Making Tax Digital for Business
The provisions for the government’s Making Tax Digital project will be legislated for in Finance Bill 2017. However, the mandatory start date for unincorporated businesses and landlords with gross income (turnover) below the VAT registration threshold will be deferred until April 2019. This means that only those businesses, self-employed people and landlords with turnovers in excess of the VAT threshold with profits chargeable to income tax and that pay Class 4 NICs will be required to start using the new digital service from April 2018.
Increasing the cash basis entry threshold
As announced in January 2017, the trading cash basis threshold for unincorporated businesses is to be increased to £150,000 for 2017/18 onwards. For Universal Credit claimants, the entry threshold will be increased to £300,000. The exit threshold will be increased to £300,000 for all users of the trading cash basis.
Simplified cash basis for unincorporated businesses
As announced in January 2017, the government will legislate in Finance Bill 2017 to provide a simple list of disallowed expenditure in order to simplify the rules for allowable deductions within the cash basis. Following consultation, the legislation has been revised slightly to make certain that specific items are clearly excluded from the list, and to ensure the rules for moving between the cash basis and accruals accounting are robust. Minor amendments have also been made to improve clarity. These changes will have effect from April 2017, though for the 2017/18 tax year trading profits can be calculated using either the new rules or the existing rules.
Simplified cash basis for unincorporated property businesses
From 6 April 2017, most unincorporated property businesses (other than limited liability partnerships, trusts, partnerships with corporate partners or those with receipts of more than £150,000) will be allowed to calculate their taxable profits using a cash basis of accounting. Landlords will continue to be able to opt to use Generally Accepted Accounting Principles (GAAP) to prepare their profits for tax purposes.
Those with both a UK and an overseas property business will be able to choose separately whether to use the cash basis or GAAP for each. Those with a trade as well as a property business both eligible for the cash basis, will be able to decide separately for each of these, and persons other than spouses or civil partners who jointly own a rental property will be able to decide individually.
To align the treatment with those who opt to use GAAP, the initial cost of items used in a dwelling house will also not be an allowable expense under the cash basis. The existing ‘replacement of domestic items relief’ will continue to be available for the replacement of these items when the expenditure is paid. Interest expense will be treated consistently between those using the cash basis and those using GAAP.
New tax allowance for property and trading income
Two new income tax allowances of £1,000 each, are to be introduced for trading and property income. These new allowances will take effect for 2017/18 onwards. Individuals with trading income or property income below the level of the allowance will no longer need to declare or pay tax on that income. The trading income allowance will also apply to certain miscellaneous income from providing assets or services.
The trading allowance will also apply for Class 4 National Insurance contribution purposes.
The allowances will not apply in addition to relief given under the rent-a-room relief legislation.
Following the publication of the draft legislation on this measure, it has been confirmed in the 2017 Spring Budget that revisions will be made to prevent the allowances from applying to income of a participator in a connected close company or to any income of a partner from their partnership. Minor revisions will also be made to improve clarity and correct errors.
Disposals of land in the UK
Existing legislation is to be amended to ensure that all profits from dealing in or developing land in the UK are brought into charge to UK tax. The original legislation took effect for disposals made on or after 5 July 2016, with an exception where the contract for disposal was entered into before 5 July 2016. The intention was to exclude the standard property disposal arrangement where the parties are committed on making the contract, but the transfer takes place a short time later. However, some contracts are entered into at an early stage in the development with transfers being made over an extended period of months or years. The result is that some profits from these long term contracts are not within the charge. This was not the intention when the legislation was enacted and the measure announced in the Spring 2017 Budget ensures that the rules set out in FA 2016 work as intended.
Simplifying the PAYE Settlement Agreement process
The process for applying for and agreeing Pay as You Earn Settlement Agreements (PSAs) is to be simplified. Broadly, a PSA allows an employer to make one annual payment to cover all the tax and National Insurance due on small or irregular taxable expenses or benefits for employees. Finance Bill 2017 contains provisions which will enable HMRC to accept a PSA without the need for prior agreement. In turn, this will allow HMRC to design and implement a new automated process for employers to apply for a PSA. Consequential changes will be made to the ‘PAYE Regulations’ covering the making, form and timing of a PSA. The changes will have effect in relation to agreements for the 2018/19 tax year and subsequent tax years.
Tackling disguised remuneration – restricting tax relief for contributions to avoidance schemes
As announced at Autumn Statement 2016, the government will continue with its pledge to tackle existing and prevent future use of disguised remuneration avoidance schemes. Legislation in Finance Bill 2017 is designed to ensure that scheme users pay their fair share of income tax and NICs and the future use of schemes will be prevented by strengthening the current rules. The existing use of schemes will be tackled by the introduction of a new charge on disguised remuneration loans that were made after 5 April 1999 and remain outstanding on 5 April 2019. Legislation will also be introduced to ensure there is no double taxation.
Following consultation, the legislation has been revised to ensure the loan charge and the exclusions operate as intended. Broadly, the close companies’ gateway will now be introduced in Finance Bill 2017 to commence from 6 April 2018 and this will allow for further consultation to ensure it is appropriately targeted at disguised remuneration schemes. Proposals on how the tax and NICs arising from the changes will be collected will be set out in a technical consultation later in 2017.
Legislation will also be introduced in Finance Bill 2017 to tackle existing and prevent future use of similar schemes used by the self-employed.
Finally, legislation will be also introduced to prevent employers claiming a deduction when computing their taxable profits for contributions to a disguised remuneration scheme unless income tax and NICs are paid within a specified period. This will have effect for contributions made on or after 1 April 2017 for corporation tax purposes, or 6 April 2017 for income tax purposes.
Corporation tax: reform of loss relief
Initially announced at the time of the 2016 Budget and following a period of consultation, Finance Bill 2017 contains provisions to reform the tax treatment of certain types of carried-forward loss for corporation tax purposes with effect from 1 April 2017.
Losses arising from 1 April 2017, when carried forward, will have increased flexibility and can be set against the total taxable profits of a company and its group members (referred to as the ‘loss relaxation’).
For all carried-forward losses, whenever they arose, companies will be able only to use the losses against up to 50% of profits (known as the ‘loss restriction’). Each standalone company or group will be entitled to a £5 million annual allowance. Profits within the allowance will not be restricted, ensuring 99% of companies are unaffected by the restriction.
Both the loss restriction and loss relaxation will apply to:
– trading losses;
– non-trading deficits on loan relationships;
– management expenses;
– UK property losses; and
– non-trading losses on intangible fixed assets.
Whilst pre-April 2017 trading losses will not be relaxed, companies will have the flexibility to choose whether or not to use pre-April 2017 trading losses before other available losses.
If a company’s trade ceases and the company has unused carried-forward losses of that trade, those losses can be set without restriction against profits arising in the final 36 months of the trade. Post-April 2017 losses will be able to be set against total profits, whilst pre-2017 losses trading losses will only be able to be set against profits of the same trade. The profits on which losses can be carried-back against will be limited to those generated from 1 April 2017.
The legislation contains loss buying rules which will mean that where a company or group of companies is acquired, any post-April 2017 carried-forward losses that arose before the company or group’s acquisition will not be available to the purchaser’s group for five years.
The legislation also contains a targeted anti-avoidance rule which will prevent any arrangements being entered into with a main purpose of obtaining a benefit from the loss reform rules.
Tax treatment of appropriations to trading stock
A new measure will remove the option for businesses to elect for capital losses, which would otherwise arise where an asset is appropriated to trading stock to be treated as trading deductions which can be offset against the total trading profits of the business. This measure will have immediate effect by preventing the election being made for appropriations into trading stock made on or after 8 March 2017.
Hybrid and other mismatches – permitted taxable periods of payees and deductions for amortisation
Two minor changes will be made to the hybrid and other mismatch regime introduced by Finance Act 2016. The first change removes the need to make a formal claim in relation to the permitted time period rules for mismatches involving financial instruments. The second change provides that deductions for amortisation are not treated as relevant deductions for the purposes of these provisions. The measure will have effect from the commencement of the hybrid and other mismatch regime, which came into effect on 1 January 2017.
Tax deductibility of corporate interest expense
From 1 April 2017, the government will introduce rules that limit the tax deductions that large groups can claim for their UK interest expenses. These rules will limit deductions where a group has net interest expenses of more than £2 million, net interest expenses exceed 30% of UK taxable earnings and the group’s net interest to earnings ratio in the UK exceeds that of the worldwide group. The provisions proposed to protect investment in public benefit infrastructure are also to be widened. Banking and insurance groups will be subject to the rules in the same way as groups in other industry sectors.
Corporation tax deduction for contributions to grassroots sport
The circumstances in which contributions to grassroots sports can be deducted from the taxable profits of corporation tax payers will be extended in relation to qualifying expenditure incurred on or after 1 April 2017. Companies will be able to make deductions for all contributions to grassroots sports through recognised sport governing bodies, and deductions of up to £2,500 in total annually for direct contributions to grassroots sports. Sport governing bodies will be able to make deductions for all their contributions to grassroots sports. The Spring 2017 Budget confirmed that the treatment of a sport governing body will be extended to its 100% subsidiaries.
Patent Box rules
Specific provisions are being added to the Finance Act 2016 Patent Box rules, covering the case where Research and Development (R&D) is undertaken collaboratively by two or more companies under a ‘cost sharing arrangement’. The provisions will ensure that such companies are neither penalised nor able to gain an advantage under these rules by organising their R&D in this way. The Spring 2017 Budget confirmed that the draft legislation for this change will be revised to narrow the definition of a cost-sharing arrangement and to better align the treatment of payments into, and payments received from, a cost-sharing arrangement by the company. These changes will have effect for accounting periods commencing on or after 1 April 2017.
Co-ownership authorised contractual schemes: reducing tax complexity
As announced at Budget 2016 and following a period of consultation, amendments are to be made to the legislation to reduce tax complexity in relation to co-ownership authorised contractual schemes (CoACS). Broadly, the measures will:
– clarify the process for calculating any capital allowances which may be claimed by investors in CoACS;
– introduce new requirements for information which the operator of a CoACS must provide to investors and to HMRC;
– introduce new rules to clarify what is to be treated as an investor’s income when a CoACS has invested in an offshore fund; and
– clarify the rules for investors to calculate capital gains arising from the disposal of units in a CoACS.
The new rules on calculating capital allowances will apply for those electing to apply them on or after Royal Assent to Finance Bill 2017 for accounting periods beginning on or after 1 April 2017. The new rules on information to be provided to investors and to HMRC and on investments in offshore funds will come into force at Royal Assent to Finance Bill 2017. The streamlined rules for investors to calculate capital gains on disposal of units in a CoACS will apply to disposals on or after an operative date in summer 2017.
Reform of the substantial shareholdings exemption
As announced at Autumn Statement 2016 and confirmed at Spring Budget 2017, the government will legislate in Finance Bill 2017 to simplify the rules, remove the investing company requirement within the substantial shareholdings exemption, and provide a more comprehensive exemption for companies owned by qualifying institutional investors. Following consultation, certain amendments have been made to provide clarity and certainty. The changes take effect from 1 April 2017.
Gift Aid and intermediaries
Intermediaries are to be given a greater role in administering Gift Aid, with the aim of simplifying the Gift Aid process for donors making digital donations. Currently a donor has to complete a Gift Aid declaration (GAD) each time they give to a new charity when giving through an intermediary. A new process will allow a donor to give permission to an intermediary to create GADs on their behalf for all subsequent donations made in that tax year. The changes, which take effect from 6 April 2017, will require intermediaries to:
– keep a record of the donor’s authorisation allowing them to complete declarations on the donor’s behalf;
– keep a record of the date on which the Gift Aid regime was explained to the donor;
– keep a record of any cancellations of the donor’s authorisation;
– issue an annual statement to donors who use the new process; and
– keep a record of an annual statement sent to donors who use the new process.
Penalties may be imposed on intermediaries for any breaches of these obligations.
Promoters of Tax Avoidance Schemes: associated and successor entities rules
Existing legislation is to be amended to ensure that promoters of tax avoidance schemes cannot circumvent the POTAS regime by re-organising their business so that they either share control of a promoting business or put a person or persons between themselves and the promoting business.
Broadly, the amendments introduce the term ‘significant influence’ to ensure promoters cannot reorganise their business so that they put a person or persons between themselves and the promoting business. The amendment also ensures that the control definitions apply where two or more persons together have control or significant influence over a business.
This change takes effect from 8 March 2017.
Plant and machinery leasing – response to lease accounting changes
The government will consult in summer 2017 on the legislative changes required following the announcement of the International Accounting Board’s new leasing standard – IFRS16, which comes into effect on 1 January 2019. The tax treatment of a lease, in some important respects, is determined by its treatment in the accounts. Following the discussion document published in summer 2016, the government intends to maintain the current system of lease taxation by making legislative changes which enable the rules to continue to work as intended.
Research and development (R&D) tax review
Administrative changes are to be made to research and development (R&D) tax credits to increase the certainty and simplicity surrounding claims.
Withholding tax exemption for debt traded on a multilateral trading facility
The government is to consult on proposals for an exemption from withholding tax for interest on debt traded on a multilateral trading facility, removing a barrier to the development of UK debt markets.
Enterprise Management Incentives: continued provision of the relief
The government will seek State Aid approval to extend provision of this tax relief beyond 2018.
Extension of High-end TV, animation and video games tax reliefs
The government will seek State Aid approval for the continued provision of the reliefs beyond 2018.