UK Autumn Budget 2017 Briefing
V&E Tax Update E-communication, November 22, 2017
This update summarises tax announcements made in the UK Autumn Budget on Wednesday 22 November 2017 that are likely to be most relevant to our clients. It is not a comprehensive summary and does not cover (in particular) many measures primarily relevant to individuals, small businesses, or specific industries other than the oil and gas sector.
While the headline grabbing measure was the abolition of
stamp duty land tax for certain first time buyers, hidden within the Budget
papers are a number of significant tax reforms for businesses. This is perhaps surprising, with Brexit
looming and given the Chancellor’s stated desire for fewer changes.
Oil and Gas Tax
The big news for the oil and gas industry made it into the
Chancellor’s speech. This is the introduction
of a “transferable tax history” mechanism
for oil and gas producers, which has been
the subject of significant consultation with industry. It is described by the government as a “world
The measure is intended to address a perceived barrier to UK North Sea deals for
new entrants; namely, the inability to access full tax relief for the costs of
decommissioning fields. Unlike companies
which have been operating in the UK North Sea for decades and therefore often have
a long history of paying tax (at high rates), new entrants will not have such “tax
history”. This is problematic because decommissioning expenditure is
relievable and in many cases will give rise to tax losses, which can be carried
back to previous years, generating repayments of the tax that has been paid in
those years. New entrants have no “tax history” and therefore, although
decommissioning expenditure is in principle relievable, limited value can be
obtained for that relief.
concept is unprecedented in UK corporation tax, and given sensitivities on it
being used for tax avoidance, the mechanism will inevitably be
complicated. The government has provided
some key design principles by reference to which the measure will be legislated,
which include the following:
will allow the transfer of historic profits which have been subject to ring
fence corporation tax and supplementary charge.
will be optional and the amount transferred will be a matter of negotiation
between the parties (subject to anti-avoidance safeguards).
will be applied on a “last in, first out” basis, meaning that tax history from
more recent years will be transferred first.
buyer will track the profits and losses generated by the field that is
transferred as a “shadow” calculation.
seller’s tax history will only become available to the buyer once it is “activated”,
which will be when the transferred field has permanently ceased production and
only to the extent that the total loss incurred on decommissioning the field is
greater than its post-acquisition “tracked profits”.
legislation and a technical consultation paper will be published in Spring
2018. Transferable tax history will be made available for deals on or
after 1 November 2018.
PRT on retention of
Back in 2016, the government clarified that companies can retain
decommissioning obligations after the sale of an asset and access corporation
tax relief for the associated costs, but had not addressed the petroleum
revenue tax (“PRT”) position. The government
has now announced that they will launch a consultation on the PRT position in
Legislation will be introduced to clarify that tariffs derived
from oil and gas infrastructure are within the higher taxed “ring fence”, regardless
of whether the underlying field is within the PRT regime or not. The measure will have effect for accounting
periods beginning on or after 1 January 2018.
will then also introduce long-awaited regulations (which were announced in
March 2016) allowing a company’s tariff income to “activate” any Investment and
Cluster Area Allowances. These had been
delayed because of the definitional issue identified in relation to tariffs. A technical note will be published on 1
Another issue for the oil and gas sector that has been the
subject of discussions with government is the treatment of tax losses following
a change in ownership. It has been confirmed
that HM Revenue & Customs will publish further guidance on this area.
Business Tax Measures
With Brexit on the horizon, the Chancellor was keen to
affirm his commitment to maintaining the UK’s competitive tax regime for
business. The phased reduction from the
current corporation tax rate of 19 per cent to 17 per cent from April 2020 will
go ahead as planned. There are no
changes to the income tax or capital gains tax rates (which apply to
Abolition of indexation
Indexation allowance on corporate chargeable gains (which is
intended to eliminate the effect of inflation in the chargeable gains
calculation) will be frozen. This measure aligns the manner in which capital
gains made by individuals and non-incorporated businesses are calculated where
no indexation allowance is available. This will apply for disposals on or after 1 January 2018.
Taxing non-resident gains on UK land
Following the introduction in 2016 of detailed legislation
aimed at taxing non-resident companies trading in UK residential property, the government
has announced additional wide-sweeping measures to bring all UK residential and commercial property
within the charge to tax, regardless of the residence status of the person
making the disposal.
This is a significant and unexpected announcement which
will, for the first time, make non-residents subject to tax on capital gains
from commercial property. The measure will cover not only direct
disposals of UK land, but also indirect disposals (broadly, disposals of
“property-rich” entities deriving 75 per cent or more of their value from UK land)
where the non-resident or a related party holds, or has held within the
previous five years, a 25 per cent or greater interest in the entity being disposed of. The consequences of these changes will no
doubt be far-reaching.
The changes will be complemented by a targeted anti-avoidance
rule and also an “anti-forestalling” rule which, effective from 22 November
2017, will counteract arrangements designed to circumvent the new rules by
exploiting provisions in a tax treaty.
While the government has indicated that some aspects of the
reforms are fixed, it is consulting with affected taxpayers to ensure the rules
are effectively targeted. The new measures are anticipated to have effect
from April 2019.
applying to non-residents
Separately, the government has confirmed (following its
consultation published in March 2017) that it will legislate, effective 6 April 2020, to bring non-resident
companies with a UK property business within the charge to corporation tax,
rather than income tax and capital gains tax as at present.
Stamp taxes and
capital markets: 1.5 per cent charge
On the capital markets side, concerns had been expressed
that the government would use Brexit as an opportunity to reintroduce the 1.5 per cent stamp tax charges that applied to share issues into depositary receipt systems
and clearance services, which had been held to be non-compliant with EU
law. In the Budget it was announced
that these 1.5 per cent charges will not be reintroduced following Brexit.
Other noteworthy measures include the following:
- An undertaking to review employment status, in both an employment law and tax
context, in light of modern working practices (such as the “gig economy”);
- Increasing the R&D expenditure credit from 11 per cent to 12 per cent (from 1 January 2018);
the investment limit in the Enterprise Investment Scheme from £1m to £2m
(from 6 April 2018);
- Consultations on the intangible fixed asset regime and trusts (to commence in 2018);
the UK’s statutory powers to ensure that the government can give full
effect to the BEPS Multilateral
Instrument which it signed on 7 June 2017.
Anti-avoidance and Anti-evasion Measures
The Budget contained the usual plethora of anti-avoidance
and anti-evasion measures.
The attack on tech companies in recent years continues. In his speech the Chancellor referred to multinational digital businesses who pay
billions of pounds in royalties to jurisdictions where they are not taxed. The Budget announces an extension of withholding tax to cover
royalties, and other similar payments, that are connected with sales to UK
customers where such payments are made
to low or no tax jurisdictions. This measure will apply irrespective of the
payer’s location. A consultation paper will be published on 1 December 2017,
with legislation being implemented in April 2019. There are indications
that these measures will not be the last to affect tech companies, and a wider
paper on the digital economy was also published.
Other measures included the following:
interest: Transitional provisions which
were introduced at the time that the carried interest rules were changed in
2015 will be removed as they are no longer required. This is stated to be to ensure that asset
managers receiving carried interest pay capital gains tax on their full
economic gain. This applies with
tax relief: A restriction will be
introduced to the relief for foreign tax incurred by an overseas branch of a
company, where the company has already received relief overseas for the losses
of the branch against profits other than those of the branch (with immediate
structures disclosure: An
undertaking to publish a response on the consultation on the requirement of
designers of offshore structures to notify HMRC of those structures;
affairs time limits: An extension in
the time limit for HM Revenue & Customs making assessments to 12 years for
non-deliberate offshore tax non-compliance
(to follow a consultation in Spring 2018);
- Tax abuse
of the insolvency regime: Tackling
tax evasion and avoidance abuse in the insolvency regime, including through the
use of “phoenixism”, where solvent companies are liquidated in order for the shareholders
to gain a tax advantage. Legislation to
counter abuse was introduced in 2016 and there are no further details as to
what the new legislation will target. A
discussion document will be published in 2018.
fraud: Amongst other VAT measures, a
new VAT domestic reverse charge to
tackle fraud in the construction industry will be introduced (from 1 October
Visit our website to learn more about V&E’s UK Tax practice. For more information, please contact Vinson & Elkins lawyers Jenny Doak, Evlogi Kabzamalov, or Simrita Chadha.