With a 3 percentage point cut in corporation tax, a slashing of Capital Gains Tax and lifting the burden of business rates on an estimated 600,000 small companies, last month’s budget was undoubtedly a great one for UK’s business sector.
But under the headline grabbing items, the budget also contained a couple of subtle changes in the way businesses and their owners are taxed. In this article we review two of those: changes to the corporation tax rules on losses and the introduction of a cap on interest relief for large corporations.
Under current rules, tax relief for losses carried forward can arise from historic losses under one of the 3 categories. Trading losses, arising from the losses as part of the operations of the business; capital losses, arising from the loss on the sale and disposal of a capital asset such as machinery or a plant and losses on property income. This categorisation was used to define the eligibility for losses to be offset against profits. Losses made on the disposal of capital assets were not eligible to offset profits made as a result of the trading of the business.
This division is being removed from the 1st of April 2017, with current losses able to be offset against profits regardless where those losses arise. The move should benefit businesses and is one small step towards the simple transparent tax regime UK businesses want and deserve.
The government has also moved to limit the use of historic losses to provide tax relief against profits. From 1st April 2017, losses carried forward can only be offset against 50% of profits (above £5 million) for any given year. Such a move seems primarily political, with ministers weary of headlines that juxtapose record profits with dribbles of cash flowing into HMRC’s coffers.
The second change we will focus on is the introduction of a cap on the amount of interest relief that can be claimed by large corporations. Tax avoidance and tax evasion by multinationals has been a hot political potato over the last few years. Despite, public anger and plenty of political posturing, legislative action to plug the holes in the current tax system has been scarce to date. This is set to change, with the government proposing to limit the amount of interest relief at 30% of taxable earnings, for all companies that pay more than £2 million in interest in the UK. Aimed at the use of intergroup loans, and the concentration of group fund raising to minimise tax bills in high-tax regions, the new rule should help ensure that the largest subsidiaries and businesses in the UK start paying their fair share of tax.