Global Tax Adviser, March 21, 2016. The UK presented its 2016 Budget on March 16, 2016. The budget lowers the UK corporate tax rate to 17% by 2020 and introduces new rules to restrict the deduction of interest payments by large corporations starting April 1, 2017. The budget also simplifies the loss relief rules but caps the losses which can be offset in each period to 50% of group profits, in excess of £5 million.
The corporate tax rate is scheduled to stay at 20% for Financial Years 2015 and 2016 and will be reduced to 19% by April 2017. The budget announced a further reduction to 17% beginning in April 2020. Additionally, the previous proposal to bring forward corporation tax payment dates for companies with profits in excess of £20 million has been deferred by two years. This proposal will apply to accounting periods starting on or after April 1, 2019.
The UK demonstrates a commitment to adopting the OECD best practice recommendations under BEPS Action 4 on combating base erosion via interest deductions and other financial payments. The budget introduces new rules restricting the deduction of interest payments.
The new rules will include the following:
The budget includes major reforms to the loss relief rules. Beginning April 1, 2017, the rules propose to restrict the losses (whenever generated) which can be offset in each period to 50% of group profits, in excess of £5 million.
Banking groups already have similar loss restriction rules in place for losses accruing before April 1, 2015. Although banks may become subject to the new loss restriction rules for their post-April 1, 2015 losses, they will continue to be subject to the existing bank-specific rules for older losses - including those generated during the financial crisis. The use of these older losses is to be further restricted by tightening the limit on losses which can be offset to 25% of profits from 1 April 2016.
The budget proposes increased flexibility in the use of corporate losses, but the proposals are not yet available. The UK plans to hold government consultations on these plans later in the year.
Beginning March 17, 2016, the method of charging Stamp Duty Land Tax (SDLT) on the acquisition of non-residential (or mixed-use) properties changes, and all considerations (generally VAT-inclusive) over £250,000 will be subject to SDLT at 5%.
The Chancellor made a surprise announcement to reduce the rate of capital gains tax (CGT) for disposals on or after April 6, 2016. The current rates of 18% for a basic rate taxpayer and 28% for higher and additional rate taxpayers will be replaced by rates of 10% and 20% respectively.
However, the current rates of 18% and 28% will be retained for capital gains arising on residential property, and carried interest arrangements. There are no changes to the CGT exemption for an individual's main residential property.
Anti-treaty shopping provision
A new domestic anti-treaty-shopping provision will be introduced to deny treaty benefits where royalty payments are routed through a connected company in a treaty jurisdiction to gain a tax advantage.
Payments in respect of intangible assets
UK income tax withholding tax requirements will be extended to payments made in respect of intangible assets, such as trademarks and brand names.
Payments connected with the activities of a UK permanent establishment of an overseas company
UK withholding tax requirements will be extended to payments made in respect of intangible assets, such as trademarks and brand names.
The budget introduces rules to address hybrid mismatch arrangements, beginning January 2017, in line with the OECD recommendations. These rules will be extended to eliminate the advantages that arise from mismatches involving permanent establishments.
For details, see a Budget 2016 on a Page and commentary prepared by KPMG UK.
For more information, contact your KPMG adviser.
Information is current to March 21, 2016. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500