Global Tax Alert | 21 March 2014
UK delivers Budget 2014
The Chancellor of the UK Exchequer, George Osborne, presented his 2014 Budget Report on 19 March 2014.
An EY survey of business leaders and Tax Directors in advance of the Budget revealed that 65% of the respondents listed the low mainstream rate of corporation tax as the factor that has most improved the competitiveness of the UK, although other elements of the corporate tax roadmap, in particular the changes to the rules for controlled foreign companies, the patent box and the above the line R&D tax relief, were also mentioned.
Unsurprisingly, 80% of the respondents listed certainty as one of the top three factors that should be driving the UK's tax policy choices, with 44% ranking this as number one. A number of the factors influencing the commercial risk posed by uncertainty are outside the Chancellor's control. However, the broad thrust of the survey pointed to a desire for a period of stability as far as corporate tax was concerned, with most respondents hoping for a Budget with very little change.
So how did this Budget measure up? In many respects, there were few surprises for business with no changes to the corporation tax rate, the patent box regime, the controlled foreign companies regime or the R&D credit for large companies. It had been hoped that the Chancellor would extend the annual investment allowance beyond the end of 2014. Not only has he done this for a further 21 months, but he has also doubled the maximum amount to £500,000 from April 2014, providing immediate tax relief for much needed investment by expanding businesses. In addition, the Enterprise Zone reliefs on business rates and capital allowances have been extended by a further three years.
In addition, the Seed Enterprise Investment Scheme (SEIS), which helps small early stage companies raise equity finance by offering tax relief to investors subscribing for shares and which was due to come to an end in 2014, has now been made permanent. This should continue to encourage entrepreneurs and support the type of start-ups that Tech City already attracts and that Media City, recently backed by Boris Johnson, wants to attract.
Corporate Tax measures
Corporation tax rate
Prospective changes to the main rate of UK corporation tax have already been enacted and no more changes have been announced. The rate will reduce to 21% from April 2014 and to 20% from April 2015, making the UK's corporation tax rate the joint lowest rate in the G20.
After significant changes to the capital allowances regime in recent years, the changes announced this year are relatively minor and mostly relate to clarifications or extensions of existing provisions.
Annual Investment Allowance (AIA)
This allowance provides immediate tax relief for qualifying capital expenditure. This has been temporarily increased and extended, from £250,000 to £500,000 for expenditure incurred between 1 April 2014 and 31 December 2015. From January 2016, the AIA will revert to its pre-31 December 2012 rate of £25,000.
Enhanced Capital Allowances (ECAs) in Enterprise Zones
The availability of 100% ECAs in Enterprise Zones will be extended by three years to 31 March 2020. In addition, a first new pilot Enterprise Zone within Northern Ireland is to be established near Coleraine.
SME R&D relief scheme: Increase of payable credit to loss-making companies
From 1 April 2014, the rate of R&D payable tax credit rate for loss-making Small and Medium Enterprises (SMEs) will be increased from 11% to 14.5%. Consequently, this increases the cash credit payable to loss-making SMEs undertaking qualifying R&D.
While most multinationals are unlikely to qualify as SMEs, this change is an important indicator of the UK Government's continued focus on creating incentives for R&D activity in the UK and should work well along with other measures recently introduced, such as the UK patent box that provides for a 10% corporation tax rate on specified profits from patented products and processes.
Tax reliefs for the creative sector
The Government has announced a number of changes to the tax reliefs for the creative sector, including amendments to the video games relief, television tax relief and film tax relief, and a new tax relief for theatrical productions. Subject to State Aid approval by the European Commission, the video games tax relief will be extended to goods and services provided from within the European Economic Area and a cap on subcontracting of £1 million per game will apply.
Modernizing the taxation of corporate debt and derivative contracts
The consultation on reform of the loan relationship and derivative contract rules has been in progress since June 2013. The only aspects of the proposed reform which will be included in the Finance Bill 2014 relate to the taxation of bond funds and an amendment to the rules where a company ceases to be a member of a group. Other substantive changes, including changes to the unallowable purpose rule and the taxation of loan relationships and derivative contracts held by partnerships, will now be deferred to 2015.
Tackling aggressive tax planning in the global economy
The Government has published a position paper which explains why the UK considers the current international tax framework is not fit for purpose, and sets out the UK's priorities for the OECD's Base Erosion and Profit Shifting (BEPS) project. The paper explains the UK's views on the various Action Points within the BEPS project and, without providing much detail, where the UK expects to make changes as a result.
The paper confirms the UK's view that the issue is an international one and cannot be solved by the UK alone; rather it is best solved globally through the mediums of the G8, G20, the EU and the OECD. To ensure effective compliance HMRC will continue to work with the Joint International Tax Shelter Information Centre (JITSIC) and OECD Countries and explore new avenues of collaboration to challenge avoidance and tax planning.
The paper is clear that, while the UK supports the BEPS initiative, it would wish any changes being proposed by the OECD to be compatible with the Government's two objectives of ensuring that the UK remains an open competitive economy whilst working with international partners to prevent unfair tax avoidance and aggressive tax planning by multinationals.
For additional information with respect to this Alert, please contact the following:
Ernst & Young LLP (United Kingdom), London
- • Claire Hooper
+44 207 951 2486
- • Chris Sanger
+44 207 951 0150
Ernst & Young LLP, UK Tax Desk, New York
- • Matthew Newnes
+1 212 773 5185
- • Sarah Churton
+1 212 773 5994
EYG no. CM4283