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Budget 2015: the impact on multinationals

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If you are the sort of multinational group that makes its money extracting oil or gas from beneath the sea, you were probably quite pleased with a Budget that promises to bring some welcome respite from falling oil prices by reducing both petroleum revenue tax (from 50% to 35%) and the supplementary charge (from 30% to 20%), as well as introducing a simplified investment allowance.

It is not such good news if you operate in the financial services sector. For banks, there is the now almost obligatory annual hiking of the bank levy, this time intended to raise a fairly hefty additional £900m a year (the levy originally having been intended to raise £2bn a year in total), as well as the restriction on using carry forward losses announced at Autumn Statement 2014. This latest hike will only increase the competitive disadvantage for UK headed banks operating overseas. Perhaps more surprising was the announcement that the government intends to change the law, so that customer compensation payments will no longer be tax deductible. While the public policy argument for punishment fines not being deductible is relatively clear, not allowing a deduction for what is, in effect, the rebate of taxable income is singling the banks out for special treatment. And both banks and insurers can expect an increased VAT burden from 1 August 2015 onwards, as the VAT rules are tightened to prevent supplies made by non-UK branches being taken into account in determining input tax recovery. (A company with branches outside the EU and making supplies of financial services to predominantly non-EU customers previously tended to give a good bump to its VAT recovery rate on overheads.)

For multinationals more generally, there are two changes which particularly catch the eye, one welcome and one not so.

The welcome change is that the diverted profits tax (DPT) notification rules are to be relaxed. One of the main (many?) criticisms levelled at the 10 December 2014 draft of the DPT legislation was that the notification threshold was set far too low, leading to an increased compliance burden for many groups that would not ultimately suffer a DPT charge. At the DPT open day, HMRC said this was deliberate to ensure that it was notified of anyone even potentially within scope and received sufficient information to judge for itself whether certain conditions were met for the charge to apply. Although we are still waiting to see the details, the government has announced that the notification requirement has been narrowed, amongst other changes, which ought to reduce the compliance burden for many groups.

The less welcome change is the new anti-avoidance rule intended to prevent loss refreshing. Many multinational groups engage in some form of what might be called loss refreshing – entering into an arrangement intended to convert a less useful carry forward loss into a more useful current year loss. To date, this would generally have been regarded merely as good corporate housekeeping – the group is simply ensuring that it pays tax on its actual net economic profit. Indeed, HMRC even acknowledges in its Corporate Finance Manual at CFM92210 that: ‘Planning of this sort, designed to utilise reliefs in the most efficient way, is widespread and has never been regarded as particularly offensive by HMRC.’ No longer. According to the Red Book this is now regarded as ‘side stepping’ the rules and is not on. Groups should be aware that they need to consider the impact on any existing arrangements, as the rule will apply with effect from 18 March 2015 to arrangements entered into at any time.

At least the new rules contain a main purpose test, which ought to help those looking to structure a commercial transaction in an efficient manner. They will also be conditional on the anticipated value of the tax advantage being greater than the anticipated value of the other economic benefits of the transaction. However, in the real world such value comparison tests are notoriously difficult to apply. While a tax advantage may have a readily ascertainable monetary value, the ‘other economic benefits’ of the transaction may not. The final point to note is that this is only targeted at loss refreshing. Planning that consists of moving a profitable activity or income producing asset into a company with stranded losses is still considered to be the right side of the line – at least for now.