An overview of the key issues in the draft Finance Bill 2017 clauses for businesses, employers and individuals.
Summary of proposal
The publication of the draft provisions for Finance Bill 2017 is a major event for taxpayers and tax advisers as it provides a significant level of detail for the forthcoming fiscal changes from April 2017. Whilst these draft clauses are for consultation, in the main the relevant policy decisions have already been taken and expected future payments of tax booked in the Government’s budget. Consequently, it is now solely a matter of fine tuning the draft legislation before Parliament commences its debates later next year.
Overall the Finance Bill follows on from the consultations published over the summer and consequently is the enactment of the proposed policies of the previous Conservative administration. It could be viewed as the final Christmas present from George Osborne.
From a corporate perspective, there are major changes on interest restrictions, loss reliefs and the substantial shareholdings exemption. The interest restrictions will only apply to groups with net interest expense of more than £2 million, so will only apply to large corporate groups. In addition there are significant elements of the new regime which have yet to be published. This includes the reliefs available to companies investing in public infrastructure which are likely to be less restrictive than previously announced. However, the proposals are a significant tax raising measure for the Government, and there are around 20 pages of detailed compliance requirements, out of a current 55 pages for the whole regime. This is likely to be a major headache as companies understand the new rules and plan to integrate the new filing requirements into their systems.
The loss rules will relax the loss streaming rules for losses incurred post 1 April 2017, so that future losses are not trapped in group companies. However, whilst there is no restriction of brought forward losses to offset against up to £5 million of profits, over £5 million only 50% of profits will be eligible to be offset, leaving 50% of profits chargeable to corporation tax. The detailed rules are complex, but this is in the main a relieving measure for groups with small levels of brought forward losses and future profits. It is overall a tax raising measure, so large groups will be hit and there are a number of complications regarding the availability of double tax relief. Other categories of business particularly caught by these rules will be entrepreneurial business, leasing business and certain PFI structures which have significant initial losses. The new rules do not apply to capital losses.
One area of good news, and a real simplification, are the changes to the substantial shareholdings exemption which exempt qualifying disposals of shares from corporation tax. For disposals from 1 April 2017, the requirement that the investing company should be a member of a trading group is to be abolished, so only the company being disposed of needs to be trading. Even this later requirement is being dispensed with if at least 80% of the ultimate shareholders in the group are qualifying institutional investors, such as pension funds, sovereign wealth funds, etc. However this relief does not apply to quoted groups. There are other relieving changes to the substantial shareholdings exemption. This simplification will be warmly welcomed by businesses.
In the private client field, the promised changes to the non-UK domiciled regime are almost here. From 6 April 2017, those individuals who have been resident in the UK for 15 out of the last 20 years will be deemed to be domiciled in the UK (DD) and taxable on their worldwide income and gains as they will no longer be able to avail themselves of the remittance basis for non UK source income and gains. There is the welcome introduction of transitional reliefs. The extension of the window for “cleansing” of mixed funds to two years will benefit all non-UK doms (apart from so called ‘returners’). For those becoming DD in 6 April 2017 there is rebasing of directly held capital assets to market value at 5 April 2017 and the possibility of reorganising assets that are not currently held personally so that they can be rebased.
Following the consultation over the summer, whilst there are welcome changes to the proposals for offshore trusts, there are further adverse changes to the capital payments legislation. Any non-UK domiciled individual who has been resident in the UK for a number of years will need to take personal tax advice as to the personal consequences of these changes.
From 6 April 2017 the scope of inheritance tax (IHT) is extended to include UK residential property owned indirectly. Non-UK close companies and partnerships holding such property will be effectively transparent for IHT purposes. A significant change is that these rules have been extended to include money lent and security provided for a loan to acquire, maintain or repair UK residential property. Such loans and/or security will be subject to IHT in the estate of the lender, regardless of lender’s residence and domicile position.
The changes to the employment intermediaries regime for public sector entities will be a significant change. In particular, this will impact any entity subject to the Freedom of Information regime and thus has quite a wide reach and the potential to either increase costs for the public sector or restrict access to the flexible labour market.
The change with the widest potential impact on employees however is likely to be that being made to salary sacrifice arrangements. Due to the increasing cost to the Exchequer, the Government has decided to remove the income tax and NIC advantages associated with salary sacrifice. Previously salary could be sacrificed in return for Benefits-in-Kind (BiKs) which attracted lower income tax and NIC. From April 2017 however, the general rule will be that BiKs delivered as part of a salary sacrifice arrangement will be subject to income tax and NIC at the higher of (i) the salary sacrificed or (ii) the taxable amount of the BiK under existing rules, so removing the advantage.
There will be exclusions from the new regime for salary sacrifice arrangements involving pension saving, childcare, cycle-to-work scheme, purchase of annual leave and ultra-low emission company cars (with CO2 emissions less than or equal to 75 g/kms). BiKs provided outside of salary sacrifice arrangements will also be unaffected.
To allow for a smooth transition to the new regime, and in acknowledgement that many will already be tied into salary sacrifices straddling April 2017, the new regime will not apply to arrangements put in place pre-April 2017 until, broadly speaking, the earlier of:
• The date that the arrangement comes up for renewal; and
• 6 April 2021 for cars, accommodation and school fees or 6 April 2018 for all other affected BiKs.
Other employment tax changes include amendments to the disguised remuneration legislation which is being extended yet again, and the introduction of a disguised remuneration type approach to combat tax avoidance in the self-employed sector. There are also major changes to the taxation of offshore pensions, to modernise and align them with UK pensions, and to the taxation of certain types of termination payments.
There is also a new tax being introduced, the soft drinks industry levy, payable by packagers and importers of soft drinks. This is likely to be colloquially known as the sugar levy. As this is a ‘sin’ tax designed to change behaviour, it is noticeable that there have already been changes in products to reduce the impact of this new levy.
As mentioned above, there is more draft legislation to come in January next year, particularly with regards to partnerships, interest restrictions and non-UK domiciled changes. This should be the last draft Finance Bill published in December. Following the announcement in the Autumn Statement that the Budget will now take place in the autumn from 2017, the publication of the draft Finance Bill will be moved backwards to the summer. Therefore we should expect the 2018 Finance Bill to be published in draft in around eight months’ time. So it will now be a busy time over the winter for tax advisers digesting the detail in the draft Finance Bill, but in future it will be a busy summer.
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