Unification of Rates: Consequential Changes

In the 2013 Budget it was announced that there would be a single unified corporation tax rate of 20% with effect from 1 April 2015. As a result, the ‘associated companies’ provisions, which prevent a tax advantage arising where a single business is operated through a number of small companies, will only be necessary in certain limited circumstances. Consequently, those provisions are to be replaced with a 51% group test which will apply to:

  • ring fence profits of oil and gas companies where there will continue to be more than one corporation tax rate;
  • the patent box where companies with profits below limits of £1m or £3m can elect to use a simplified method in calculating profits subject to the 10% tax rate;
  • capital allowances which are restricted for assets with a useful life of 25 years or more (long-life assets) where the expenditure exceeds a limit of £100,000; and
  • quarterly instalment payments where regulations set an upper limit for profits above which a company must pay tax by instalments.

Corporate Loss Relief

The rules restricting the availability of relief for corporation tax trading losses when companies change ownership will be relaxed for any qualifying change of ownership on or after 1 April 2014 as follows:

  • a holding company will be allowed to be inserted at the top of a group of companies;
  • the test as to whether there has been a ‘significant increase in capital’ of a company with investment business will be amended so that the capital of the company after the change has to exceed the amount of capital before the change by both £1m and at least 25%.

Avoidance Involving Losses

Existing anti-avoidance provisions which counter the use of capital losses in contrived arrangements to shelter income profits through the creation of a capital gain are to be amended. The changes are intended to confirm that the provisions can apply to arrangements under which chargeable gains or capital losses arise under legislation other than the Taxation of Chargeable Gains Act 1992. The changes will apply to disposals on or after 30 January 2014 and to arrangements entered into on or after that date under which a gain arises otherwise than on a disposal.

Film Tax Relief

From 1 April 2014, subject to State aid approval, the existing film tax relief rules are to be amended to remove the ‘cliff-edge’ between the two rates. Film tax relief will be available for surrenderable losses at a rate of 25% up to the first £20m of each production’s qualifying core expenditure (to a maximum of 80% of the qualifying production core expenditure) and 20% thereafter (to a maximum of 80% of the qualifying production core expenditure), for all productions. The minimum UK spending requirement will be reduced from 25% to 10%.

Creative Industries Reliefs

Following the introduction of corporation tax reliefs for high-end television and video games in 2013, amendments are to be made in Finance Act 2014 to clarify that only those games or television programmes on which relief is claimed are to be treated as separate trades. Additionally, changes are to be made to the video games legislation to make it compliant with EU State aid approval. The changes to the video games provisions will take effect when State aid approval has been received, and the change to the television provisions will take effect from Royal Assent to the Finance Act.

A new corporation tax relief is to be introduced for theatrical productions and touring theatrical productions. The legislation will be introduced during the passage of the 2014 Finance Bill following consultation.

Research and Development (R&D) Tax Relief

From 1 April 2014 the rate of R&D payable tax credit for loss-making small and medium-sized enterprises (SMEs) will be increased from 11% to 14.5%. This will increase the rate of the cash credit payable to SMEs that conduct qualifying R&D activity but do not have corporation tax liabilities.

Modernising the Taxation of Corporate Debt and Derivative Contracts

Where a company ceases to be a member of a group on or after 1 April 2014 the ‘de-grouping’ provisions that apply when a company to which a loan relationship or derivative contract has been transferred will be amended to bring into account both credits and debits.

Worldwide Debt Cap

Finance Act 2014 will include two changes to the worldwide debt cap rules which limit the tax deduction for interest and other finance expenses for UK members of international groups of companies. The first change will ensure that a UK resident company which does not have ordinary share capital can be subject to the rules and will apply for accounting periods beginning on or after 5 December 2013. The second change will enable regulations to be made to include conditions to be met by companies making an election to transfer debt cap liabilities to another group company and will apply on or after the date of Royal Assent to Finance Act 2014.

Controlled Foreign Companies (CFCs): Profit Shifting

Finance Act 2014 will introduce legislation, effective from 5 December 2013, which prevents the non-trading finance profits of a CFC from being regarded as a qualifying loan relationship if they are connected with an arrangement the main purpose of which is to artificially divert non-trading profits from a UK company into a CFC.

A further change, also effective from 5 December 2013, tightens the provisions that prevent relief to a creditor relationship of a CFC when the third party debt of a non-UK resident group company is repaid and effectively replaced with new UK debt.

Avoidance Schemes Involving the Transfer of Corporate Profits

Finance Act 2014 will introduce a measure blocking tax avoidance arrangements where profits are transferred between companies in the same group for tax avoidance purposes. It will not apply to any arrangement falling within CTA 2009, s 695A (derivative contracts). The new measure will apply to payments made on or after 19 March 2014 arising from arrangements entered into on any date.

Avoidance Using Total Return Swaps

Avoidance schemes where deductions are claimed for payments between companies in the same group under derivative contracts which are linked to company profits are to be blocked. This measure applies from 5 December 2013 to schemes entered into at any time and ensures that deductions are not allowed for corporation tax purposes where a payment is made under a derivative contract which is, in substance, a payment of profits. Certain commercial transactions will not be affected.

Exclusion of Research and Development Allowances from Loss Buying Rules

Anti-avoidance provisions which apply to prevent ‘loss buying’ where there is a change in the ownership of a company are to be amended with effect for changes of ownership occurring on or after 1 April 2014. The amendment will exclude expenditure which is crystallised as research and development capital allowances from the deductions which are restricted by the provisions.