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Your guide to Finance Bill 2016

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Key measures in Finance Bill 2016 include the following:

  • The further cut in the CT rate to 17% from 1 April 2020.
  • Changes to the patent box rules to comply with the OECD proposals dealing with preferential IP regimes.
  • New rules to address hybrid mismatches with some increases in scope from the December’s draft clauses.
  • A package of three measures on royalty payments and the deduction of income tax at source.
  • Legislation requiring certain large groups companies partnerships and UK PEs of foreign entities to publish an annual tax strategy.
  • A special measures regime aimed at tackling large businesses that engage in aggressive tax planning or refuse to engage with HMRC in an open and collaborative manner.
  • Oil and gas changes including the reduction of...

On 24 March 2016, the government published Finance Bill 2016 (technically introduced as Finance (No. 2 Bill) 2015/16 but intended to become Finance Act 2016). The government noted, in its accompanying press release, that the Bill contains measures which are intended to provide opportunity for families, back British business and tackle multinational tax avoidance.

In addition to the specific measures the government highlights (including the cut in corporation tax to 17% in 2020 and increases in personal allowances and thresholds) there are many more changes in the Bill which taxpayers will be interested in. They include new rules to tackle hybrid mismatch arrangements, extend the circumstances in which withholding tax will be due on royalty payments and amend the patent box rules. The Bill also takes forward the announced new regime for large business tax compliance, the SDLT changes in respect of non-residential properties, the new dividend tax rules, the reduction in CGT rates, the new investors’ relief and the upcoming apprenticeship levy. This guide focuses on key areas and those areas which were either not included in the draft Finance Bill clauses published in December 2015 or where the draft provisions have been substantially amended. References are to the Bill as published on 24 March.

The Bill’s second reading is scheduled for 11 April, when Parliament returns from the Easter recess. In the course of its progress we expect legislation to ensure that profits from the development of UK property are always subject to UK tax (promised at report stage) and to widen further the circumstances in which withholding tax must be applied to royalties (simply promised ‘later’). Assuming that the Bill follows the usual timetable, report stage would take place at the end of June or the beginning of July, with royal assent before the Summer recess in July.

Business tax

Corporation tax rate in 2020

The Bill confirms (clause 42) that the main rate of corporation tax, which applies to all companies subject to corporation tax except for those within the oil and gas ring fence, will be cut further to 17% from 1 April 2020. The rate from this date had been previously set at 18% in Finance (No.2) Act 2015. This means that the current rate of 20% will be cut to 19% from 1 April 2017 and then cut by a further 2% from 1 April 2020.

This additional 1% cut in the corporation tax rate follows the government’s ongoing policy trend of reducing the rate and, as highlighted in the Business Tax Roadmap, is intended to help support investment in the UK and ensure that the UK has the lowest rate in the G20.

The inclusion of the new rate for 2020 means that for accounting periods ending after the date of substantive enactment (under IFRS and UK GAAP) or enactment (US GAAP) of the Bill, companies will be required to measure deferred tax at differing rates depending upon when the deferred tax is expected to reverse.

Patent box

As anticipated, the Bill included updated legislation (cl 60 and Sch 9) to amend the patent box rules to comply with the OECD proposals dealing with preferential IP regimes. Whilst the majority of the provisions are consistent with the draft clauses released in December 2015, there were a number of important changes and previously omitted items included in the Bill. A summary of some of the key changes is included below.

Perhaps most notably, flexibility is now provided for the grandfathering of products which contain both pre 1 July IP qualifying rights (‘old IP’) and post 30 June IP qualifying rights (‘new IP’). The income from a product can be fully grandfathered either where the ‘value’ of the product is wholly or mainly attributable to old IP or where the proportionate number of old IP rights compared to total qualifying IP rights is 80% or more. Where that is not the case but the proportionate number of old IP rights compared to total qualifying IP rights is between 20% and 80%, then that proportion of income from the product can be grandfathered. This is a welcome amendment to the draft legislation.

As before, the new regime reduces the benefits of the patent box by the ‘R&D fraction’ which is based on the proportion of research and development (R&D) incurred by the company as opposed to outsourced to related parties or acquired IP. As expected, the Bill now includes a provision allowing for an increase in the R&D fraction in exceptional circumstances. This is termed the rebuttable presumption in the OECD final reports on preferential IP regimes. Where it applies, the company may elect to increase the R&D fraction to the amount which, on a just and reasonable assessment, represents the proportion of value of the IP rights attributable to R&D carried on by the company or on the company’s behalf. However, as required by the OECD recommendations, a company must have an R&D fraction of at least 0.325 to elect for this uplift. The legislation does not provide any detail as to what might constitute ‘exceptional circumstances’, although HM Treasury has made it clear that cases of taxpayers using this will be ‘heavily scrutinised’.

The default length of the ‘relevant period’ for tracking and tracing R&D expenditure to the IP has been extended from 15 years to 20 years. In addition, a new provision has been introduced within the relevant period rules to provide clarification on the timing of expenditure for tracking and tracing purposes. Whilst this rule looks to align the timing of expenditure with the time at which it becomes deductible for corporation tax purposes, it should also act as an anti-forestalling measure. Unfortunately, despite representations, it seems that a company is only able to track and trace R&D expenditure at product family level (rather than as individual IP rights) where the product contains more than one item of IP. This remains a significant issue for some taxpayers.

The Bill also includes an updated ‘safeguard’ to prevent IP being transferred into the grandfathered patent box regime. The previous safeguard prevented grandfathering where the IP was transferred into the UK from a territory without a preferential IP regime between 2 January and 30 June 2016. This has now been relaxed such that grandfathering is available in such circumstances provided a main purpose test is satisfied. This is a welcome addition to the finalised legislation.

The government is considering further changes to the legislation to address issues that arise from acquisitions of businesses and collaborative development (such as cost contribution arrangements) and it is unfortunate that legislation has not been released on this. HM Treasury has also noted that a number of policy areas relating to the patent box will be kept under review, and that they are still keen to hear real-life examples of cases where the updated legislation may create issues.

Hybrid mismatch arrangements

The Bill includes the new rules (Sch 10) to address hybrid mismatches which were included in December’s draft clauses, but with some increases in scope. The rules implement the best practice recommendations in the OECD’s final report on Action 2 of the base erosion and profit shifting (BEPS) project. Hybrid mismatches are defined as cases where an amount is deductible in one jurisdiction but not taxed in any other (a deduction/non-inclusion mismatch), or where an amount is deductible more than once (double deduction mismatches). They are not restricted to financial transactions and are also seen, for example, in respect of payments relating to IP.

Hybrid mismatches are countered by a primary response of disallowing a deduction where the UK is the jurisdiction of the payer in respect of a deduction/non-inclusion mismatch. Where the UK is the payee jurisdiction, and the primary response has not been applied in another jurisdiction, the UK will bring the receipt into charge. In the case of a double deduction, the UK will deny the deduction where it is the parent jurisdiction. If the UK is the payer jurisdiction and the deduction is not denied in the parent jurisdiction, the UK will deny the deduction to the payer.

As announced in Budget 2016, the scope of the rules in the Bill has been expanded over December’s draft clauses to include various cases where payments are made to or from a permanent establishment (PE). Where a double deduction is available to both a PE and its UK head office, the rules provide that the head office can only take the deduction against dual inclusion income (income taxed in both the PE and the head office). If the PE is in the UK and the head office jurisdiction does not disallow the deduction under its own anti-hybrid provisions, then the PE can only deduct the amount against dual inclusion income.

A further expansion in scope encompasses situations where a UK company makes a payment to a non-UK company with a PE in another territory (regardless of whether the PE is recognised as such in the relevant territory), or a payment is made to a UK company with a non-UK PE. There is a mismatch if the payer company receives a deduction for the payment, but there is no inclusion in the PE or its parent. Counteraction if the payer is a UK company is to deny the deduction. If the payee company head office is in the UK and the payer company’s deduction is not denied under UK or non-UK rules, the head office is subject to tax on the receipt.

A further increase in scope applies where a PE makes a payment to its head office and the deduction in PE exceeds the income inclusion for the head office. In this case, where the PE is within the UK corporation tax net, the excess deduction is denied unless it is deducted against dual-inclusion income. Where the head office is in the UK and the excess deduction in the PE is not otherwise dealt with, the head office is taxed on the excess, taking account of any dual inclusion income.

Other new features in the Bill include an anti-avoidance provision intended to counteract arrangements which seek to circumvent the anti-hybrid rules in a manner inconsistent with the OECD BEPS Action 2 report. There is also a saving provision so that where a payment for which a deduction was denied is subsequently brought into UK tax, in certain circumstances the receipt is exempted from tax.

The rules come into effect from 1 January 2017. Where a company has an accounting period that straddles 1 January 2017, it is deemed to start a new accounting period on that date.

The lack of grandfathering rules makes reviewing the implications of these rules a priority. The wide scope of the legislation and the lack of a purpose test means that even structures that have previously been cleared by HMRC may now need to be looked at again.

Royalty payments and deduction of income tax at source

As announced at the Budget, a package of three measures is being introduced with regard to royalty payments and the deduction of income tax at source. The measures are:

  • The introduction of a new anti-avoidance provision to counteract connected party arrangements which have as the main, or one of the main, purposes the avoidance of withholding tax as a result of a double taxation agreement. In such a case, the benefits of the relevant double tax agreement will be denied. The new rule applies to royalty payments made on or after 17 March 2016. Legislation for this measure is contained in the Bill (cl 40) and is unchanged from the draft that was published on Budget day.
  • Broadening the definition of a royalty for the purposes of the rules on the deduction of income tax at source to ensure that income tax is withheld from all royalty payments to non-resident persons where the royalty has a UK source. Currently some royalties are only subject to withholding if they are ‘annual payments’, which amongst other things requires that they be pure income profit in the hands of the recipient. The legislation for this measure was also published on Budget day, but will be introduced at a ‘later’ stage of the Finance Bill 2016 process, which may be report stage (which is expected in late June). It applies from royal assent.
  • Extending the rules to determine whether a royalty has a UK source to include scenarios where a royalty is connected with a UK PE (or an avoided UK PE under the diverted profits legislation). The relevant legislation, which has yet to be released, will also be introduced at a later stage of the Finance Bill 2016 process and apply from royal assent.

Large business requirement to publish a tax strategy

The Bill includes legislation (cl 149 and Sch 19) which would require certain large groups, companies, partnerships and UK PEs of foreign entities to publish an annual tax strategy in relation to UK taxation. The inclusion of UK PEs of foreign entities represents a change from the December draft clauses. The Bill states that the strategy must be published on the internet. Non-publication or incomplete content may lead to appealable penalties. The requirement applies to all financial years beginning on or after royal assent (likely to be July 2016).

The definition of businesses potentially covered includes:

  • UK groups and sub-groups (including UK PEs of companies within the group) where the UK group/sub-group’s aggregated turnover (including that of UK PEs) is more than £200m or the total of its balance sheet assets (including that of UK PEs) is in aggregate more than £2bn in the previous financial year;
  • other UK groups and sub-groups (including UK PEs of companies within the group) in respect of which there is a mandatory reporting requirement under the UK country-by-country reporting regulations (or would be if headed by a UK resident company);
  • other UK companies or UK PEs of foreign entities not part of a UK group or UK sub-group which meet these turnover or balance sheet thresholds or are members of a country-by-country reporting group as above; and
  • partnerships that meet the above turnover or balance sheet thresholds.
  • The tax strategy to be published must set out:
  • the approach of the UK group/company/PE/ partnership to risk management and governance arrangements in relation to UK taxation;
  • their attitude towards tax planning (so far as affecting UK taxation);
  • the level of risk in relation to UK taxation they are prepared to accept; and
  • their approach towards their dealings with HMRC.

This is not restrictive and the draft legislation states that the tax strategy may also include other information relating to taxation, which we are seeing as becoming leading practice for many organisations.

The strategy must be published before the end of each financial year, on the internet, and be accessible to the public free of charge for at least a year after it is first published, with an initial penalty of £7,500 on the company (not on an individual like the senior accounting officer regime) for failure to comply with these requirements, in line with the Companies House maximum penalty for late/non-filing. There is provision for further monthly penalty of £7,500 per month for failures continuing after six months.

In the case of a non-UK headed group with a UK sub-group, the requirement falls on the UK parent of the UK sub-group, which is responsible for ensuring that a tax strategy for the UK sub-group is published. Where a UK company which is a member of a non-UK headed group which, if headed by a UK resident company, would meet the mandatory country-by-country reporting requirements (but is not part of a UK sub-group), the publication requirement falls on that company. However, HMRC has confirmed that (as may be the case for many non-UK headed groups) if the group as a whole has a single global tax strategy, the obligation to publish will be satisfied by publication of that global tax strategy, subject to any UK specific adjustments that it is appropriate to make.

Large business special measures regime

As expected, the Bill introduces a special measures regime (also in Sch 19) said to be aimed at tackling the small number of large businesses that engage in aggressive tax planning, or refuse to engage with HMRC in an open and collaborative manner. We understand that the definition of large businesses for this purpose is intended to be the same as that for the large business transparency strategy measure above. However, unlike the December draft clauses, the Bill measures appear to contain no minimum turnover or balance sheet thresholds for the UK groups included in scope. Notices under the regime can be given only after the start of a company’s or partnership’s financial year beginning after royal assent, but notices may take into account a business’s behaviour before that time.

The legislation allows a designated HMRC officer to issue a warning notice to a group, company or partnership which it considers meets the special measures regime conditions. These conditions are that the business has persistently engaged in uncooperative behaviour contributing to two or more significant unresolved tax issues, and there is a reasonable likelihood of further uncooperative behaviour contributing to significant tax issues in the future.

Uncooperative behaviour is defined as either being party to certain avoidance schemes (e.g. those counteracted through the GAAR or notifiable schemes), or behaving in a manner which has delayed or hindered HMRC in the exercise of their functions in determining the business’s UK tax liability. A number of factors are listed as indicating such behaviour, including the use by HMRC of formal information powers, the number and seriousness of inaccuracies within returns, and reliance on ‘speculative’ interpretations of legislation.

Where a business has been given a warning notice, it has 12 months to make representations. If the business continues to meet the special measures regime conditions at the end of this 12 month period, HMRC may issue a special measures notice, which renders the business liable to potential sanctions. These sanctions include removing the defence of ‘reasonable care’ for the purpose of penalties in respect of inaccurate returns and – if the special measures notice is confirmed by HMRC following an extended 24 month period of being in special measures – power for HMRC to publish the name and address and any other identifying information in relation to the business and the fact that it is subject to the special measures regime. HMRC has also indicated that administrative sanctions could include the removal of access to non-statutory clearances.

Oil and gas

Following the announcements in the Budget, the Bill includes the reduction of the supplementary charge from 20% to 10% (cl 54) and the permanent reduction of petroleum revenue tax to 0% (cl 128), to take effect from 1 January 2016. The Bill also includes the expected changes to the investment and cluster allowances (clauses 55–59).

Other business tax measures

A number of other measures announced at the Budget are also included in the Bill. These include legislation which:

  • further restricts the proportion of a bank’s annual taxable profit that can be offset by pre-April 2015 carried forward losses from 50% to 25% from 1 April 2016 (with a more general restriction on the use of corporation tax losses coming into effect from 1 April 2017) (cl 53);
  • updates the UK transfer pricing rules to incorporate the revisions made in the final reports on Actions 8–10 of the OECDs BEPS project with effect from accounting periods beginning on or after 1 April 2016 (cl 71). A consultation on the introduction of secondary adjustment rules into the UK’s transfer pricing legislation is expected to follow;
  • ensures the receipt of non-monetary income is subject to tax, even if it is not included in the accounts, effective from 16 March 2016 (cl 67);
  • repeals the renewals allowance, which allows businesses and traders a full tax deduction for the cost of replacing ‘tools’, with effect from April 2016 (cl 68); and
  • extends the period of availability of 100% enhanced capital allowances (ECA) in enterprise zones from five to eight years. All enterprise zones will now be entitled to eight years of ECA from the date of their announcement (cl 65).

In addition, as announced at the Budget, legislation will be introduced at report stage of the Bill to ensure that non-UK residents pay corporation tax on their trading profits from dealing in or the development of UK land. The changes take effect from Report stage but anti-avoidance measures will take effect from Budget Day to prevent rebasing of land values through transactions with related parties before that date.

Other business tax measures in the Bill that are largely unchanged from the draft clauses last December include:

  • sundry changes to the loan relationships rules (cl 45 and Sch 7);
  • transactions involving intangible fixed assets and partnerships (clauses 48 and 49);
  • bad debt relief for peer-to-peer investments (cl 32);
  • anti-avoidance measures aimed at capital allowances and leasing (clauses 64 and 66); and
  • orchestra tax relief (Sch 8).

Other tax administration measures

Other tax administration measures, which are largely unchanged from the draft clauses published in December, include:

  • a number of provisions intended to enhance the government’s ongoing campaign to tackle offshore tax evasion. As previously announced, as well as increased penalties (including asset-based penalties) and new ‘naming and shaming’ provisions, the legislation introduces a number of ‘strict liability’ offences for offshore evasion. These carry penalties of a fine and/or imprisonment for up to 51 weeks in England and Wales (clauses 150–154 and Schs 20–22);
  • provisions aimed at changing the behaviour of taxpayers who regularly use tax avoidance arrangements. A warning period is triggered when a person suffers an avoidance defeat and lasts for five years. During the warning period, the taxpayer has information obligations and is at risk of further sanctions including financial penalties, restrictions in the use of tax reliefs and being publicly named. The regime comes into effect on 6 April 2017 (Sch 18); and
  • a new penalty of 60% to be introduced for all cases that are successfully tackled by the general anti-abuse rule (cl 146).

Stamp tax

As expected, the Bill includes:

  • the new progressive rates of SDLT, with effect from 17 March 2016, for non-residential property announced in the Budget, with a maximum rate of 5%, and a new 2% rate for leases with a net present value exceeding £5m (cl 116);
  • the 3% surcharge for additional residential properties, with effect from 1 April 2016 (cl 117);
  • changes to the stamp tax treatment of ‘deep in the money options’ (clauses 126,127);
  • SDLT seeding relief for certain property funds and co-ownership schemes (Sch 16);
  • the extension of certain reliefs from the annual tax on enveloped dwellings (clauses 123–125); and
  • the higher 15% rate of SDLT for certain purchases of residential property (clauses 118–120).

Employment tax

The employment tax clauses in the Bill originate in the main from the chancellor’s announcements in the Autumn Statement. These are supplemented by draft legislation published in connection with Budget 2016 and other draft clauses released in recent months, such as those outlining the apprenticeship levy, published on 4 February.

Apprenticeship levy

The clauses in the Bill (clauses 87–110) remain virtually unchanged from the draft legislation published on 4 February and define the scope of how the levy will be collected from employers by HMRC. Recent guidance outlines how employers will be able to access funding for apprenticeship training via a new digital apprenticeship service (DAS) account and the main functions of this service will be in place by April 2017. The chancellor’s announcement in the Budget of a 10% government top-up for levy payers does not figure in the Bill and further details are likely to be outlined when the levy operating model is set out in April 2016.

Disguised remuneration

As announced in the Budget, the Bill (cl 18) amends the ‘disguised remuneration’ legislation at Part 7A of ITEPA 2003 (the clause is substantially the same as the draft legislation published on 16 March). The provision has the effect of removing relief (from 16 March) where consideration is given for a ‘relevant step’ and is targeted at specific perceived tax avoidance schemes. In addition, the amendments withdraw transitional relief on investment returns after 30 November 2016 and minor technical clarifications are made to the Part 7A rules to ensure they work as Parliament intended. The latter clarifications include the prevention of double taxation by making it possible to apportion the value of a relevant step where this creates a charge on more than one person simultaneously.

Taxable benefits

The Bill (cl 7) introduces provisions to remove the concept of ‘fair bargain’ from applying to employer-provided living accommodation, company cars and vans, and beneficial loans; specifically where the tax charge is based on tax rules specifying how the cash equivalent should be calculated. This measure was announced in the Budget and the change in legislation follows the decision by the Court of Appeal in Apollo Fuels & Ors [2016] EWCA Civ 157 which confirmed that when ‘fair bargain’ applies, there is no benefit in kind. Apart from some very limited exceptions, the provisions mean that in tax terms it is immaterial whether the benefits constitute a fair bargain. This measure takes effect from 2016/17.

Exemption for trivial benefits and payrolling of benefits

Previously announced measures (cl 13) introduce an exemption from income tax for qualifying trivial benefits in kind, where the cost of providing the benefit does not exceed £50. The measures come into effect from 2016/17, a year after having been announced at March Budget 2015. Measures are included in the Bill to enable the payrolling of vouchers and credit tokens.

Employee share scheme simplification

The Bill (cl 17 and Sch 3) amends ITEPA 2003 s 477, so that the acquisition or the exercise of an (unapproved) option is now to be charged to tax solely under the rules that deal with securities options (ITEPA 2003 Chapter 5) and not under the rules dealing with earnings. The rationale is to put beyond doubt the tax (and NIC) treatment of restricted stock units (RSUs) so that the charge to tax will arise only under the rules that relate to securities options. This particularly impacts the taxation of the long term share based reward of internationally mobile employees. The changes are to come into effect for chargeable events on or after 6 April 2016.

As previously announced, the Bill (Sch 3) makes a number of further, simplifying amendments to the administrative processes for the tax-advantaged share schemes; SIPs, EMI, SAYE and CSOPs.

Employee shareholder status

As announced in the Budget, there is provision (cl 77) for an individual lifetime limit of £100,000 with regard to the capital gains eligible for exemption from CGT on a disposal of shares acquired under employee shareholder agreements entered into after 16 March 2016. The legislation which deals with disposals and acquisitions between spouses and civil partners is also amended. The effect is to limit the exemption to the gain that arises during the period that the employee shareholder holds the shares and to transfer the benefit of that exemption to the transferee by increasing the allowable base cost of the shares.

In a measure not announced in the Budget, the Bill (cl 78) amends the CGT legislation so that a gain on a disposal of shares is not exempt under the employee shareholder rules where the proceeds of disposal constitute either a disguised investment management fee, or carried interest. This has effect for gains accruing on or after 6 April 2016.

Overall, the rationale behind these measures is to ensure that the advantages of the employee shareholder status are fair and not open to abuse.

Employment intermediaries and travel and subsistence

As previously announced, the Bill (cl 14) introduces two new sections into ITEPA 2003, disallowing a deduction from earnings for travel and subsistence expenses where a worker is engaged through an employment intermediary. The Bill includes changes to address avoidance through the use of managed service companies. The amended rules come into effect from 6 April 2016.

Sporting testimonials

As also previously announced, the Bill (cl 12) provides for a charge to income tax for income from sporting testimonials for employed sportspersons which are not otherwise chargeable to tax. A limited tax exemption is to be introduced (Sch 2) which applies to the first £100,000 of sporting testimonial payments made out of money raised by the sporting testimonial, subject to certain conditions being met. The measures have effect for payments made out of money raised for events which take place on or after 6 April 2017.


Previous announcements regarding the reduction of the lifetime allowance to £1m will take effect from 6 April 2016 and provisions to this effect are included in the Bill (cl 19 and Sch 4). The Bill also includes:

  • a reduction in the number of calculations required to determine whether a dependant’s scheme pension exceeds the authorised limit (cl 21);
  • legislation to allow the pension tax rate on bridging pensions to be aligned with the Department for Work and Pensions legislation (cl 20); and
  • a measure to ensure that no inheritance tax charge arises where an individual has remaining pension funds in a drawdown account upon death. This measure will be backdated to cover deaths on or after 6 April 2011 (cl 83).

As announced in the Budget, a number of changes to the pensions tax rules are included in the Bill (Sch 5) which remove some unintended consequences arising from the pensions flexibility provisions. These relate to:

  • serious ill health lump sums;
  • dependant’s flexi-access drawdown benefits;
  • charity lump sum death benefits;
  • trivial commutation of money purchase scheme pensions in payment; and
  • top-ups to dependants’ death benefits.

Personal tax

Reduction in CGT rate

From 6 April 2016, CGT rates on most disposals will be reduced from 18% to 10% for basic rate taxpayers and from 28% to 20% for higher rate and additional rate taxpayers (cl 72 and Schs 11,12). The new rates will apply to individuals, trusts and personal representatives.

However, the new CGT rates will not apply to chargeable gains on residential property interests and carried interest and the 18% and 28% rates will continue to apply to these gains. A residential property interest is an interest in land that includes or included a dwelling during the seller’s period of ownership, or which subsists under a contract for an off-plan purchase. Special provisions apply to apportion gains where a property is used only partly as a dwelling or where it has not been a dwelling throughout the period of ownership.

Investors’ relief

As announced in the Budget, the Bill includes provisions (Sch 14) to introduce a new ‘investor relief’ for CGT. Where a disposal qualifies for investors’ relief, any capital gain will be subject to the reduced CGT rate of 10%.

Broadly, shares will qualify for investors’ relief where:

  • they are ordinary shares issued after 17 March 2016 and were subscribed for by the person making the disposal;
  • the company was unquoted at the time the shares were issued and has been a trading company or the holding company of a trading group throughout the holding period;
  • neither the investor nor anyone connected with the investor is an officer or employee of the company at any time in the holding period; and
  • the shares have been held for at least three years beginning on 6 April.

In contrast to entrepreneurs’ relief (ER), there does not appear to be a minimum percentage shareholding to qualify for investors’ relief. Investors’ relief applies on qualifying gains up to a maximum lifetime limit of £10m. This is in addition to the £10m limit which applies for ER.

There are special matching rules applying to qualifying and potentially qualifying shares to ensure that potentially qualifying disposals have the best chance of meeting the minimum three year holding period. There are also special rules where there has been a reorganisation or takeover to determine whether relief will be available for the new shareholding and to aggregate the holding periods of the original and the new shareholding in some cases. There are also provisions to deny relief where an investor has received any value (other than insignificant value) from the company.

Entrepreneurs’ relief: various amendments

The Bill contains a number of changes to the qualifying conditions for ER (clauses 73–75 and Sch 13). Many of these changes effectively relax some of the anti-avoidance rules introduced in Finance Act 2015 and remove some genuine commercial arrangements from their provisions. For this reason, the measures are backdated.

  • The definition of a trading company/group has been updated for ER purposes where the shares are held in a company which invests in a joint venture company or partnership. These new definitions will extend the availability of ER where the person has at least a 5% indirect interest in the shares and effectively controls 5% voting rights of the joint venture company (i.e. looking through the holding company) or where the person is entitled to at least 5% of the assets and profits of the partnership and also controls 5% of the voting rights of the corporate partner. This measure will be backdated to take effect from 18 March 2015. HMRC announced plans to review the definition of trading company generally for the purposes of ER at the time of the Budget.
  • The availability of ER for associated disposals has been extended to include a disposal of a privately-held asset when there is an accompanying disposal of business assets to a family member in some circumstances. The relief can now also be claimed in some cases where the disposal does not meet the current 5% partnership share requirement, provided the individual making the disposal has held a 5% interest in the partnership’s assets for at least three of the eight years ending with the date of the disposal. These amendments will take effect for associated disposals made on or after 18 March 2015.
  • Amendments to the legislation will be introduced to allow ER to be claimed in respect of transfers of goodwill to a close company where the transferor holds less than 5% of the shares and voting rights in that company. Relief will also be due where the individual holds more than 5% of the shares or voting power if the transfer of the business is part of arrangements for the company to be sold to a new independent owner. These measures will be backdated to apply to disposals on or after 3 December 2014.

Company distributions and transactions in securities

The clauses in the Bill in relation to the changes to transactions in securities rules and distributions on a company winding-up (clauses 33–35) contain some changes from the draft clauses published in December. From 6 April 2016 the definition of a transaction in securities will specifically include distributions on a winding-up and repayments of share capital/premium, and the rules are being widened so that, inter alia, a person party to a transaction in securities can be subject to counteraction where any person obtains an income tax advantage. Also, distributions subject to counteraction will include those arising from assets available for distribution by controlled subsidiaries. We have concerns that these changes could present difficulties where the person subject to counteraction has no links to the person with the tax advantage, and where subsidiaries have restrictions on their ability to pay dividends, and it is disappointing that the clauses published today have taken no account of this.

The targeted anti-avoidance rule (TAAR) on distributions on a winding-up, which also applies from 6 April 2016, can subject the distribution to income tax in certain tax-motivated situations where the shareholder carries on broadly the same business after the winding-up as before. The final TAAR now excludes small investors from its scope by imposing a 5% minimum shareholding requirement, but widens the range of situations in which the individual might be regarded as continuing a similar business. The TAAR has also been changed so that it now no longer applies where the distribution does not result in a gain (previously this was by reference to repayment of capital). There is an exclusion for demergers, but it is disappointing that this has not been clarified to ensure that it applies to indirect as well as direct demergers. The previous limitation that meant the exclusion only applied to distributions of 51% subsidiaries has however been removed, which is a welcome change.

HMRC will publish guidance on the new rules, which will include a number of examples to demonstrate the type of transactions to which HMRC considers the new TAAR should and should not apply.

Asset managers’ performance based rewards

The Bill contains provisions (clauses 36–38) which are intended to ensure that CGT treatment only applies to carry payments received by asset managers in circumstances where the investment fund is engaged in long-term investment activity. The legislation operates by considering the average holding period that investments are held by funds.

Draft legislation published at the time of the Autumn Statement provided that the carry received by the investment manager would be subject to CGT where the average period exceeded 48 months. This period has now been reduced to 40 months. Where the average holding period is less than 36 months, the whole amount will be subject to income tax (this is unaltered from the draft provisions). However, for averages falling between 36 and 40 months, the graduated system to determine the proportion subject to income and CGT has been altered to provide slightly different tapering of the amounts subject to CGT. This will be more generous in some cases and less generous in others.

The average holding period for investments will be calculated on a weighted average, based on holding period and value invested as a proportion of the fund. Special rules deal with circumstances where a significant investment is made in tranches and where exit from such an investment takes place in stages, subject to certain conditions. These special rules have been expanded to reduce the percentage investment which will be treated as ‘significant’, but the fund itself must meet additional conditions to access this relief.

Where carry arises to an individual in the first four years of a fund making investments, it is possible to qualify for ‘conditional exemption’ from the income tax charge. This period is extended to 10 years if the carried interest is calculated on the realisation model. In such circumstances, a further calculation is made to determine the treatment of the payment at the time the exemption is lifted.

There are a number of further detailed provisions dealing with direct lending funds, derivatives and hedging. The legislation published also includes special provisions for VCTs, real estate funds and funds of funds.

Amounts treated as income under these provisions will be taxable on the arising basis for non-UK domiciled individuals. However, the Bill includes provision to allow those arriving in the UK who have been non-UK resident for at least five tax years to be taxable on the remittance basis where carry received is in respect of foreign pre-arrival services and conditions are met. These provisions will apply to such individuals for the first four tax years of UK residence.

Changes to the dividend rate

Measures introducing changes to the dividend rate (cl 5 and Sch 1) are as expected, with the dividend tax credit removed from 6 April 2016 and replaced by a tax-free dividend allowance for the first £5,000 of dividend income per year.

UK residents will pay tax on any dividends received over the £5,000 allowance as follows:

  • 7.5% on dividend income within the basic rate band;
  • 32.5% on dividend income within the higher rate band; and
  • 38.1% on dividend income within the additional rate band.

The 38.1% rate will apply to dividends arising to trustees and the nil rate band will not apply.

Loans to participators

The Bill also includes provisions (cl 46) to increase the rate which applies to close companies making loans to participators from 25% to 32.5%, in line with the higher rate applying to dividend income.

The rate will apply to any loans made or benefits conferred on or after 6 April 2016. Where an accounting period straddles 6 April 2016, different rates will apply to loans made before, and those made on or after 6 April 2016.

As mentioned in the Autumn Statement, a new exemption from the loan to participator rules (cl 47) applies to certain loans made by close companies to charitable trusts provided the proceeds are used wholly for charitable purposes. This provision applies to loans or advances made on or after 25 November 2015.

Inheritance tax residence nil rate band and downsizing relief

As expected, the Bill contains provisions (Sch 15) to ensure that estates will continue to benefit from the new residence nil rate band even where individuals have downsized or sold their property, subject to certain conditions. The residence nil-rate band is an additional transferable nil rate band which is available for transfers of residential property to direct descendants on death. The additional relief will be available from 6 April 2017 and the relief for downsizing or disposals will apply for deaths after that date where the disposal occurred on or after 8 July 2015.

The taxation of non-domiciled individuals

The provisions to amend the taxation of non-UK domiciled individuals have now been postponed to Finance Bill 2017.

Other personal tax measures

The Bill also includes a number of previously announced measures including:

  • the introduction of a personal savings allowance (cl 4);
  • provisions to prevent the use of venture capital schemes for investments in the remaining energy generation activities (cl 28);
  • changes to property taxation, including the abolition of the wear and tear allowance (cl 70); and
  • technical changes to the operation of non-resident CGT on UK residential property (cl 79).

Indirect tax

The Bill provides for a reduction of the VAT rate on women’s sanitary products from 5% to the zero-rate (cl 115). This change, which was not previously foreshadowed, follows recent discussions with the European Council which has reportedly agreed to increased flexibility for EU member states over VAT rates. It will take effect from a date to be appointed by Treasury order. The absence of a clear effective date indicates that European authorisation for this VAT rate change, which has been the subject of media coverage in recent days, may still be pending.

The draft Finance Bill clause published in December relating to the reduced rate of VAT for the supply and installation of energy-saving materials in residential accommodation does not appear in the Bill. This issue arose following infraction proceedings brought by the European Commission against the UK, where the CJEU recently held that the UK legislation which provided for a reduced rate for energy-saving materials went beyond the scope allowed under EU law. The draft clause had sought to amend the reduced rate with effect from 1 August 2016, whilst retaining as much of the relief as permissible under EU law. This may be another area where the Government is hoping that the increased flexibility referred to above, allows it to meet its political objectives.

The Bill includes a package of VAT measures (cl 113), announced in the Budget, supporting the government’s policy of tackling online fraud and creating a level and fair playing field for all businesses selling goods online. These measures, which take effect from the date of royal assent, strengthen HMRC’s powers to tackle non-compliant overseas businesses that avoid paying UK VAT on sales of goods to UK consumers via online marketplaces.

The Bill also includes the following measures announced in the Budget:

  • the standard rate of insurance premium tax will increase from 9.5% to 10% with effect from 1 October 2016 (cl 129);
  • the removal of the climate change levy (CCL) exemption for renewable source electricity generated before 1 August 2015 where this is supplied on or after 1 April 2018 (cl 132); and
  • the CCL main rates will increase with effect from 1 April 2019 to recoup revenue lost from the abolition of the carbon reduction commitment energy efficiency scheme (clauses 135 and 136).

Legislation providing for the introduction of the new soft drinks industry levy will be included in Finance Bill 2017.

What does this mean for taxpayers?

The Bill implements tax changes announced at Budget 2016, Autumn Statement 2015 and Summer Budget 2015. There is a wide range of effective dates for these provisions and many will have effect from dates before Royal Assent, expected in July. Given that Budget 2016 also announced changes to be included in Finance Bill 2017, and that some changes may be introduced in other ways (such as the ‘framework for cooperative compliance’ for large businesses), taxpayers will need to track carefully, not only which changes apply to them but when those changes will take effect.