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The Budget did not contain many new announcements in relation to corporation tax. Whilst there are a few new measures, most of the Chancellors announcements were either on matters subject to consultation or which had already been announced in the last Autumn Statement.
We will know more as further details are announced, but in the meantime here is a quick reminder of the tax changes affecting corporate’s.
From Budget Day, 8 March 2017
Tax treatment of appropriations to trading stock
A new announcement is the removal of the ability of businesses to convert capital losses into trading losses when making appropriations to trading stock with effect from 8 March 2017. The government considers that this will eliminate an unfairness in the tax system which was being exploited by certain businesses.
The changes will mean that the legislation will only permit a s.161(3) TCGA 1992 election (to rebase the transfer value for the purpose of computing trading losses) to be made where the appropriation into trading stock at market value would give rise to a chargeable gain and not where it gives rise to an allowable loss. This means that an allowable loss will be crystallised when the appropriation takes place, and the loss will therefore remain within the chargeable gains rules with respect to how it may be set off in the future.
From April 2017
The rate of corporation tax will be reduced to 19% from April 2017
New rules for corporate losses arising on or after 1 April 2017
There are two measures which will affect the utilisation of losses from April 2017.
Firstly, under the current rules losses carried forward can only be used by the company that incurred them, and some losses can only be set against certain types of income. Increased flexibility is being introduced, meaning that businesses will be able to use carried forward losses against profits from other income streams, or from other companies within a group.
Secondly, companies can currently offset eligible taxable profits against corporation tax losses carried forward from earlier periods. From April 2017, the profit that can be offset against losses carried forward will be restricted to 50% of the amount of profits in excess of £5 million. Where the company is in a group, the £5 million allowance will apply to the group.
Restrictions on interest deductibility
Broadly these restrict the amount of interest deductions to 30% of EBITDA, or a higher group ratio of external interest to group EBITDA. Currently this restriction only applies to corporation tax so will not apply to non-UK resident companies, which pay income tax rather than corporation tax. However the Government intends to proceed with a consultation on bringing these companies within the charge to corporation tax, so any difference in treatment on this point may be short-lived.
Substantial Shareholdings Exemption
The Substantial Shareholdings Exemption (SSE) exempts from the charge to tax gains or losses accruing on the disposal by companies of shares where certain conditions are met. From April 2017 there are changes to some of these qualifying conditions. The condition that the investing company is required to be a trading company or part of a trading group is being removed. This will allow investment companies to benefit from the exemption where they sell shares in a trading company or group.
Looking beyond 2017
There had been some speculation that the Chancellor may look to reduce tax rates further, particularly in light of the fact that Donald Trump has announced plans to reduce US taxes. After all the Government wants the UK to offer “the most competitive corporate tax regime in the G7.” However the Chancellor confirmed that he would stick to Osborne’s plans on this, so the corporation tax rate is still set to fall to 17% from April 2020.
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