Autumn Budget 2017: Corporation Tax and other matters affecting large companies

The last few years have seen significant changes in the UK Corporation tax regime. Many were as a response to the OECD/G20 Base Erosion and Profit Shifting Project which aimed to reduce the opportunities for multi-nationals to shift profit from high tax jurisdictions to low tax jurisdictions, or use arbitrage between different systems to eliminate tax on profits altogether. The use of tax losses has been reformed, and for large companies restricted, and large companies are required to publish their “Tax Strategy”. Given all this already enacted legislation, significant legislation affecting large businesses was not expected in this budget, and the Chancellor did not spring any major surprises.

However, large UK companies, particularly those in the media and technology sectors, will be aware that at both the OECD and EU level, reviews of the “digital economy” are under way. Governments continue to struggle to reconcile the perception from their citizens that “internet giants” have a significant “footprint” in economies where they have a lot of sales but relatively little other presence, with an international corporate tax system that taxes value creation, and attributes little if anything of that to sales activity.

Responding to this activity the Government has published a “Position Paper”. The UK remains committed to the principle of taxation following where value is created. However, the paper discusses the concept that sustained engagement and active participation in an on-line platform can create material value for a business; and that this “user-generated” value is not captured under the existing framework. Capturing the value that users in a jurisdiction create and taxing that value is seen as the long-term required reform to the international tax system. It is acknowledged that this will take time to achieve; and pragmatic solutions such as splitting up worldwide advertising income in proportion to platform users may need to be considered as an alternative.

Prior to a multilateral solution being reached, the UK agrees with the European Commission that a tax on revenue from digital business could be an appropriate interim solution, although this should be targeted on businesses deriving income from platform advertising and intermediation services rather than the simple supply of digital content or “plain vanilla” online retailing.

The concept of “value creation through platform usage” is bound to be controversial and it will be interesting to see how attribution of value can be calculated. The interim solution of taxing revenues rather than profit is also a break with past principles. However, the UK government is targeting the “platform sector” - which relies on high consumer engagement - rather than seeking broad brush taxes across all digital supplies, which would have been a much more fundamental attack on the concept of taxing where value is created.       

Accompanying the position paper are two specific measures; a proposal to impose a withholding tax on digital services provided to the UK from abroad, to the extent that these services are dependent on intellectual property held in a tax haven. This is an attack on arrangements such as where a US tech company provides digital services to the UK via Ireland; but the US has transferred an interest in the underlying IP to the Cayman Islands and the Irish subsidiary is paying a royalty to the Caymans. The payment to Ireland from the UK will be subject to withholding tax to the extent of the royalty. The government is to consult on introducing this measure from April 2019.

The second measure is to make on-line platforms such as Amazon jointly and severally liable for VAT on sales, ending the possibility of overseas sellers undercutting domestic sellers by evading their VAT liabilities; if they do not charge the VAT, the platform will have to add it. This will apply from the enactment of the forthcoming Finance Bill in the spring

In regard to other measures, the abolition of future indexation on capital gains of companies will increase the tax take on disposals of assets; however, as sales of shares in a business by corporates are generally exempt, and this is usually the preferred method of large scale disposals, the impact is likely to be relatively limited. The relief was introduced at a time when inflation was high, and was designed to ensure only “real” gains were taxed; it is perhaps surprising it has survived a long period of low inflation, especially as it was abolished for individuals some time ago. It is perhaps also surprising that the allowance is being “frozen” at the December 2017 amount rather than abolished altogether, which would have been a greater simplification (if more painful for those affected).

The further increase in R&D tax credit will be welcomed by those eligible, as will the transferable tax credit regime for North Sea oil companies. Whilst the Chancellor trumpeted a further major crackdown on evasion and avoidance, this is made up of a large number of small scale measures across a range of taxes, and there are no headline grabbers in the corporate sphere. Finally, business will not be surprised to see a consultation on extending the recent tightening of the tax treatment of contractors in the public sector into the private sector; for many companies, if this comes in, it could be one of the costliest and most disruptive measures of all.

By Glyn Fullelove, Chair of CIOT's Technical Committee, and Group Corporate Services Director, Informa

This article was first published by Bloomberg BNA as part of their Budget 2017 special report