Global Tax Alert | 11 December 2013

UK issues draft Finance Bill 2014 clauses for consultation

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On 10 December, promptly following the UK Chancellor's Autumn Statement of 5 December,1 the UK Government published draft clauses to be included in UK Finance Bill 2014 (FB 2014). The consultation on these draft clauses runs until 4 February 2014. The UK Government also published its summary of responses to a number of earlier consultations. This Alert provides an overview of the key corporate tax issues contained in these documents.

Various clauses in the draft Finance Bill have been published previously as part of the consultation process, or at the time of the Autumn Statement announcement. Where relevant, the Alert highlights if there are any key changes between the original draft and the draft clauses now published.

Not all the tax announcements addressed in the Autumn Statement will be included in FB 2014. As an example, an amendment to the National Insurance Bill currently before Parliament addresses the proposal that, from 6 April 2015, employers will no longer be required to pay Class 1 secondary national insurance contributions on earnings paid up to the upper earnings limit (which is £42,285 a year or £813 per week in 2015-16) to any employee under the age of 21.

A similar amendment in the National Insurance Bill provides that the Treasury may, for the purposes of national insurance contributions (NICs), make regulations that provide that, in prescribed circumstances, a member of a limited liability partnership is to be treated as an employed earner and that the limited liability partnership (LLP) is to be treated as the secondary contributor in relation to any payment of earnings to or for the benefit of the person treated as the employed earner. The conditions are those set out in income tax legislation to be introduced under FB 2014 discussed below.

It is also worth noting that not all the draft legislation to be included in FB 2014 has been published. The details of the Government's proposals for ”follower penalties” on failed tax avoidance schemes, which was covered in the Autumn Statement, remain to be published. More detail is expected in January along with the legislation on loan relationship changes to be included in FB 2014 and legislation aimed at preventing charities being used for tax avoidance.

A key Government policy is for the UK to be the most competitive place to do business in the G20. By 2015, the Government's aim is that the UK will have the joint-lowest rate of corporation tax in the G20. Other measures, specifically identified by the Government in publishing the Finance Bill clauses, as making the UK more competitive for businesses, include:

  • A new onshore oil and gas tax relief, which will support investment in the UK's emerging onshore shale gas industry by applying a halved rate of tax to initial profits from projects
  • Changes that will make the government's long-standing film tax relief more attractive and easier to use
  • The abolition of stamp duty and stamp duty reserve tax on growth market shares

The Government also highlights the proposed inclusion in FB 2014 of anti-avoidance measures as part of its drive to tackle tax avoidance.

Corporate taxes

The main rate of corporation tax for financial year 2015 of 20% was enacted in Finance Act 2013. A single unified rate of corporation tax will apply on and after 1 April 2015 for companies (other than those with oil and gas ring fence profits).

Transfer of ownership provisions

FB 2014 will include legislation amending the provisions which restrict the relief for corporation tax losses when companies change ownership. There are two separate changes.

The first of these is intended to allow a holding company to be inserted at the top of a group of companies (a common form of corporate reorganization) without triggering the provisions. This is good news as many companies have been caught out by these provisions when they have needed to insert a new company on the top of the group for commercial reasons and there are loss carry-forwards in the group. To prevent abuse, there will be continuity rules, which will apply to the holding-company shareholders throughout the transaction.

The second change amends the definition of ”a significant increase in capital” which is relevant when a change of ownership occurs in a company with investment business. An investment company cannot carry forward losses across a change in ownership in a number of scenarios, including where there has been a significant increase in capital. The threshold for a significant increase in capital is currently set as £1m OR a doubling of capital by reference to the amount before the change in ownership. This level was set back in 1995. The new provisions amend this to an increase of at least £1m AND an increase of 25%.

Loan relationships and derivative contracts

Following the publication of a consultation document in June 2013, HMRC (HM Revenue & Customs) has been reviewing proposals and options for updating the regime governing the taxation of loan relationships and derivative contracts held by companies. HMRC established a series of joint working groups, which have met regularly and which are expected to continue throughout the project.

HMRC saw the key areas to be reviewed as part of that consultation process as:

  • Refining the core structure of the regime, including clarification of the role to be played by accounting in determining taxable amounts.
  • Basing taxable amounts on accounting profit and loss, rather than, as now, taking account of debits and credits appearing in any part of a company's financial statements.
  • Combining the rules which apply separately to loan relationships and derivative contracts.
  • Revision of some of the detailed rules in the areas of connected party debt, intra-group transfers, partnerships, foreign exchange movements, hedging, debt restructuring and the treatment of bond funds and certain particular types of instrument.
  • Introducing an integrated and comprehensive anti-avoidance provision.

It was proposed that a small number of changes would be included in FB 2014, with the bulk being included in FB 2015.

In the light of consultation responses, the measures for FB 2014 will now be restricted to:

  • Loan relationships and derivative contracts held by partnerships with corporate partners. The consultation document suggested that the existing rules do deal effectively with partnerships in most cases. However, it identified a number of areas where the treatment is not explicit or is open to interpretation, leading to risk and uncertainty. On the basis of the responses received, HMRC intends to move forward by retaining the current approach to the taxation of partnerships, while consolidating the rules so that, across the regime as a whole, each partner is treated as being party to a share of partnership loans and derivative contracts.
  • The treatment of bond funds. The intention is to retain the bond fund rules, while addressing the tax avoidance issues identified and tackling some of the difficulties with the operation of the test for identifying a bond fund.

Draft legislation for these measures will be published in January 2014.

The proposed changes to rules on the taxation of index linked gilt-edged securities will not now be made. The ”unallowable purpose” anti-avoidance rule will now be updated as part of the main changes in Finance Bill 2015.

Worldwide debt cap (WWDC)

FB 2014 will amend the WWDC grouping rules to ensure that a UK tax-resident company that does not have ordinary share capital, such as a company limited by guarantee, can be a relevant group company subject to the WWDC. It also modifies the definition of a 75% subsidiary for the WWDC rules to trace ownership of intermediate entities without ordinary share capital.

There is also an amendment which enables regulations to be made, relevant to the potential impact of the provisions on whole business securitizations.

Controlled foreign companies (CFCs)

Draft legislation, in the form circulated at the time of the Autumn Statement, inserts new anti-avoidance provisions to the CFC offshore financing regime which applies to exempt certain non-trading finance profits. These changes aim to prevent groups from moving either receivables, funds or other assets, which would otherwise be taxable in the UK, into an offshore finance company and benefitting from the exemption regime.

A new anti-avoidance provision means that the offshore financing regime can no longer apply where a UK resident company that is connected with the CFC has a loan receivable and an arrangement is entered into, one of the main purpose(s) of which is to reduce the loan relationship credits or increase the loan relationship debits of the UK-resident connected company. This change has effect for cases in which the relevant arrangement is made on or after 5 December 2013.

In addition, there is an expansion of the existing anti-avoidance rule which prevents the offshore financing regime from applying to a creditor relationship of the CFC in connection with UK funds or assets, themselves funded by external debt raised in the UK, being used to repay external debt of an offshore entity. Previously, it only applied when such funds were used wholly or mainly to repay the external debt, but has now been expanded to include scenarios where the funds are used to repay the external debt to any extent (other than a negligible one). This change has effect for accounting periods of a CFC beginning on or after 5 December 2014. In addition deeming provisions apply to apportion the relevant profits where an accounting period straddles 5 December 2013.

Other general measures

As announced in the Autumn Statement, FB 2014 will include a measure which blocks tax avoidance schemes involving total return swaps, where deductions are claimed for payments between companies in the same group under derivative contracts which are linked to company profits

FB 2014 is intended to ensure that the limit on the amount of credit for foreign tax is to be applied separately to each non-trading credit from a loan relationship or an intangible fixed asset, so that credit for foreign tax arising on such a non-trading credit is limited to the amount of corporation tax on that non-trading credit.

FB 2014 will also amend the existing provisions so as to reduce the credit allowed or deduction given where a repayment is made by a foreign tax authority and there are arrangements in place which enable another person to receive the repayment of foreign tax.

Finally, legislation is proposed to align the treatment of mineral extraction allowances with the existing principles for plant and machinery allowances for the purposes of the foreign branch exemption.

Banking and financial services

FB 2014 will include a number of changes to the operation of the bank levy, namely:

  • Removal of the link between the excluded amount of protected deposits and any premium paid in respect of the deposit protection scheme
  • Deemed short term treatment of all derivative contract liabilities
  • High Quality Liquid Assets deduction to be given effect at the rate applicable to long term liabilities only
  • The transition of the definition of Tier 1 regulatory capital to reflect the new regulatory definition arising from the Capital Requirements Directive IV (CRD IV)
  • Exclusion from charge of certain liabilities arising from client clearing activities
  • Widening of the scope of the power to include new regulatory requirements that are introduced by any EU or other legislation

These changes have the effect of widening the bank levy tax base. To ensure that receipts meet Government targets and take account of the benefit of corporation tax cuts to the sector, the rate of the levy will also be increased to 0.156% in January 2014.

Separate to the draft Finance Bill clauses, a Statutory Instrument has been laid before Parliament implementing the country-by-country reporting requirements under CRD IV. Guidance should be published shortly.

FB 2014 will also require HMRC to publish an annual report on the operation of the Code of Practice on Taxation for Banks. The report will list groups or entities which have unconditionally adopted the Code at the date of the report as well as those which have not adopted the Code. In addition the report will name any groups or entities that HMRC considers has not complied with the Code. However, before taking this second step, HMRC must first commission a report from an independent reviewer on whether the Code has been breached and whether the group or entity should be named in an annual report. The group in question will have the opportunity to make representations at this stage.

Section 363A TIOPA 2010 treats offshore funds that are undertakings for collective investment in transferable securities as not being resident in the UK, if they are resident in another Member State for the purposes of any tax imposed under the law of that State on income. The scope of this section is to be extended to include entities within the definition of an alternative investment fund, where they are established in a State other than the UK and treated as resident in that State for the purposes of any tax imposed on income.

Changes are also to be made to allow regulations to prescribe the tax treatment of an insurer's Solvency II compliant instruments issued in advance of agreement to Solvency II.

Finally, the corporation tax loan relationship rules, that apply to cases where credits are not required to be brought into account on the release of debts, have been amended such that no tax charge will arise should the Bank of England apply its stabilization powers in respect of a financial institution.

Oil and gas

The Government is seeking to introduce measures which incentivize investment in the UK onshore oil and gas industry, particularly, the shale gas industry. The draft legislation in FB 2014 confirms the introduction of the following main measures:

  • An exemption to a given level of profits of a ring fence company from the supplementary charge, equal to 75% of qualifying investment expenditure incurred on UK onshore oil and gas activities on or after 5 December 2013 (onshore allowance)
  • An extension to the ring fence expenditure supplement from 6 to 10 accounting periods for eligible UK onshore oil and gas unrelieved expenditure
  • The extension of the reach of the UK's ring fence reinvestment relief provisions to the disposal of exploration and appraisal interests by pre-trading companies, where proceeds are reinvested in exploration assets / activities
  • A widening of the meaning of 'trade' to oil and gas exploration and appraisal activities such that the disposal of a subsidiary which holds exploration and appraisal interests transferred from other group companies, that have held these interests for at least 12 months, can immediately qualify for the substantial shareholding exemption, where all other conditions apply

Film tax relief

Subject to State Aid approval, film tax relief will be available for losses which can be surrendered, at a rate of 25% up to the first £20 million of each production's qualifying core expenditure (to a maximum of 80% of the qualifying production core expenditure) and 20% thereafter (to a maximum of 80% of the qualifying production core expenditure) for all productions. The minimum UK spending requirement will also change from 25% to 10%. The changes will take effect from 1 April 2014.


Measures will be introduced by secondary legislation (rather than in FB 2014) that will allow tax-advantaged real estate investment trusts (REITS) to invest in other REITs without breaking the non-close company rule. This will be done by including UK REITs and their foreign equivalents as ”institutional investors.” The aim is to facilitate joint ventures and co-investment opportunities. The secondary legislation is open for comment until 10 January 2014.

Measures will also be introduced from April 2014 to ensure that only the actual direct costs of converting or renovating an unused business premises to bring it back into business use (i.e., the cost of construction and related professional services) are eligible

for business premises renovation allowance. This measure also applies for income tax purposes.


Tax-motivated allocation of profits

FB 2014 introduces complex anti-avoidance measures intended to combat certain partnership profit or loss transfer arrangements. It is unchanged from the draft published alongside the Autumn Statement.

Part of the legislation is aimed at situations whereby partnership income profits are allocated to a non-individual partner in circumstances where a UK taxpaying individual partner may still benefit from those profits. This may arise, for instance, where there are arrangements where income profits of a partnership are allocated to a non-individual member but either represent a UK individual partner's ”deferred profit” or the UK individual still has the ”power to enjoy” these profits (for example by holding shares in a company to which profits are allocated). When the rules apply, the UK individual's profit allocation is increased on a just and reasonable basis.

The legislation also prevents individuals from claiming relief in situations where partnership losses occurring in connection with ”tax avoidance arrangements” are allocated to a UK taxpaying individual partner (instead of a non-individual) to allow that individual to access certain loss reliefs.

The new rules will apply to partners in all types of UK established partnerships, including Limited Liability Partnerships (LLPs) as well as foreign entities treated as partnerships for UK tax purposes. The rules will take effect from 6 April 2014, with the exception that the anti-avoidance rules concerning profit allocation are intended to apply from 5 December 2013.

Salaried members

The partnership consultation published in May 2013 suggested that the existing presumption in the law that all members of an LLP are self-employed would be removed. In the draft FB 2014 this presumption has not, in fact, been removed. Instead, there are special provisions to treat as employees certain 'salaried members' of LLPs where they meet three conditions (A-C).

Condition A is that there are arrangements under which the individual will provide services to the LLP and it is reasonable to suppose that payments by the LLP to the individual will be wholly or substantially wholly 'disguised salary'. Payments are disguised salary if they are either fixed or; variable but without reference to the overall profits or losses of the partnership or; if they are not in practice affected by the overall profits or losses of the partnership.

Condition B is that under the terms of the partnership, the individual does not have significant influence over its affairs.

Condition C is that the capital that the individual has contributed to the partnership is not at least 25% of the “disguised salary” the individual receives. Individuals must meet all three conditions for the rules to apply.

The provisions are also expanded to apply where members provide services through a third party which is a member of the partnership. Members will not be treated as employees, however, where the conditions would otherwise be met and arrangements exist with a main purpose of circumventing the profit reallocation rules (see above).

Where members are treated as employees under these rules, partnerships will be entitled to a deduction in respect of the costs of the individual's deemed employment.

Disposal of assets through partnerships

Additional draft legislation has been published following the partnership consultation in relation to disposals of income streams and certain assets between members of partnerships. There is existing legislation governing the transfer of income streams for both individuals and companies in ITA 2007 and CTA 2010 respectively, but the application of these provisions to transfers of income streams through partnerships (for instance by an adjustment to profit sharing ratios) is limited.

The new draft legislation will extend the scope of these provisions to cover situations where a right to income is transferred between members of a partnership (or associated partnerships) for the main purpose of achieving a tax advantage (for instance if the transferee has a tax attribute that would mean it is not taxed on the income). In such a situation, the transferor would be subject to tax as income on the consideration received for the transfer (or the market value of the right if substantially higher). A charge to income would also arise if there is a transfer of assets through a partnership in circumstances where a direct transfer would wholly or partly be subject to tax as income.

The legislation would apply for arrangements entered into on or after 6 April 2014 (for individuals) or 1 April 2014 (for companies), but would not apply where the transferor and transferee are related individuals (for example spouses and immediate family members).

Partnerships: Alternative Investment Fund Managers (AIFMs) and deferred profit

There is a further change to partnerships in the draft Finance Bill for AIFMs. The legislation will allow partners and members of LLPs to allocate certain profits to AIFM partnerships where those profits are ”restricted” such that the individual is unable to access them under the Alternative Investment Fund Managers Directive. Where profits are allocated in this way, the partnership or LLP itself will pay tax at the additional rate (currently 45%) on amounts allocated. Once the profits vest and the individual is able to access them, they will be treated as profit for that year with an associated 45% tax credit. If the profits do not vest there is no mechanism for the 45% tax to be repaid. This allocation of deferred profit to the partnership or LLP is only permissible if the firm elects for these provision to apply.

Where the deferred profit takes the form of securities or other instruments and they vest on the individual, the individual is treated as acquiring the instruments from the partnership for an amount equal to the deferred profit net of the income tax paid.

Where income does not vest on the individual concerned and, for example, reverts to a corporate partner, the application of these provisions could result in a considerable overpayment of tax. There are also likely to be considerable complexities where partnerships have partners with different tax characteristics – for example UK and non-UK domiciled individuals.


1. For details regarding the Chancellor's Statement, see EY Global Tax Alert, UK Chancellor issues Autumn Statement, dated 6 December 2013.

For additional information with respect to this Alert, please contact the following:

Legal Ernst & Young LLP (United Kingdom), London
  • Claire Hooper
    +44 20 7951 2486
  • Chris Sanger
    +44 20 7951 0150
Ernst & Young LLP, UK Tax Desk, New York
  • Matthew Newnes
    +1 212 773 5185
  • Sarah Churton
    +1 212 773 5994

EYG no. CM4031