The autumn statement delivered by the Chancellor on 23 November 2016 provided for new tax measures, many of which will be included in the Finance Bill 2017. The measures include the following:
Restriction on tax deduction for interest
The UK has confirmed its intention to introduce rules limiting the tax deductions claimed by large groups for their UK interest expense. This implements the recommendations of Action 4 of the OECD project on Base Erosion and Profit Shifting (BEPS).
Interest deductions will be restricted if a group has net interest expense of more than GBP 2 million per annum in the UK and the net interest expense in the UK exceeds 30% of UK tax EBITDA (earnings before interest, tax, depreciation and amortization). The tax deduction for interest will be subject to a further test of whether the group’s ratio of net interest to earnings in the UK exceeds that of the worldwide group. Draft legislation to implement the proposals was published on 5 December 2016.
Measures to tackle tax evasion
New measures are being introduced to clamp down on tax evasion and aggressive tax avoidance. These measures will yield an extra GBP 2bn in tax this parliament. The measures include the removal of a tax break on employee benefits in salary sacrifice schemes with some exclusions for certain schemes.
Corporation tax rate
The Chancellor announced that the corporation tax rate would fall to 17% by 2020.
Patent Box rules
The government has been working to incorporate the changes resulting from action 5 of the BEPS project relating to harmful tax practices. This requires implementation of a nexus approach to the patent box regime. Most of these changes were already enacted on 15 September 2016 in the Finance Bill 2016 and came into effect from 1 July 2016, the date on which the current patent box regime closed to new entrants.
The UK will introduce specific provisions in the Finance Bill 2017 to set out how these changes will apply to companies within a cost sharing arrangement. The provisions will aim to ensure that companies within a cost sharing arrangement would be in the same position as other claimants under the patent box regime.
Research and development
Two new funds are to be introduced in relation to innovation, research and industrial strategy. A review of the current R&D tax incentives will be carried out.
Also investment is planned for innovative start-up businesses through venture capital funds.
Substantial shareholding exemption
Changes are being made to simplify the Substantial Shareholding Exemption (SSE) rules that relieve UK companies from tax on capital gains on the sale of substantial shareholdings. The rules will remove the investing requirement from the SSE and will provide a broader exemption for companies owned by qualifying institutional investors.
Hybrid mismatch arrangements
The government has issued a technical note in relation to the legislation on the new hybrid mismatch regime. Further technical modifications are being made in relation to financial sector timing claims and the rules concerning deductions for amortization.
Income tax personal allowance
The income tax threshold will increase to GBP 11,500 in April, from the current level of GBP 11,000. The threshold for the higher rate of tax to apply is to increase to £50,000 by the end of the current Parliament.
Income tax on termination payments
The government is changing the tax and national insurance contribution treatment of termination payments. For termination payments from 6 April 2018 any payment in lieu of notice (PILONs), whether contractual or not, will become fully subject to tax and national insurance.
Insurance premium tax
The insurance premium tax is to increase from 10% to 12% from June 2017.
National insurance contributions
Employee and employer national insurance thresholds are to be set at GBP 157 per week.
