Spring Budget 2017 – Corporation Tax

The budget re-affirmed a number of announcements mentioned in previous Spring and Autumn budget statements. The details are as follows:

Substantial Shareholding Exemption 

Finance Bill 2017 will include provisions removing the investing company requirement and provide a more comprehensive exemption for companies owned by qualifying institutional investors. 

Loss relief reform 

The Finance Bill will also include previously announced changes covering the use of corporate losses carried forward from earlier periods. The reform will:

  • give all companies more flexibility by relaxing the way in which they can use losses arising on or after 1 April 2017 when they are carried forward. These losses will be usable against profits from different types of income and profits of other group companies;
  • restrict the use of losses carried forward by companies so that they cannot reduce profits arising on or after 1 April 2017 by more than 50%. This restriction will apply to a company or group’s profits above £5 million. Carried forward losses arising at any time will also be subject to the restriction.

Both these reforms will take effect from 1 April 2017.

Northern Ireland (NI) Corporation Tax change 

The Government will amend the NI corporation tax to give all SMEs trading in Northern Ireland the potential benefit. The Northern Ireland Executive has committed to setting a rate of 12.5% in April 2018. Amendments will also be made at the same time to minimise any abuse.

Tax relief for museums and galleries 

The new tax relief for museums and galleries who develop new exhibitions including those which are toured, will be introduced to take effect from 1 April 2017.

The rates for the relief are 25% for touring exhibitions and 20% for non-touring exhibitions. The relief will allow museums and galleries to claim a credit worth up to £100,000 on exhibitions that are toured and £80,000 on non-touring exhibitions. The maximum credit allowable is the equivalent of qualifying expenditure of £500,000. Following consultation, the draft legislation will be revised to allow for exhibitions which have live performances as part of the exhibition (but where a live performance is not the main focus of the exhibition).

Tax deduction for contributions to grassroots sport 

It was confirmed that the government will expand the circumstances in which companies can get deductions for contributions to grassroots sports with effect from 1 April 2017. Following consultation, the legislation has been amended to extend the treatment of a sport governing body to its 100% subsidiaries.

Patent Box – cost sharing arrangements 

Specific changes to the Patent Box rules will be made where Research and Development (R&D) is undertaken collaboratively by two or more companies under a cost sharing arrangement. The provisions will ensure that companies are neither penalised nor able to gain an advantage under these rules by organising their R&D in this way. Following consultation, the legislation will be revised to narrow the definition of a cost-sharing arrangement and to better align the treatment of payments into, and payments received from, a cost-sharing arrangement by the company. These changes will take effect on or after 1 April 2017.

Deductibility of corporate interest expense 

As part of the Base Erosion Profit Shifting (BEPS) initiative, the Government will introduce with effect from 1 April 2017, a limit to tax deductions that companies can claim for their interest expenses.

The new rules will restrict each company/group’s net deductions for interest to 30% of the earnings before interest, tax, depreciation and amortisation (EBITDA) that is taxable in the UK. An optional group ratio rule, based on the net-interest to EBITDA ratio for the worldwide group, may permit a greater amount to be deducted in some cases. Companies/groups with net interest of up to £2m will not be affected by these rules.

Following consultation, changes to the proposed rules will be reflected in the Finance Bill 2017. In particular:

  • certain unintended restrictions arising from the modified debt cap that could prevent deductions for carried forward interest expense will be removed;
  • the optional alternative rules for public infrastructure will be easier to apply in practice. There will be no need to compare the level of indebtedness of companies qualifying for these rules with that of non-qualifying group companies, such as those outside the UK; transitional rules will apply in the first year so that business have time to restructure if necessary to qualify for the alternative rules;
  • the rules treat interest on debt guaranteed by related parties as related party interest, which can be subject to restrictions. This rule will not apply to certain performance guarantees and all guarantees granted before 31 March 2017, nor will it apply to intra-group guarantees in the context of the group ratio rule;
  • the definition of interest will include income and expenses from dealing in financial instruments as part of a banking trade;
  • rules will be introduced for insurers regarding the calculation of interest on an amortised cost basis to provide a practical alternative to fair value accounting.

The majority of these reaffirmed changes will be welcomed. From an SSE perspective, the changes will simplify the rules and increase the scope of the exemption which will benefit many trading businesses operating within groups. The changes for losses will also be welcomed as they provide greater flexibility in the use of losses for most SMEs.

The interest restriction should only apply to larger companies/groups so many companies will therefore still be able to fully deduct their interest expense as before.