European Tax Advisory

THE AUTUMN STATEMENT 2016

Corporate Tax and Reliefs

Summary

There were few new announcements from the Chancellor from a mainstream corporate tax perspective.

No further changes have been made announced to the headline corporate tax rate, which will fall to 17% by April 2020.

The proposed changes to the deductibility of interest, and the utilisation of carried forward losses, will be implemented largely in the form originally envisaged. The changes to both of these regimes will take effect from 1 April 2017.

A future consultation is expected on bringing all non-resident companies receiving taxable income from the UK into the charge to UK corporation tax.

There are welcomed announcements on the substantial shareholding exemption and the UK’s R&D regime.

Corporate tax rate reduction

Despite murmurings in the media to the contrary, the Chancellor has reaffirmed the Government’s commitment to cut the rate of corporation tax to 17% by 2020, the lowest in the G20.

The current rate of 20% will fall to 19% from 1 April 2017, with the subsequent reduction to 17% having effect from 1 April 2020.

The reduction to 17% was substantively enacted in Finance Act 2016, so companies will need to take account of this reduction in their deferred tax reporting for accounting periods ending after 6 September 2016.

Interest deductibility

In line with the 2016 Budget, the OECD’s recommendations under Action 4 of the Base Erosion and Profit Shifting (“BEPS”) project and the Treasury’s Consultation Document on Interest Deductibility, the Government has confirmed the introduction of rules that will limit the tax deductions that groups can claim for their UK interest expense from 1 April 2017.

We note that the Consultation Document questioned whether small and medium companies (SMEs) should be exempt. The Autumn Statement refers to ‘large’ groups, and so it is possible that the new rules will be introducing such an exemption.

In line with expectations, the rules will limit deductions where a group has net interest expense of more than £2 million, net interest expense exceeds 30% of UK taxable earnings and the group’s net interest to earnings ratio in the UK exceeds

European Tax Advisory

THE AUTUMN STATEMENT 2016

Corporate Tax and Reliefs

that of the worldwide group. A widening of the previous proposals to protect investment in public benefit infrastructure is promised. Significantly, banking and insurance groups will be subject to the new rules in the same way as businesses in other industry sectors, and, subject to seeing the provisions of the Finance Bill, may expect to escape restriction if they have net UK interest income.

With only a few months until the new rules take effect, FTI Consulting recommends that groups act now to review their debt structure.

Loss relief

The Chancellor has confirmed that the previously announced restriction on the use of carried forward losses will indeed come into effect from 1 April 2017.

Very broadly, the new rules will:

• Restrict the amount of profit that can be offset by carried-forward losses to 50% from April 2017.

• Allow greater flexibility over the types of profit that can be relieved by losses incurred after that date.

The restriction will be subject to a £5 million allowance for each stand-alone company or group.

Following consultation, the government has confirmed that when published, the legislation will take steps to address unintended consequences and simplify the administration of the new rules. These are welcomed changes.

The amount of profit that banks can offset with losses incurred prior to April 2015 will continue to be restricted to 25%, in recognition of the exceptional nature and scale of losses in the industry.

Bringing non-resident companies’ UK income into the corporation tax regime

Consideration is being given to bringing all non-resident companies receiving taxable income from the UK into the charge to UK corporation tax. The Government will first consult on both the case for doing so, and also as to how any changes would be implemented.

The purpose behind this is to ensure equal tax treatment, and ensure that all companies are subject to the rules which generally apply for the purposes of corporation tax (for example, the anticipated rules on loss relief and interest deductibility as outlined above). We see this announcement being particularly pertinent to those investors in UK real estate currently taxed under the non-resident landlord regime.

European Tax Advisory

THE AUTUMN STATEMENT 2016

Corporate Tax and Reliefs

About FTI Consulting

FTI Consulting, Inc. is a global business advisory firm dedicated to helping organisations protect and enhance enterprise value in an increasingly complex legal, regulatory and economic environment. FTI Consulting professionals, who are located in all major business centers throughout the world, work closely with clients to anticipate, illuminate and overcome complex business challenges in areas such as investigations, litigation, mergers and acquisitions, regulatory issues, reputation management and restructuring. The views expressed herein are those of the author(s) and not necessarily the views of FTI Consulting Inc, its management, its subsidiaries, its affiliates, or its other professionals, members of employees.

www.fticonsulting.com ©2016 FTI Consulting,Inc. All rights reserved.

Toni Dyson +44 (0)20 3727 1145 toni.dyson@fticonsulting.com

EXPERTS WITH IMPACT

Reform of the substantial shareholding exemption

The substantial shareholding exemption (‘SSE’) was introduced in 2002 and, in certain circumstances, exempts gains on corporate share disposals from UK corporation tax. SSE was designed to ensure that tax does not act as a disincentive to commercially desirable business sales or group restructurings.

Following consultation, the government will make changes to simplify the Substantial Shareholding Exemption (SSE) rules with effect from April 2017. The changes are expected to relax the qualifying conditions and also provide a more comprehensive exemption for companies owned by qualifying institutional investors.

Research and development

Following the Prime Minister’s announcement prior to the Autumn Statement, further enhancements are expected to the UK R&D tax incentive regimes. It appears that the focus will be on the R&D expenditure credit, and further details are due to be announced in the New Year. FTI have led representations for the acquisition of data for research purposes to be introduced as a category of qualifying expenditure addressing an increasingly important shortcoming in the current legislation, and will continue our efforts in light of this announcement.

HMRC have also published new Simplified Guidance on R&D tax relief for SMEs.

Oil and Gas

Two changes are being made to simplify the PRT regime, effective from 23 November 2016:

1. A company (normally the field operator) will be able to remove its oil field from the PRT regime by making an election. This will be available for the next chargeable period, beginning 1 January 2017.

2. Certain reporting requirements in respect of oil allowance and tax liability reporting will be removed now that the PRT rate has been permanently reduced to zero.

These welcome changes result from discussions between Government and industry representatives earlier this year. However, some technical issues relating to PRT still need to be addressed in order to maximise economic recovery from the UKCS.