Corporation Tax

Diverted Profits Tax

The diverted profits tax will apply to diverted profits arising on or after 1 April 2015, with apportionment rules for accounting periods that straddle that date. The tax does not apply where, broadly, the parties to the relevant transactions are small and medium sized enterprises. It is a tax that is aimed at large multinational groups of companies and is intended to deter the implementation of aggressive tax planning which seeks to divert profits away from the UK, in order to minimise the group’s overall corporation tax bill.

The diverted profits tax effectively operates by applying a 25% tax charge on diverted profits relating to UK activity and applies to companies that:

  • design their activities to avoid creating a taxable presence (a permanent establishment) in the UK; or
  • create a tax advantage by using transactions or entities that lack economic substance. Note this rule also applies where a non-UK resident company (‘the foreign company’) trades through a UK permanent establishment.

The initial onus to notify liability falls on the relevant company.

Film Tax Relief

Subject to State aid clearance, the Government will increase the rate of film tax relief to 25% for all qualifying expenditure. This will apply from 1 April 2015 or, if later, the date of approval by the European Commission.

High-end Television Tax Relief

With effect for qualifying expenditure incurred on and after 1 April 2015, subject to State aid clearance, the minimum UK expenditure requirement for television tax relief will be reduced from 25% to 10% for companies within the charge to corporation tax that are directly involved in the production of high-end television or animation. The cultural test will be modernised.

Children’s Television Tax Relief

The existing television tax reliefs for animation and high-end TV are extended to children’s television programmes, including children’s game shows and competitions. Companies within the charge to corporation tax that are directly involved in the production of children’s television programmes will be able to claim a deduction from their profits at the rate of 25% on qualifying expenditure incurred on eligible programmes on and after 1 April 2015. Where that additional deduction results in a loss, the company may surrender the loss for a payable tax credit. Both the additional deduction and the payable credit are calculated on the basis of a maximum of 80% of the total UK core expenditure by the qualifying company. The additional deduction is 100% of qualifying core expenditure and the payable tax credit is 25% of losses surrendered.

Children’s programming will not be subject to the £1m per programme hour threshold or the 30 minute slot length that apply to high-end TV programmes.

Orchestra Tax Relief

Legislation will be introduced in a future Finance Bill for a new relief for orchestras at a rate of 25% on qualifying expenditure from 1 April 2016.

Accelerated Payments and Group Relief

The Government will introduce legislation to ensure that the accelerated payments legislation works effectively where avoidance arrangements give rise to losses surrendered as group relief. It will be applicable to all cases involving group relief where there is an open enquiry or open appeal on or after the day of Royal Assent to Finance Act 2015. Where a company makes a return asserting a tax advantage from chosen arrangements, and then surrenders all or part of that advantage as group relief, the legislation will allow HMRC to issue an accelerated payment notice to the effect that the asserted advantage may not be surrendered while the dispute is in progress.

Modernisation of Corporate Debt and Derivative Contracts

A series of wide-ranging changes have been announced to update, simplify and rationalise the legislation on corporate debt and derivative contracts.

The main changes will be:

  • The relationship between accountancy and tax will be clarified and strengthened. In particular, the requirement that amounts brought into account for tax must ‘fairly represent’ the profits, gains and losses arising will be removed.
  • The calculation of taxable amounts will be amended to bring them into line with the usual approach to the computation of profits. Taxation will be based only on amounts recognised as items of accounting profit or loss, rather than on amounts recognised anywhere in accounts – in reserves or equity, for example. A transitional rule will ensure that this change is broadly tax neutral.
  • Taxable amounts that would otherwise arise where arrangements are made to restructure the debts of a company in financial distress with a view to ensuring its continued solvency will be excluded. This will cover situations where debt is released, or where the terms are modified, supplementing and extending the existing rule that exempts credits arising in debtor companies when creditors exchange debt investment for an equity stake.
  • A new regime-wide anti-avoidance rule will counter arrangements entered into with a main purpose of obtaining a tax advantage by way of the loan relationships or derivative contracts rules. As a consequence, a number of existing specific anti-avoidance rules will be repealed.

The first two changes will apply for accounting periods commencing on or after 1 January 2016. The latter two apply, respectively, to releases and modifications on or after 1 January 2015 and arrangements entered into on or after 1 April 2015. The Government has announced that these changes will be legislated for in a future Finance Bill.

Research and Development

Legislation will be introduced to restrict qualifying expenditure for research and development (R&D) tax credits so that the cost of consumable items incorporated in products that are sold in the normal course of a company’s business are not eligible for R&D relief, with effect from 1 April 2015. Qualifying expenditure on consumable items will be limited to the cost of only those items fully used up or expended by the R&D activity itself which do not go on to be sold as part of a commercial product. This restriction will not apply where the product of the R&D is transferred as waste, or where it is transferred but no consideration is given.
In addition, from 1 April 2015, the rate of the above the line credit for large companies will increase from 10% to 11% and the rate of the relief for the SME scheme will increase from 225% to 230%.

Consortium Relief

Legislation will be introduced to repeal all requirements relating to the location of a ‘link company’ for consortium claims to group relief. This will apply to all claims to group relief for accounting periods beginning on and after 10 December 2014. Prior to this amendment the link company had to be in the UK or EEA. This measure makes the tax system simpler by removing differences in treatment of link companies based in the UK and other jurisdictions.

Goodwill Transfers on Incorporation

Corporation tax relief will be restricted where a company acquires internally-generated goodwill and customer-related intangible assets from related individuals on the incorporation of a business on or after 3 December 2014, unless the transfer is made pursuant to an unconditional obligation entered into before that date. Currently companies are given corporation tax relief on internally-generated goodwill even when there is continuing economic ownership. This change will ensure that businesses that do not incorporate are not at a disadvantage compared to those which do.

Companies already receiving relief for goodwill recognised on incorporation will not be affected.

Corporate Loss Refresh Prevention

From 18 March 2015 there are restrictions to prevent companies converting brought forward trading losses, non-trading loan relationship deficits and management expenses into in-year deductions. Where a company enters into an arrangement, the main purpose of which is to utilise the brought forward losses, it will be unable to use the brought forward losses against profits created as a result of the arrangement.

Deduction at Source from Interest Paid on Private Placements

A UK company’s duty to deduct income tax from certain payments of yearly interest will not apply to a payment of interest on qualifying private placements and the condition relating to the minimum term of the security will be removed. The primary legislation for this measure will have effect on or after the date of Royal Assent to Finance Act 2015 and regulations will set out detailed conditions of private placements that qualify for the exemption. These regulations may allow the exemption to be targeted at particular types of company, and may contain safeguards to ensure the exemption is not abused.

Country-by-country Reporting

Legislation will be introduced in Finance Bill 2015 that gives the UK the power to implement the OECD model for country-by-country reporting. The new rules will require multi-national enterprises (MNEs) with a parent company in the UK to make an annual country-by-country report to HMRC showing, for each tax jurisdiction in which they do business:

  • the amount of revenue, profit before income tax and income tax paid and accrued; and
  • their total employment, capital, retained earnings and tangible assets.

Regulations giving effect to the scope and detail of the reporting obligation will be made at a later date.

Late Paid Interest

As part of the review of the legislation on corporate debt announced at Budget 2013, the Government will repeal rules concerning loans made to UK companies by a connected company in a non-qualifying territory.