Corporate Tax update


John McAuslin

John McAuslin

Tax Partner

29 October 2018


    For UK companies, there was a lot more in the 2018 Budget than initially expected.  The key message is that the UK is open for business.  This manifests itself in a combination of measures which deliver stability of tax rates, take the lead in areas such as Digital Services and Intangible assets, and seek to promote capital investment.

    Corporation Tax rates

    The UK’s main rate of corporation tax (for all profits except ring fence profits) remains at 19%, with no rate changes announced. The 19% rate applies for the years starting on 1 April 2017, 2018 and 2019, with 17% for the year starting 1 April 2020.

    New Digital Services Tax

    This is not going to be an online sales tax but will be a new 2% tax on turnover to ensure that profits made by UK users will be taxed in the UK. This will apply to revenue from search engines, social media platforms and online marketplaces.

    This will only apply to companies and groups with a turnover more than £500m and subject to a £25m annual allowance.

    This is due to come into force as of April 2020, prior to a consultation.

    Restrictions on the Utilisation of Losses

    Following a consultation, the ability to utilise capital losses will be restricted in line with the rules governing the use of income losses from 1 April 2020.  In the meantime, anti-avoidance measures have been introduced which are expected to prevent the circumvention of these new rules during the consultation period.

    Amendments will be made to the legislation governing the use of brought forward losses to ensure that they operate as intended.

    Intangible Fixed Asset regime

    The Government will consult and introduce from April 2019 tax relief on goodwill arising from the acquisition of a business with qualifying intellectual property.

    In addition, legislation will correct an anomaly arising on the de-grouping intangible assets to bring the rules into line with other capital assets.

    PFI / PF2

    The Government announced that it will no longer use PF2 (the successor to PFI) for new projects and it will create new centre of best practice to manage existing PFI contracts. 

    Spending on such public infrastructure projects is a devolved matter and therefore does not preclude the Scottish Government reaching agreement with private finance providers on CAPEX projects.

    Insolvency

    From 6 April 2020, the Government will change the rules so that when a business enters insolvency, more of the taxes paid in good faith by its employees and customers but held in trust by the business go to fund public services as intended, rather than being distributed to other creditors such as financial institutions.

    The rules remain unchanged for taxes owed by the business, and HMRC will remain below other preferential creditors, such as the Redundancy Payment Service.

    International Tax

    Change to the definition of permanent establishment

    The change is targeted at companies that currently split their activities in the UK to enable certain branches to be exempt from any reporting requirements. 

    Previously, you could have an overseas group with storage facilities in the UK and not give rise to a permanent establishment and have another operation in the UK that would give rise to a permanent establishment.

    Now a permanent establishment will exist where either the overseas or UK company and related entities carry on a cohesive business operation, either at the same geographical location or across the UK. If all of the UK activities would together create a permanent establishment this will now create a permanent establishment, as if they were a single company including the exempt activities. 

    Offshore receipts from intangible property

    As of April 2019, any UK income generated from intellectual property held in low tax jurisdictions will be taxable to the extent that this is referable to UK sales. This will be subject to a £10m de minimis UK sales threshold.

    International Tax enforcement: disclosable arrangements

    The Government is enacting new legislation to allow the introduction of international disclosure rules about offshore structures that could avoid tax, or could be misused to evade tax.

    Diverted profit tax amendments

    Diverted profit reviews with HMRC are extended from 12 months to 15 months, this is in line with a new addition that if a company wishes to include a divert profits tax into their Corporation Tax computation they will also have 15 months to amend their computations instead of 12 months. However, no returns can be amended after a divert profit review.

    An attractive place to do business

    The UK remains an attractive place to do business.  The continued low headline corporate tax rate, the availability of Substantial Shareholding Exemption, the Dividend Exemption, tax relief for interest costs and CAPEX, flexible loss utilisation, innovative tax reliefs such as R&D and the Patent Box all combine to attract businesses to the UK.