GEORGE OSBORNE has aimed to keep his Budget short and sweet, announcing a much-welcomed sugar levy on sugary drinks, but revealed a £1.3bn cash injection through the adoption of OECD measures on taxing multinationals.
With Britain teetering on the edge of a European Union exit, Osborne used the budget to emphasise the pitfalls of Brexit, while attempting to make Britain more appealing for overseas investment.
Good news for multinationals?
To the surprise of many, Osborne slashed the rate of corporation tax from 20% to 17%, a move that many tax experts including Kevin Hindley, managing director at Alvarez & Marsal Taxand UK, believes will “encourage inward investment”. No doubt both small and large business owners will have been jumping for joy at that news.
However, it wasn’t all good news for corporations, as Osborne strengthened Britain’s ties to the OECD and its BEPS initiative, which looks to cut down on widespread international tax avoidance.
The chancellor has extended hybrid mismatch rules to cover mismatches arising from permanent establishments, which pushes HMRC one step closer to receiving a fairer share of tax from multinationals.
‘Highly polarised’ announcement
Osborne is also implementing a restriction on deductions for interest payable, which according to Hindley, will gain the Treasury roughly £1bn a year.
He is also proposing changes designed to tackle avoidance in relation to overseas royalty payments to low or no-tax jurisdictions, introducing domestic law which will prevent tax treaties being abused by royalty payments that are routed through third countries to gain a tax advantage.
On top of all these announcements, KPMG tax partner Robin Walduck believes the government will go even further to demonstrate its commitment to the OECD.
“The government has also signalled its intention to press the case for public disclosure of country-by-country reporting information on a multilateral basis as it believes there is an opportunity to go beyond the outcomes of BEPS and enhance transparency still further,” he said. “Views in the business community on public disclosure are highly polarised so this announcement will not be received well by some companies.
“With the introduction of these changes, the UK is clearly signalling it is an early adopter of the OECD’s recommendations,” continued Walduck, who added that it is difficult to estimate the impact that these changes will have on UK businesses.
Good news for SMEs
One announcement that is certain to have a positive impact on small firms is Osborne’s changes to business rates.
From April 2017, small businesses that occupy property with a rateable value of £12,000 or less will pay no business rates, which is great news for Britain’s high street shops but bad news for local councils, as it’s estimated that these changes will leave a £7bn hole in the total business rate take in England between now and 2021.
The chancellor announced a surprise further reduction in the headline rate of corporation tax to 17% from 1 April 2020, which is welcome news for companies and should attract more inward investment to the UK.
His strategy is for the UK to be a destination of choice for business, and reducing the rate plays a part in that.
But it’s not just about being known for our generous tax environment; for the chancellor, this rate reduction only works if all companies are paying their taxes. His reputation hangs on companies big or small being taxed on a level playing field.
For this reason there was also anti-avoidance legislation announced to prevent large and seemingly profitable businesses paying little or no UK corporation tax. This may be due to them intentionally moving profits offshore or claiming tax relief on artificially high UK interest payments, but it could also be simply due to the use of brought-forward tax losses.
From April 2017, tax relief on interest payments over £2m will be capped at 30% of UK earnings (EBITDA) or be based on the net interest to earnings ratio for the worldwide group in line with OECD recommendations.
This will prevent large multinational groups artificially putting excessive debt and interest deductions through the UK group and these groups will have to urgently consider refinancing and possibly pushing debt down into overseas subsidiaries.
Anti-avoidance provisions will also be introduced to prevent multinational companies avoiding paying tax in any of the countries they do business in using hybrid mismatches; tax outbound royalty payments better so that multinationals pay more tax in the UK; and make sure offshore property developers are taxed on their UK profits.
To prevent very profitable companies paying little or no tax, due to offsetting brought forward tax losses, provisions will be introduced from April 2017 to restrict the use of losses for groups making a profit of more than £5m. There will be a limit on the use of brought-forward losses to 50% of the taxable profit for the year.
In other words, a company making £6m profit could use £3m of brought-forward losses but would pay corporation tax on the remaining £3m profit. This will mean profitable groups will be able to use their tax losses more slowly and will have a cashflow disadvantage from having to pay tax earlier than they would under the current rules.
On a positive note, changes on the use of tax losses from April 2017 will also bring more flexibility to companies because they will be able to carry forward trading losses against other taxable profits and against profits in other group companies.
This flexibility will be welcome news to companies who could currently suffer from losses being “trapped” but in future will be able to benefit from them.
David Brookes is a tax partner at BDO
EXPERT VIEW – So where is all this ‘new cash’ going?
Much is directed to small and micro businesses, which benefit from the reduction in the main rate of corporation tax too in due course.
Permanently doubling the small business rate relief costs a whopping £1.5bn and with other changes to business rates, about 600,000 firms will benefit.
Another change was around commercial stamp duty, although there’s a catch. Duty was cut in respect of purchases up to £150,000 to zero, with a 2% charge on the next £100,000 of value. But the charge has been increased over this threshold to a higher 5% charge.
These changes should help smaller businesses significantly, yet the concern is that as both of these reductions apply to landlords (if the landlord pays the business rates), there’s a risk these ‘benefits’ aren’t passed on through reduced rents. So overall there is a shift from big to small, a signal to those who want to start out in business to get up and try.
Jonathan Riley is head of tax at Grant Thornton