created by the participation of users in digital businesses is recognised in determining where those businesses' profits are subject to tax.

However, the UK is proposing some more immediate action. The Chancellor announced that a consultation will be published on 1 December 2017 on the design of rules expanding the circumstances in which a royalty payment to persons not resident in the UK could be subject to a withholding of UK tax.  It is proposed that the changes will have effect from April 2019.

Despite the legislation for the corporate interest restriction only having received Royal Assent last week, the government has announced that it will "make technical amendments" to the rules in the next two Finance Bills to "ensure the regime works as intended". Some of the changes will be treated as having effect on and after 1 April 2017, when the corporate interest restriction rules commenced. The remainder of the amendments will have effect on and after 1 January 2018. Brief details of the changes, which include a number of changes to the infrastructure rules, are set out in a policy paper issued by HMRC.

"This is depressing, but not unexpected," said Eloise Walker a corporate tax expert at Pinsent Masons, the law firm behind  "When they introduced the old worldwide debt cap they rushed it, and spent every finance bill since tidying it up. We expect the same to happen here."

The Finance Bill will also contain a small number of changes to the hybrid and other mismatches regime, which is designed to tackle mismatches in tax treatment in relation to entities and financial instruments. The HMRC policy paper says that these are not intended to change the overall scope of the regime but, like the interest restriction changes, are "designed to ensure that the regime operates as intended".

According to the budget documents, future changes to the tax system which are being considered include a consultation on the intangible fixed asset regime to consider whether there is an economic case for changes to the regime.

Minor changes to the substantial shareholding exemption legislation and the share reconstruction rules will be made to avoid unintended chargeable gains being triggered where a UK company incorporates foreign branch assets in exchange for shares in an overseas company. The change will correct an anomaly whereby a postponed tax charge may become payable when a new holding company is inserted directly above an overseas company to which a UK company has previously transferred the trade and assets of a foreign branch in return for shares.

The budget documents announce that the 6 year limit on the look back for depreciatory transactions will be abolished.  A depreciatory transaction is one that takes value out of shares, which might be by transferring the assets of a company to another company within a group for no or little cost. When the shares are disposed of the legislation requires that previous depreciatory transactions are adjusted for in computing any loss on disposal. Currently there is a time limit of 6 years, so that depreciatory transactions before that are not taken into account.

Another change announced is to restrict from 22 November 2017 the amount of credit allowed, or deduction given, for foreign tax suffered by an overseas permanent establishment (PE) of a company, where the company has received relief in the foreign jurisdiction for the losses of the PE against profits other than those of the PE.

It has also been announced in the Budget that all gains from UK property held by non- UK residents will be subject to UK tax with the regime commencing in April 2019. There are forestalling measures in effect from 22 November 2017 aimed at stopping arrangements introduced to circumvent the regime.

This means that the traditional offshore structures for commercial property to pool UK institutional investment, and offshore investors, will generally become subject to tax on capital gains on disposals of UK property from the date the charge is effective.  Currently, offshore funds and investors are subject to UK tax on gains from residential property and in respect of trading and similar transactions, but not on capital gains on UK commercial property.

"This will be a blow to the industry but, again, not entirely unexpected given the recent changes to the transactions in land rules and comments made by HMRC at that time. What is worrying is that such a sweeping change is being made right in the middle of Brexit uncertainty when Britain can ill afford to put off foreign investors" Eloise Walker said.