Below is a list of the main aspects of the Finance Bill 2016 from a Corporate and International perspective:
The Finance bill 2016 and a reduction in Corporate Tax rate
For corporates the main headline grabbing measure is the reduction of corporation tax to 17% in 2020. The question has to be asked as to why the UK continues to reduce its corporation tax rate when it was already very competitive at 20%. Well in their Business Tax roadmap the government articulate their view that high rates of corporation tax hinder business growth and foreign direct investment, and that lower corporate rates give a clear signal that the UK is open for business. This approach has resulted in the UK having the lowest corporate tax rate in the G20, and pitches us closer to rival Ireland’s 12.5%. Given the direction of travel, I wouldn’t be surprised if we didn’t see the rate ultimately settle at 15%.
The Finance bill 2016 and the Patent Box
The UK has been one of the loudest voices behind the OECD BEPS project so it clearly has to put its legislation where its mouth is and adopt the recommendations coming out from the project. The FB therefore introduces new Patent Box legislation to apply from 1 July 2016 which is in accordance with the OECD proposals dealing with preferential Intellectual Property regimes. In this respect the new Patent Box regime has an ‘R&D fraction’ which in general terms is designed to restrict the benefits of the patent box to the proportion of the R&D incurred by the company. This results in the new Patent Box regime having some rather complex calculations with tracking and tracing and rebuttable presumptions, so the record keeping and compliance obligations have considerably increased for companies taking advantage of this regime.
The Finance bill 2016 and the deduction of income tax on royalty payments
This is a response to the structuring that has been adopted by a number of high profile multinationals whereby royalties are charged into the UK to reduce profits liable to UK corporation tax. The changes here will enable the UK to withhold income tax on the payment of the royalties in a broader set of circumstances than previously existed. The definition of royalty has been expanded to include trademarks and brands, the source rules will now include UK Permanent Establishments, and anti-avoidance provisions with a main purpose test have also been introduced to deny advantages obtained through double taxation agreements. It’s fair to say that Intellectual Property is a key battleground between tax authorities and multinationals. To date the UK has only had a piecemeal response, so these changes go some way to start to shore up the defences, and are justified on the basis that they follow a path being set out in the OECD BEPS project.
The Finance bill 2016 and Tax Strategies
For financial years beginning after the date of Royal Assent, large companies will be required to publish their tax strategy in relation to UK taxation. In this context, large includes UK companies, groups or subgroups with aggregate turnover of more than £200m and also includes those that meet the requirements for mandatory UK country-by-country reporting. The strategy must set out how the business deals with issues such as tax risk management and governance, their attitude towards tax planning and their approach towards dealings with HMRC. It will need to be published on the internet and there will be penalties for non-compliance. With the compliance threshold set at a turnover of £200m or more, this requirement will apply to many more companies and groups than would generally expect to have to articulate or formalise their tax strategy and will continue to ensure that tax moves higher up the Boardroom agenda.
If you require any further information on any of the Finance bill 2016 issues raised above, please email Nick Farmer at firstname.lastname@example.org.