United Kingdom Tax Alert - 21 March 2012
2012 budget measures affecting foreign multinationals
By John Bird, Christie Buck, Bill Dodwell and Andy Wilde
The 2012 U.K. Budget announced on 21 March 2012, contains a number of measures consistent with the government’s economic policy objective of rewarding work and supporting growth, as well as measures designed to retain and promote investment.
The headline announcement is a further 1% cut in the previously announced corporation tax rate reductions. The Chancellor also confirmed the introduction of the new controlled foreign company (CFC) and patent box regimes, following substantial consultations, as well as the government’s intention to proceed with the introduction of a narrowly targeted general anti-avoidance rule (GAAR). The top rate of income tax for individuals will be reduced from 50% to 45% as from April 2013.
The key measures for foreign multinational groups are summarized below.
Corporation tax rate – The main rate of U.K. corporation tax will be reduced to 24% as from 1 April 2012 (rather than the previously announced decrease to 25%). As a consequence, the further planned rate reductions from 1 April 2013 and 1 April 2014 will fall to 23% and 22%, respectively. The Chancellor did make reference in his speech to aligning the corporation tax rate with the basic rate of income tax of 20%, although there are currently no concrete proposals in this area.
The 24% and 23% rates will be included in Finance Bill 2012 and the 22% rate will be included in Finance Bill 2013.
From a tax reporting perspective, the rate reductions will need to be taken into account as follows:
- UK GAAP/IFRS – Substantive enactment of the 24% rate is expected during the week commencing 26 March 2012 when the resolution having statutory effect is passed. The 23% and 22% rates are expected to be substantively enacted in June/July 2012 and 2013, respectively, when the final reading in the House of Commons of each Finance Bill takes place.
- US GAAP – The 24% and 23% rate changes will apply once Finance Bill 2012 receives Royal Assent, which constitutes full enactment and which is expected in July 2012. The 22% rate reduction will apply once Finance Bill 2013 receives Royal Assent, expected in July 2013.
Promoting investment – The Chancellor reconfirmed a number of previously announced measures which, in conjunction with the rate reductions above, serve to fulfill the government’s aim of further increasing the attractiveness of the U.K. for foreign investors and creating a highly competitive holding company regime.
- CFC reform – Finance Bill 2012 will include legislation covering a full reform of the U.K. CFC regime, following various stages of consultation over the last few years. The new regime is designed to better reflect the way that businesses operate in a global economy and to promote investment by foreign multinationals into and through the U.K. The new rules will be effective for accounting periods starting on or after 1 January 2013.
- Patent box – The patent box regime has been subject to extensive consultation and legislation will be included in Finance Bill 2012. The elective regime allows for all profits attributable to qualifying patents (whether paid separately as royalties or embedded in the sales price of products) to be taxable at 10%. The patent box will apply to existing and new patents, as well as to acquired patents provided the group has further developed the patents or the product that incorporates it. Coupled with the corporation tax rate reductions, this will increase the attractiveness of the U.K. for foreign groups to centralize IP and technology functions in the U.K. This regime is to be phased in over four years from 1 April 2013 when relief at 60% will be available, increasing to 100% by 2017.
- Research and development (R&D) tax credits – The Chancellor announced an “above the line” R&D tax credit from April 2013, with loss-making companies able to claim a refundable credit. This measure had previously been announced in the 2011 autumn statement and there will be a consultation on the detailed design of the credit shortly with final rates decided following the consultation. At this stage, the government has indicated that relief will be available at a rate of at least equal to 9.1% of qualifying spend.
- Relief for technology – The Chancellor announced that U.K. corporation tax reliefs will be introduced as from April 2013 for the video games, animation and high end television industries. The next step will be a consultation process and the government anticipates that EU state aid approval will be required.
- Enterprise zones – Legislation will be included in Finance Bill 2012 to provide 100% first year allowances for trading companies investing in plant and machinery for use in specially designated enterprise zones, a key aim being to attract overseas investment in these zones.
Anti-avoidance – The government seeks to curtail tax avoidance through a GAAR and by specifically targeting connected party debt buybacks.
- General anti-avoidance rule (GAAR) – Following a study headed by Graham Aaronson in 2011, the government agrees with the need for a GAAR targeted at artificial and abusive tax avoidance schemes in order to tackle tax avoidance, while maintaining the attractiveness of the U.K. to investors. A consultation document will be issued in summer 2012 with legislation to be included in Finance Bill 2013. Foreign multinationals will be familiar with GAARs in other territories, and the government will be keen to ensure that the U.K. GAAR does not create unnecessary complexity and uncertainty for business.
- Connected party debt buybacks – As previously announced, the government will amend the corporation tax rules on certain debt buybacks. The calculation of deemed releases of debts becoming held by connected companies will be amended and a targeted anti-avoidance rule to counter arrangements that aim to circumvent the deemed release rules will be inserted. Parts of the legislation will have retroactive effect to 1 December 2011.
Income tax rate – The top rate of income tax (for earnings of over GBP 150,000) will be reduced from 50% to 45% as from April 2013, which will be largely welcomed by business. In line with this, also as from April 2013, the top dividend rate will be reduced from 42.5% to 37.5%. This should reduce the cost of foreign groups relocating individuals to the U.K.
Statutory definition of residence – The budget confirms a number of changes relating to the taxation of nonresident and non- domiciled individuals. These include an increase to the annual charge to GBP 50,000 for non-domiciles who have been U.K. resident for 12 or more years, the introduction of a statutory residence test on 6 April 2013 and the abolition of ordinary residence for tax purposes as from 6 April 2013.
The Chancellor announced new measures aimed at tackling avoidance in respect of high value property transactions:
- Stamp duty land tax has been increased (effective immediately) from 5% to 7% on the sale of residential property valued at over GBP 2 million.
- A new stamp duty land tax charge will apply at a rate of 15% to the acquisition of U.K. residential property where the consideration exceeds GPB 2 million and the property is acquired by way of a corporate vehicle, i.e. companies, collective investment schemes (including unit trusts) and certain partnerships. This measure also is effective immediately.
- As from March 2013, an annual charge will be levied on property held in companies and capital gains tax will be levied on disposals.
The U.K. government affirmed its commitment to fiscal consolidation and the elimination of the structural deficit by 2016. This meant that tax cuts needed to be financed by tax increases – and the beneficiaries are business, with the 1% corporation tax rate cut and individuals with the income tax cut to 45%. The largest cut was in the tax-free personal allowance, which benefits those on average earnings. A range of anti-avoidance measures also help finance the cuts.