Extensive and far reaching reforms to the United Kingdom’s (UK's) corporate 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.
Up to 2017 most of the reforms to tax rules were typically announced in November/December and March each year before becoming law in the Finance Act, usually in the following July. This pattern is disrupted in years of a general election. So, a truncated Finance Act 2017 became law in April 2017 ahead of the June 2017 general election. A second, and more extensive, Finance Act became law in November 2017 with several of those reforms effective from 1 April 2017. From 2017 the timetable for reform to the tax rules has changed, with reforms expected to become law in February or March each 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. 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 below 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:
- Reduction in the rate of corporation tax to 19% with effect from 1 April 2017.
- Revised loss utilisation rules from 1 April 2017 to allow more flexible use of losses carried forward, but with a restriction on the utilisation of carried forward losses to 50% of the relevant profits. The restriction applies only to profits in excess of 5 million pound sterling (GBP). For banks, the maximum loss offset is limited to 25%.
- Introduction from 1 April 2017 of new interest deductibility rules (BEPS Action 4), including a fixed expense ratio of 30% of UK earnings before interest, taxes, depreciation, and amortisation (UK EBITDA), a group ratio rule for highly geared groups, and an overall cap that limits UK net interest deductions to the worldwide group’s net interest expense.
- Relaxation of the conditions for the substantial shareholding exemption making it simpler, more coherent, and more internationally competitive, effective from 1 April 2017.
- Introduction of the apprenticeship levy of 0.5% of total payroll costs of employers in excess of GBP 3 million per annum with effect from 1 April 2017.
- Introduction of anti-avoidance provisions in respect of hybrid mismatches from 1 January 2017.
- Additional tax incentives for museum and gallery exhibitions from 1 April 2017.
- The patent box rules are amended with effect from 1 April 2017 to address cases where research and development (R&D) is developed under a cost sharing arrangement.
- For companies claiming under the large company R&D expenditure credit scheme, the 'above the line' tax credit is increased from 11% to 12% of qualifying expenditure from 1 January 2018.
- Introduction, with effect from 30 September 2017, of a corporate criminal offence of facilitating tax evasion.
- Double taxation treaty passport (DTTP) scheme was extended from 1 April 2017 to all borrowers, and provides a simplified procedure to obtain approval for the payment of interest overseas without deduction of WHTs.
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.
- Introduction, from April 2018, of a levy on producers of soft drinks.
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.
- 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.
Measures focused on international matters
- Introduction of secondary adjustments to the UK’s transfer pricing legislation.
- 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 GAAR, (iv) controlled foreign company (CFC) rules, and (v) a framework to tackle hybrid mismatches. Member states have 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 a GAAR, CFC rules, rules to address hybrid mismatches and interest deductibility. It remains to be seen whether the United Kingdom will introduce legislation to implement the exit tax requirements of the ATAD.
- 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.
- With effect from April 2019, withholding tax obligations will be extended to royalty payments, and payments for certain other rights, made to some low or no tax jurisdictions in connection with sales to UK customers. The rules will apply regardless of where the payer is located.
- All gains on non-resident disposals of UK property will be brought within the scope of UK tax. This will apply to gains accrued on or after April 2019. Targeted exemptions will be introduced for institutional investors such as pension funds.
- From April 2020 income that non-resident companies receive from UK property, and gains that arise on the disposal of UK property, by non-resident companies will be chargeable to corporation tax.