Extensive and far reaching reforms to the United Kingdom’s (UK's) corporation tax system have been made in recent years. The reforms have a stated aim of “creating a tax system that is easy to understand, simple to engage with, and hard to evade, [and] successfully supports investment in business, as well as those who work hard and save” (Financial Secretary to the Treasury, December 2015). The reforms are also intended to maintain the UK’s competitive position. The main areas of reform have included:
- Reductions in the rate of corporation tax.
- Redefining the corporate tax base, including aspects of the Organisation for Economic Co-operation and Development (OECD) base erosion and profit shifting (BEPS) project.
- Policy and practice concerning tax evasion and unacceptable tax avoidance.
- Administration and collection, including plans for increased use of digital systems.
Because the UK legislative process can lag behind the announcement of proposals, certain changes are already law, others are very likely, or practically certain, to become law, whilst others are issues announced for wider consultation and future enactment into law.
Typically, most of the reforms to tax rules are announced in November/December each year, with reforms expected to become law in February or March of the following year. Any reforms of significance, and proposals for important reforms, included in those processes, are discussed below.
In a referendum on 23 June 2016, voters in the United Kingdom chose to leave the European Union (EU) (so-called ‘Brexit’). The United Kingdom invoked Article 50 of the Treaty on the Functioning of the European Union (TFEU) in March 2017, and this triggered a two-year exit procedure. This has since been extended to 31 October 2019. The implications will depend to a substantial extent on the terms on which exit is agreed and, therefore, remain unclear at this stage. The information included in this tax summary assumes, for now, the continuance of the UK’s membership in the European Union. Comments on the impact of leaving the European Union would be entirely speculative.
Changes that have taken effect in the past year
Reforms that took effect in the past year include:
- The United Kingdom has ratified its agreement to the OECD's Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (the 'Multilateral Instrument' or 'MLI') and deposited that instrument of ratification with the OECD. Consequently, the MLI entered into force in the United Kingdom on 1 October 2018 and will have a fundamental impact on how taxpayers access double tax treaties (DTTs) to which it applies. It began to apply (for example, in relation to withholding tax [WHT]) from 1 January 2019 to the UK’s double tax agreements (DTAs) with those territories that have also ratified before 1 October 2018, where those are covered tax agreements. The precise dates on which the MLI will begin to have effect for other purposes, or in relation to other DTAs, will depend upon when other treaty partners submit their instruments of ratification with the OECD and what options and reservations they have submitted.
- Very large companies (broadly with profits exceeding 20 million pound sterling [GBP] in an accounting period) must pay corporation tax by instalments four months earlier for accounting periods commencing on or after 1 April 2019. Corporation tax is due in months three, six, nine, and 12.
- The amount of qualifying investment in plant and machinery that benefits from a 100% allowance went up from GBP 200,000 to GBP 1 million where the expenditure is incurred between 1 January 2019 and 31 December 2020.
- The rate of capital allowance on special rate expenditure (e.g. integral features) is reduced from 8% to 6% from 1 April 2019.
- Tax relief is available for certain new goodwill, customer relationships, and customer information created or acquired as part of the acquisition of a business on or after 1 April 2019 that also includes the acquisition of new patents or copyrights (or licences over new patents or copyrights).
- Building on previous proposals for a 'royalty WHT', a new ‘Offshore Receipts in Respect of Intangible Property’ tax has effect from 6 April 2019 (with a targeted anti-avoidance rule, which is applicable to certain arrangements put in place from 29 October 2018). An overview of the proposals is set out in the Other taxes section.
- Gains on non-resident direct disposals and certain indirect disposals of UK property have been brought within the scope of UK tax. This applies to gains accrued on or after 1 April 2019. There are targeted exemptions for institutional investors, such as pension funds.
- New rules took effect in April 2019 to prevent companies and individuals from moving profits offshore (tax avoidance involving profit fragmentation).
- A Structures and Buildings Allowance (SBA) was included within the Finance Act, applicable to qualifying spend from 29 October 2019; however, the legislation is still draft.
- Gains accruing to non-UK resident investors on or after 6 April 2019 on direct disposals and certain indirect disposals of UK property have been brought within the scope of UK tax.
- In June 2016, the European Union adopted an anti-tax-avoidance Directive (ATAD), which sets out minimum standards for rules to address key international tax and BEPS-related issues: (i) deductibility of interest, (ii) exit taxation, (iii) a general anti-abuse rule (GAAR), (iv) controlled foreign company (CFC) rules, and (v) a framework to tackle hybrid mismatches. Member states had until 31 December 2018 to implement these provisions to come into effect from 1 January 2019 (with one additional year for exit charges and the potential for some countries to delay the interest deduction restrictions). The United Kingdom already has rules covering each of these areas but has introduced limited amendments to the CFC (including a tightening of the Finance Company Partial Exemption [FCPE] regime, see comment below) and exit charge rules to ensure they are compliant with this minimum standard.
- In order to make the regime ATAD compliant, the government has tightened the FCPE regime (which offers an exemption for certain intra-group financing profits) so that the reduced rate of tax will no longer be available in relation to profits that are attributable to UK significant people functions (SPFs).
- From 1 January 2019, the definition of 'permanent establishment' (PE) has been tightened where the non-resident has artificially fragmented their business operations to avoid coming within the charge to corporation tax. See the description of Permanent establishment (PE) in the Corporate residence section.
- In January 2019, Her Majesty's Revenue and Customs (HMRC) launched a new initiative, the Profit Diversion Compliance Facility, which is aimed at multinationals using arrangements targeted by the Diverted Profits Tax (DPT) that are not currently under a DPT or transfer pricing enquiry. See the description of the Diverted Profits Tax (DPT) in the Taxes on corporate income section.
Changes enacted but not yet in force
Changes enacted but not yet in force include:
- A reduced rate of corporation tax for businesses based in Northern Ireland may be introduced. This is subject to joint approval by the Northern Ireland government and the UK Treasury. The commencement date has not yet been finally determined.
- From April 2020, income that non-resident companies receive from UK property will be chargeable to corporation tax.
Consultations and proposals - ongoing
The most significant proposals, which include announced proposals and those in draft legislation, and those subject to consultations include:
Measures focused on domestic matters
- The rate of corporation tax is proposed to reduce to 17% from April 2020.
- First year allowances and cash tax credits in respect of energy efficient and environmentally beneficial technologies and products will, under current proposals, not be available from 1 April 2020. However, the availability of the first year allowance for expenditure on electrical car charging points is proposed to be extended until April 2023.
- A range of specific and narrow anti-avoidance rules.
- Further reforms regarding collection of taxes, application of penalties, and related issues focused on tax evasion.
- Plans to move all tax reporting, compliance, and payments onto a digital platform by 2020.
- Relief for carried forward capital losses will be brought into line with relief for carried forward income losses from 1 April 2020. From that date, capital losses carried forward will only be able to be offset in a later accounting period against 50% of any capital gains arising in excess of GBP 5 million, with a single GBP 5 million ‘deductions allowance’ per group against which carried forward losses (both income and/or capital) can be set.
- When a company becomes resident in the United Kingdom on or after 1 January 2020, or a company that is not resident in the United Kingdom begins to hold an asset for the purposes of a trade carried on by the company in the United Kingdom through a permanent establishment on or after 1 January 2020, the asset will be deemed to have been acquired by the company at market value if the company has been subject to an EU exit charge in relation to the asset.
Measures focused on international matters
- In October 2016, the European Commission (EC) published four draft directives as part of an EU corporate tax reform package. The proposals include: a common corporate tax base (CCTB) to harmonise the corporate tax base across the European Union from 1 January 2019; a consolidation of the results of entities in a corporate group in the European Union under a single filing and apportionment of the aggregate profits to individual member states via a common consolidated corporate tax base (CCCTB) from 1 January 2021; measures to address hybrid mismatches in relation to non-EU countries from 1 January 2019; and extending existing double taxation dispute resolution mechanisms in the European Union by 31 December 2017. It remains to be seen whether these proposals will be adopted, and, if so, whether there will be amendments to the content or timetable, and how this will interact with the UK’s negotiations for leaving the European Union.
- From April 2020, a new digital services tax of 2% will apply to the revenues of certain digital businesses to reflect the value they derive from the participation of UK users, pending an appropriate international solution. The tax will apply to annual ‘UK’ revenues above GBP 25 million from activities relating to search engines, social media platforms, and online marketplaces (of businesses with in-scope annual global revenues of more than GBP 500 million). Loss-makers will be exempt, and businesses with very low profit margins will be subject to a reduced effective rate.