July 12, 2019 UK publishes draft clauses for Finance Bill 2019-20 Executive summary On 11 July 2019, the United Kingdom (UK) Government published draft clauses for Finance Bill 2019-20, together with accompanying explanatory notes, tax information and impact notes, responses to consultations and other supporting documents. Consultation on the draft legislation will run until 5 September 2019. A summary of some of the key corporate tax and related measures is set out below. The UK Government is committed, where possible, to publishing most tax legislation in draft for technical consultation before the relevant Finance Bill is put before Parliament. However, the final contents of Finance Bill 2019-20 will be subject to confirmation at Budget 2019 later this year. Detailed discussion Key measures Digital Services Tax (DST) The UK is committed to enacting a DST, notwithstanding the international reform project being undertaken by the Organisation for Economic Co-operation and Development. It has now published draft legislation as part of the draft Finance Bill 2019-20 confirming its intention for a 2% tax on the revenues earned from 1 April 2020 that a group derives from providing a social media platform, search engine or an online marketplace to UK users, if the group exceeds designated thresholds. This tax can be claimed as an allowable expense against UK corporation tax, but is not creditable against UK tax. The tax applies to revenues linked to UK users and not just UK companies or permanent establishments. The total UK DST liability is calculated at a group level but the tax will be charged on the individual entities in the group that realize the revenues that contribute to this total. UK DST will be payable annually, nine months after the end of the relevant accounting period. Outstanding DST liabilities can be demanded from any entity that was a member of the group in the relevant accounting period. The group consists of all entities which are included in the group consolidated accounts, provided these are prepared under an acceptable accounting standard. More detail is available in a separate EY Global Tax Alert on these proposals. Corporate capital loss restriction As announced at Budget 2018, the UK Government will introduce a new corporate capital loss restriction that will restrict the use of carried-forward capital losses to 50% of the amount of annual capital gains from April 2020. The draft legislation maintains the fundamental design features that were set out at the previous consultation, including the amount of annual deductions allowance (£5m). The UK Government acknowledged concerns expressed regarding the interaction of the commencement date (1 April 2020) with Brexit, but has decided not to defer the commencement of the new restriction. However, in response to comments raised regarding the interaction with the rules covering the taxation of basic life assurance and general annuity business (BLAGAB), the Government announced that the proposal will be amended so that there is no restriction of BLAGAB losses that are offset against BLAGAB gains. The UK Government will also provide exemptions for gains within the Oil and Gas ring-fence and the Real Estate Investment Trust Property Rental Business ring-fence. Further provisions have been made in respect of one-day accounting periods, connected party losses and loss streaming rules. Deferred corporation tax payments on cross-border transfers This legislation will allow companies to defer payment of tax that arises on certain transactions with group companies in the European Economic Area by entering into a corporation tax payment plan. This is intended to provide certainty for UK businesses following a recent First-tier Tax Tribunal decision. In that case, Gallaher, the Tribunal considered the compatibility with European Union law of the limitation to UK corporation taxpayers of the relief in the "no-gain no-loss" provisions contained in section 171 TCGA 1992, and equivalent provisions in the intangible assets rules. In relation to one of the scenarios it found that it was necessary to disapply the UK corporation taxpayer limitation in section 171 entirely rather than impose a deferral of tax. The deferred tax is to be payable in six annual instalments, commencing nine months after the end of the accounting period to which the payment plan relates. This is subject to rules making the balance of the tax immediately payable. The legislation will apply to corporation tax that becomes payable for accounting periods that end on or after 10 October 2018. Other measures Protecting taxes in insolvency Draft legislation has been published which will make HM Revenue & Customs a secondary preferential creditor for certain tax debts paid by employees and customers on the insolvency of a business. Stamp taxes on shares consideration rules Finance Act 2019 introduced a targeted market value rule to prevent contrived arrangements involving transfers of listed securities to connected companies to minimize stamp taxes on shares liability. Following consultation, the Government is extending the market value rule to the transfer of unlisted shares to a connected company. Transfers of unlisted securities to connected companies will be caught by the extended market value rule where the consideration for the transfer consists of, or includes, an issue of shares. As such it should not apply to transactions such as distributions and contributions (where no shares are issued). The draft legislation also prevents share for share relief (under section 77 Finance Act 1986) being denied where there is an arrangement for a person(s) to obtain control of the acquiring company where that person held at least 25% of the shares in the target company for three years prior to the share for share exchange (the stated purpose being to prevent two charges to stamp duty arising on most capital reduction partition demergers). The legislation is due to apply for instruments executed after Royal Assent to the Finance Bill 2019-20. The Government also consulted on aligning the Stamp Duty and Stamp Duty Reserve Tax definitions of what constitutes "consideration," and on the rules on contingent consideration but has decided not to make a legislative change now. Capital Gains Tax: Relief for loans to traders The draft legislation will extend the scope of the Capital Gains Tax relief in respect of loans to traders, so that it applies to loans made to traders located anywhere in the world and not just the UK. Share loss relief There will be extension of the scope of the Income Tax and Corporation Tax share loss relief, so that it applies to shares in companies carrying on a business anywhere in the world, and not just the United Kingdom. Scope clarification: Lease accounting standards There will be minor amendments to clarify the scope of legislation on changes to lease accounting standards introduced in Finance Act 2019. The amendments have been introduced to clarify that the spreading rules in paragraphs 13 and 14 of Schedule 14 FA 2019 (which made changes to the tax rules as a result of the introduction of IFRS 16) apply to all lessees adopting IFRS 16 for any period of account. Future responses
A statement from the Financial Secretary to the Treasury, Jesse Norman, indicates that other measures are still being considered. For example, no proposals have been published for preventing abuse of the research and development tax relief available to small and medium enterprises. Nor has there been anything on the proposed new plastics levy, the consultation for which closed on 12 May. ——————————————— For additional information with respect to this Alert, please contact the following: Ernst & Young LLP (United Kingdom), London
Ernst & Young LLP (United States), UK Tax Desk, New York
Ernst & Young LLP (United States), UK Tax Desk, San Jose
Ernst & Young LLP (United States), FSO Tax Desk, New York
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