Annual update to the Energy Technology List for first year capital allowances

Finance Bill 2018-19 will contain provisions to extend First Year Tax Credits (FYTC) for five years and reduce the percentage rate of the claim to two-thirds of the corporation tax rate. The government will also update the energy-saving technology list (ETL) which specifies what qualifies for First Year Allowances (FYAs).

FYAs enables profit-making businesses to deduct the full cost of investments in energy and water technology from their taxable profits. Loss-making businesses do not make profits, so they cannot claim these tax breaks. Instead, loss-making businesses can claim FYTC when they invest in efficient products that feature on the energy and water technology lists.

The ETL will be updated to:

  • add three new technologies to the list: evaporative air coolers, saturated steam to electricity conversion and white LED lighting modules for backlit illuminated signs;
  • modify nine existing technologies to reflect technological advances and changes in standards and clarify the qualifying criteria;
  • remove Localised Rapid Steam Generators and Biomass fired Warm Air Heaters

These changes update the qualifying criteria to reflect technological advances and changes in standards. The government will legislate by statutory instrument to update the ETL in December 2017. The changes to FYTC will have effect on and after 1 April 2018.

Extension of first year allowances for zero-emission goods vehicles and gas refuelling equipment

The 100% First Year Allowances (FYA) for businesses purchasing zero-emission goods vehicles and/or gas refuelling equipment are being extended for a further three years. The scheme will end on 31 March 2021 for corporation tax and 5 April 2021 for income tax.

Corporate interest restriction

An amendment is to be made to the corporate interest restriction (CIR) rules, which took effect from 1 April 2017, to ensure the regime works as intended. The changes are as follows:

  • derivatives hedging a financial trade that is not a banking business will not be inappropriately excluded from the rules;
  • the calculation of group-earnings before interest, tax, depreciation and amortisation (EBITDA) will be aligned with the treatment of research and development expenditure credits;
  • technical changes will be made to the infrastructure rules to ensure that insignificant amounts of non-taxable income do not affect their operation;
  • the definition of a group will be aligned with accounting standards and also to ensure that otherwise unrelated businesses are not inadvertently grouped; and
  • minor amendments to the administrative rules.

Corporation Tax: double taxation relief and permanent establishment losses

A new measure will restrict the amount of credit allowed or deduction given in the UK for foreign tax suffered by a company with an overseas permanent establishment (PE) where losses of the PE have been set off against profits other than of the PE in the foreign jurisdiction. The changes will have effect for accounting periods ended on or after 22 November 2017 with a transitional rule applying where the accounting period straddles 22 November 2017.

Intangible fixed assets – related party step-up schemes

The tax treatment of a disposal of a company’s intangible fixed assets involving non-cash consideration is to be clarified.

In addition, the rules are to be amended in relation to licences in respect of intangible fixed assets granted by or to a company where the other party to the licence is a related party.

Both measures take effect on 22 November 2017.

Income tax: debt traded on a multilateral trading facility

The current requirement to apply an interest withholding tax for ‘quoted Eurobonds’ is to be extended to cover debt traded on a Multilateral Trading Facility (MTF) that is operated by a recognised stock exchange, regulated by a European Economic Area territory. This will have effect for interest payments made on or after 1 April 2018.

The definition of Alternative Finance Investment Bonds, (AFIBs), which are Shari’a-compliant financial instruments, is to be widened to include securities admitted to trading on an MTF. This will have effect for accounting periods beginning on or after 1 April 2018 for corporation tax purposes, and for 2018/19 for income tax purposes.

This measure is designed to ensure that UK debt markets can compete internationally on an equal footing by ending the anomaly which leads UK companies to issue debt on overseas venues in order to benefit from an existing UK exemption from withholding tax on interest.

Increasing the rate of research and development expenditure credit

The research and development (R&D) expenditure credit is brought into account as a receipt in calculating profits of large companies (and some smaller companies) that carry out qualifying research and development. The current rate is set at 11% of qualifying research and development expenditure but it will be increased to 12% for all expenditure incurred on or after 1 January 2018.

Capital gains depreciatory transactions within a group

This measure will remove the time limit of six years for which a company must look back and adjust the capital loss claimed on sale of shares in a subsidiary company to account for earlier depreciatory transactions that have materially reduced the value of those shares.

A depreciatory transaction is one that takes value out of shares, which might be by transferring the assets of a company to another company within a group for no or little cost. This reduces the value of the shares but without any economic loss to the group. When the shares are disposed of (by liquidating the company or making a negligible value claim), the legislation requires that previous depreciatory transactions are adjusted for in computing any loss on disposal. Currently there is a time limit of six years, so that depreciatory transactions before that are not taken into account. Removal of the six-year rule means that companies will need to consider the history of the shares and will be required to adjust for any prior depreciatory transactions when calculating a loss.

This measure will ensure companies cannot prevent the depreciatory transaction rules applying by simply holding onto a company that no longer has any value for six years before claiming an inflated amount of loss relief.

This change will have effect for disposals of shares in, or securities of a company made on and after 22 November 2017. For assets that are of negligible value, the commencement rule will apply to the date that the claim is made and not any earlier date that might be specified.

Removal of capital gains indexation allowance from 1 January 2018

Indexation allowance for individuals and other non-corporate entities was abolished from 31 March 2008. Indexation allowance is now being abolished for companies with effect from 1 January 2018. However, indexation up to 31 December 2017 will still be allowable, and will be frozen at that date.

Capital gains assets transferred to non-resident company: reorganisation of share capital

An unintended tax charge that can arise in certain circumstances is to be removed. Where the trade and assets of a UK company’s foreign branch are transferred to an overseas company in exchange for shares in that company, existing legislation allows tax on any capital gains on this disposal of assets to be postponed. The postponement is temporary, until the overseas company sells the assets, or the UK company disposes of the shares in the overseas company, other than in exchange for further shares during a corporate reconstruction. Under the current rules, an unintended consequence is that if the shares exchanged during the reconstruction fall within conditions for the Substantial Shareholding Exemption (SSE) to apply, the postponed tax charge may become payable, even though the group still owns the shares of the overseas company.

This measure seeks to correct that anomaly. It will have effect for disposals of shares in, or securities of a company made on or after 22 November 2017.

Partnership taxation: proposals to clarify tax treatment

In September 2017, HMRC published a policy paper setting out several measures designed to provide additional clarity over the following aspects of the taxation of partnerships:

  • how the current rules and reporting operate in particular circumstances where a partnership has partners who are bare trustees for another person or that are partnerships; and
  • the allocation and calculation of partnership profit for tax purposes.

The legislation is to be amended to clarify that partnership profits for tax purposes must be allocated between partners in the same ratio as the commercial profits. In addition, it will be made clear that the allocation of partnership profits shown on the partnership return is the allocation that applies for tax purposes for the partners. This rule will have effect for accounting periods commencing after the date of Royal Assent.

A new process will also be introduced to allow disputes over the correctness of the allocation of profit (or loss) for tax purposes to be referred to the tribunal to be resolved. Disputes over the quantum of partnership profits are not within the scope of the new process. This will apply for 2018/19 partnership returns.

Partners in nominee or bare trust arrangements -This change clarifies that where a beneficiary of a bare trust is entitled absolutely to any income of that bare trust consisting of profits of a firm, but is not themselves a partner in the firm then they are subject to the same rules for calculating profits etc and reporting as actual partners.

Partnerships with partnerships as partners-A partnership that has partners that are themselves partnerships (participating partnerships) will be required to include, for each of the participating partnerships, the share of the partnership’s income or loss calculated on all four possible bases of calculation unless details for all the partners and indirect partners are included on the partnership statement.

Investment partnerships -Partnerships that don’t carry on a trade or profession or a UK property business won’t be required to return the tax reference for a partner if that partner is not chargeable to income tax or corporation tax in the UK and the partnership reports details of the partner to HMRC under the CRS.

Partnerships that are partners in another partnership – If a partnership (the reporting partnership) is a partner in one or more partnerships that carry on a trade, profession or business then the legislation will make clear that the profits or losses from each partnership must be shown separately, and separately from any other income or losses, on the reporting partnership’s return.

Corporation Tax: capital gains depreciatory transactions within a group

A change to the legislation will remove the time limit of six years for which a company must look back and adjust the capital loss claimed on sale of shares in a subsidiary company to account for earlier depreciatory transactions that have materially reduced the value of those shares.

A depreciatory transaction is one that takes value out of shares, which might be by transferring the assets of a company to another company within a group for no or little cost. This reduces the value of the shares but without any economic loss to the group. When the shares are disposed of (by liquidating the company or making a negligible value claim), the legislation requires that previous depreciatory transactions are adjusted for in computing any loss on disposal. Currently there is a time limit of six years, so that depreciatory transactions before that are not taken into account. Removal of the six year rule means that companies will need to consider the history of the shares and will be required to adjust for any prior depreciatory transactions when calculating a loss.

This measure will ensure companies cannot prevent the depreciatory transaction rules applying by simply holding onto a company that no longer has any value for six years before claiming an inflated amount of loss relief.

The measure will have effect for disposals of shares in, or securities of a company made on and after 22 November 2017. For assets that are of negligible value, the commencement rule will apply to the date that the claim is made and not any earlier date that might be specified.

Pensions tax registration

HMRC powers to refuse to register, and to de-register pension schemes are to be extended to those which are Master Trusts and don’t have authorisation from the Pensions Regulator under their new authorisation and supervision regime, and to those pension schemes with a dormant company as a sponsoring employer. The objective behind this change is to restrict tax registration and beneficial tax treatment only to those pension schemes that provide legitimate pension benefits. This measure will have effect from 6 April 2018.

 

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