30 March 2012 ~ www.taxjournal.com

SPEED READ The government is focused on making the UK an attractive place to do business. The cut in corporation tax emphasises this, as well as the incentives offered by the Patent Box and the forthcoming ‘above the line’ R&D credit. There’s also a case for incentives tailored to sectors where the UK’s strength is being eroded by competition – so tax credits are offered for video games, animation and high-end TV production. Could destination taxation become relevant in other business sectors? Gambling moves this way in 2014. Finally, a bit of micro-business simplification rounds off the package.

Bill Dodwell leads Deloitte’s Tax Policy Group, which is responsible for tax knowledge, training and for making representations to the Treasury and tax authorities. Bill is a Member of the CIOT Council, Vice-Chairman of the CIOT Technical committee and Chairman of their International tax sub-committee. Email: bdodwell@deloitte.co.uk; tel: 020 7007 0848.

T here’s a pretty clear message to business from Budget 2012 – and indeed the Coalition government’s previous two

Budgets: the government really is focused on making the UK the best place in the G20 to do business.

The surprise cut in corporation tax – which drops to 24% from 1 April 2012 – is the latest signal. The Chancellor also mentioned his ambition to introduce a 20% mainstream corporation tax rate– unifying both corporate rates and the basic rate of income tax.

Cutting the main corporate rate by 1% costs about £800m – which should be seen in the context of overall corporation tax of £45bn pa. When we get to the 22% rate in 2014, only Russia, Saudi Arabia and Turkey will have lower corporate rates.

Tax accountants will want to know that the 24% rate is substantively enacted on 26 March 2012, due to the Provisional Collection of Taxes Act. Bringing the rate into force in this way is needed to take account of instalment payments. The new 23% rate, which takes effect from 1 April 2013, will be included in Finance Bill 2012, which is expected to have finished its stages in the House of Commons by the end of June/first week of July – and thus then be substantively enacted. Substantive enactment is the relevant test for IFRS and UK GAAP; US GAAP relies upon actual enactment, with is due by 17 July 2012.

The next instalment is the introduction of ‘above the line’ R&D credits. This means transforming the R&D credit into a taxable grant. The relief will be available as a minimum of 9.1% of R&D spend – before tax.

This change will hand the R&D benefit directly to the R&D team – which should be more effective at incentivising UK-based R&D. It will also give cash refunds to loss-makers, which is why it comes with a £200m price tag – a 20% addition to the value of the R&D credit. More details – including whether companies may opt to retain the tax credit – are due soon. The new proposals are expected to take effect from April 2013.

The video games industry will be pleased to find that its long campaign to win Exchequer support has succeeded. There will be a new credit – modelled on the film tax credit – which will cover culturally British video games, animation and TV mini-series.

This change highlights the fact that countries do set out to compete with each other in some sectors – and staying on the sidelines simply isn’t an option. Other countries offer tax breaks and, since the UK has significant industry presence, acting now is important to prevent business moving elsewhere. The credit will take effect in April 2013, after a summer consultation.

The final two measures aimed at general UK competitiveness are the Patent Box regime and the new Controlled Foreign Company (CFC)

rules. Nothing much was said in the Budget, as the next steps for both is the release of the draft legislation in the Finance Bill on 29 March. The CFC regime is intended to make the UK a destination of choice for corporate headquarters. The Treasury acknowledges that these operations bring PAYE/NIC; business rates; a plethora of minor taxes and, in some sectors, VAT.

However, they also bring a range of employment; the purchase of significant services in the UK; and perhaps greater influence in setting up operational activities. Little corporation tax is paid by headquarters’ activities; the CFC regime should remove a key barrier to being based here.

Already we have seen ‘return’ signals from some companies that left the UK and other groups are looking at relocating. US insurer Aon is now moving its headquarters from Chicago to London.

The Patent Box should also have a wider impact than initially appreciated. It’s focused – obviously (!) – on patents, but there’s a wide range of technology sectors where patents are significant. It will support UK-based activities in aerospace and defence (where the UK is number two, globally); the automotive sector, including the suppliers; the electronics sector and indeed a whole range of activities.

It’s not just an incentive for the important pharmaceutical sector. I expect that more companies will consider obtaining patents for their activities, so as to benefit from the 10% incentive rate.

Lewis Booth, the retiring CFO of Ford, told the Daily Telegraph he thought the UK government ‘is working hard’ at making the country an attractive place for manufacturers to invest. But having worked in Japan, Germany, South Africa and now the US, Booth, who is on

Budget analysisCorporate (UK)

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www.taxjournal.com ~ 30 March 2012

the board of aerospace company Rolls-Royce, doesn’t attempt to hide that the competition for that pool of capital is now fiercer than ever. ‘At the end of the day, it's all about economics. This is a global business and Britain is competing with many countries around the world,’ he said.

A year or two ago, Professor Michael Devereux from the Oxford Centre for Business Taxation suggested that a sales-based measure could help in defining the base for corporation tax. In a world of tax competition, traditional profits-based taxation may have less relevance.

We saw the first signs that the government may take this concept forward with the announcement that the taxation of online gambling would be moved to a ‘point of consumption’ basis. This is a sector where turnover-based taxation is seen as the best way to levy a contribution and, given that 90% of the remote gambling sector is based outside the UK, a change in approach is needed.

Online gambling companies collect location-based information, not least to make sure that they do not offer gaming where it is illegal, so they have all that’s needed to deal with the tax base.

Clearly taxation needs to follow licensing, so as to give a legal mechanism for levying the charge. It’s also another example where the move to collecting tax for other countries provides the necessary enforcement in case companies choose not to comply.

However, it’s not realistic that all taxation should be directly paid by individuals – not least because some of those profiting from doing business in the UK aren’t taxed here. We need to remember, as the CBI recently pointed out, that 30% of UK taxation is directly incurred by business. In 2010/11, this amounted to £163bn out of total tax receipts of £521bn. Sometimes it seems that media coverage implies that business doesn’t make a contribution. It does – and tax advisers need to help inform public debate.

The Office of Tax Simplification has had an impact on the Budget. The Chancellor has adopted proposals on the taxation of the smallest businesses, with a plan to allow them to file on an income and expense basis. The limit for this simplified approach will align with the VAT registration threshold, at £77,000.

There’s also a plan for simplified expenses, thereby reducing the need for record keeping in a group that sometimes seems to struggle with keeping business records. The proposal for a ‘disincorporation’ relief has also been accepted. This is intended to allow companies to transfer their trading business to shareholders without a tax charge.

It will be interesting to see how popular in practice this proves to be; finding evidence to support the need for the relief has been difficult, which I understand is why the relief hasn’t been brought forward to date. n

Currently, a distribution of an asset in specie is a distribution for corporation tax purposes, per CTA 2010 Part 23, unless the transferee is also a company and either:n both companies are UK resident and

the transferor is a 51% subsidiary of the transferee or both are 51% subsidiaries of another UK resident company, or

n the companies are not under common control, but are both UK resident and are not 51% subsidiaries of a non-UK company.

HMRC’s stated concern is that this means that the treatment of a distribution in specie depends on the residence of the transferee company, although there is no policy reason for this difference.

But the problem is wider than that: distributions in specie are common within capital gains groups, often as part of a group reorganisation preparatory to a demerger or other form of reconstruction.

Such a transfer is not a distribution for tax purposes, as the companies in a group will be within the first exception above, and the worry is that it is a capital distribution, treated as a part-disposal of its shareholding by the recipient company, under TCGA 1992 s 122.

To be fair, in most cases this was a theoretical risk, as it is not tax policy that such transactions should be capital distributions and I am not aware that HMRC ever took the point. But the risk was highlighted by recent changes to the distributions legislation and First Nationwide [2012] EWCA Civ 278 recently decided in the taxpayer’s favour in the Court of Appeal.

As a result of these concerns, the Finance Bill will amend the definition of a distribution, so that transfers of assets from a company to a shareholder at undervalue (a distribution in specie), or from a shareholder to a company at overvalue, will be distributions for corporation tax purposes.

As a result, such a distribution cannot be a capital distribution (by TCGA 1992 s 122(6)), as it is prima facie chargeable under CTA 2009 Part 9A.

This will give a consistent treatment of all distributions in specie, regardless of the relationships between the companies concerned, it resolves the concerns about capital distribution treatment for intra-group transfers and the treatment means distributions in specie will no longer be partly dependent on the residence of the companies concerned.

This amendment represents a welcome simplification of the distributions code, which has been somewhat in disarray in recent years, although there is still some way to go to make it a coherent regime.

The fact that the changes have been made is also a triumph of the consultation process. HMRC was made aware of the issues and listened to the concerns of the tax community, convening a group of interested parties to discuss and resolve the problems.

Changes to capital distributions

Pete Miller Partner, The Miller Partnership

The fact that the changes have been made is also a triumph of the consultation process

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