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 cash flow 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
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