Finance Act 2014: Corporation tax and CGT

In the second in a series of AccountingWEB articles summarising the key measures in Finance Act 2014, Andrew Goodall sets out the main corporation tax and capital gains tax provisions in part one of the act.

Corporation tax

Rates

Finance Act 2013 fixed the main rate for profits other than ring fence profits at 21% for financial year (FY) 2014, beginning on 1 April 2014, and 20% for FY 2015.

Finance Act 2014 sections 5 to 7 and schedule 1 fix the rates other than the main rate for FY 2014 and FY 2015.

The small profits rate for FY 2014, beginning on 1 April 2014, is 20% (19% for ring fence profits of oil-related activities) and the standard fraction for marginal relief for that year is 1/400th (11/400ths for ring fence profits). HMRC updated its marginal relief calculator in June 2014.

Schedule 1 abolishes the small profits rate (for profits other than ring fence profits) with effect from FY 2015, when the profits (other than ring fence profits) of all companies will be taxed at the main rate of 20%. Schedule 1 also sets the corporation tax rates for ring fence profits for FY 2015 and future years.

Loan relationships

Section 26 changes the loan relationship rules on credits to be brought into account on the release of debts, to allow for the release of a debt in the exercise of new “stabilisation powers” relating to failing financial institutions.

Section 27 amends the “bond fund” rules on corporate debt and derivative contracts, which provide that holdings in funds are treated as loan relationships in some circumstances.

Section 28 makes changes to remove an “anomaly” in the de-grouping rules that apply when a company to which a loan relationship or derivative contract has been transferred leaves a group.

Corporation avoidance schemes

Section 29 is intended to counter corporation tax avoidance schemes involving the use of “total return swaps” and other derivative contracts to transfer profits to a group company, often based in a tax haven.

Section 30 is intended to counter arrangements to transfer profits between companies in the same group for the purpose of tax avoidance, and is intended to apply to arrangements designed to circumvent the change introduced by section 29. HMRC published on 24 July a revised guidance note on this provision, including minor changes to the examples provided in the previous version.

R&D tax credits

Section 31 increases the rate of the payable research and development tax credit for small and medium sized companies, from 11% to 14.5% of the surrenderable loss.

Film tax relief

Section 32 makes two changes to the existing film tax relief, subject to EC state aid approval. The minimum UK expenditure requirement is reduced from 25% to 10% and, broadly, relief for a surrenderable loss will be available at 25% up to the first £20m of a production’s surrenderable loss and 20% thereafter.

Television tax relief

Section 33 is intended to make it clear that any animation or high-end television programme qualifying for tax relief is treated as a separate trade for the purposes of tax relief, and that only those programmes qualifying for the relief need to be treated as separate trades.

Video games tax relief

Section 34 makes minor changes to video games tax relief to make it compliant with EC state aid approval and to make it clear that only those games qualifying for relief need to be treated as separate trades.

Community amateur sports clubs

Section 35 extends charitable donations relief to payments made by companies to community amateur sports clubs (CASCs). The definition of “charity” is extended to include a “registered club”, i.e. a club registered as a CASC.

Theatrical productions

Section 36 and schedule 4, added at report stage of the Finance Bill, introduce a new corporation tax relief for theatrical productions. Broadly, a qualifying company engaged in a dramatic production or ballet may claim a deduction in computing taxable profits. Where the deduction results in a loss the company may surrender the losses for a payable tax credit. HM Treasury published a consultation response document in June 2014.

Losses and changes in ownership

Section 37 relaxes the existing anti-avoidance legislation which restricts relief for brought-forward trading losses against future profits where the ownership of a company changes. Two changes are made to “bring the legislation up to date with modern commercial practice”.

Research and development allowances

Section 38 makes changes to ensure that tax allowances for certain capital expenditure on research and development are not restricted by the anti-loss-buying rules introduced in Finance Act 2013.

Worldwide debt cap

Section 39 makes two changes to the tax treatment of financing costs and income, or the “worldwide debt cap”, which limits deductible interest and other finance expenses for UK members of a worldwide group of companies. The operation of the group relief rules for the purpose of the debt cap is clarified and there is a change to regulation-making powers.

Group relief

Section 40, added at report stage of the Finance Bill, changes the group relief anti-avoidance rules so that conditions set by some statutory public bodies will no longer restrict the flow of group relief.

Capital allowances

Annual investment allowance

Section 10 introduces a temporary increase in the annual investment allowance for expenditure on plant and machinery – see Finance Act 2014 summary: Income tax.

Enhanced capital allowances

Section 64 gives the Treasury the power to extend the existing enhanced capital allowances (ECAs) that provide first-year allowances for certain expenditure on plant and machinery. The periods specified for expenditure on cars with low carbon dioxide emissions, zero-emission goods vehicles, and plant or machinery for gas refuelling stations may be extended by Treasury order. The government has already indicated that these schemes will be extended to March 2018. The ECA scheme for expenditure on plant and machinery for use in designated assisted areas (enterprise zones) will be extended to 31 March 2020, and may be extend further by Treasury order.

Section 65 and schedule 13 make changes to ensure that UK legislation providing ECAs for expenditure on zero-emission goods vehicles, and plant and machinery for use in designated assisted areas (enterprise zone allowances), continues to comply with EC state aid rules following revision of the General Block Exemption Regulation.

Business premises renovation allowances

Section 66 makes detailed changes setting out the expenditure that qualifies for business premises renovation allowances, following a review undertaken in response to the disclosure of tax avoidance schemes. A 100% initial allowance is provided for specified expenditure on bringing back into use vacant business properties in disadvantaged areas.

Mineral extraction allowances

Section 67 makes a number of changes. It provides confirmation that a mineral extraction trade is within the charge to UK tax, and that the activity of a foreign permanent establishment subject to an election for exemption is treated as a separate mineral extraction trade. Section 68 aligns the treatment of successful and unsuccessful expenditure on seeking planning permission for mineral exploration or the working of mineral deposits.

Capital gains tax

Annual exempt amount

Sections 8 and 9 set the CGT annual exempt amount at £11,000 for 2014/15 and £11,100 for 2015/16. Statutory indexation is over-ridden and the amount is increased by 1% for both years, as announced at Autumn Statement 2012.

Private residence relief

Section 58 reduces the length of the final period of ownership that is always eligible for private residence relief from 36 months to 18 months. The 36-month limit is retained for an individual who is a disabled person or living in a care home at the time of the disposal.

Remittance basis

Section 59 provides that foreign gains arising to a remittance basis user in the overseas part of a split year of residence, and remitted in the UK part of the year, are not charged to tax. This corrects a drafting error in Finance Act 2013, which introduced the new statutory residence test.

CGT on death: Trusts

Section 60 extends the capital gains tax uplift provisions that apply to property held on trust for the benefit of a vulnerable beneficiary to include trusts for the benefit of a disabled person where the beneficiary has no interest in possession, in order to remove an anomaly that was reported to be distorting decisions on whether to establish a trust.

Rollover relief

Section 61 amends the capital gains rollover relief rules to ensure that relief is maintained when EU’s basic payment scheme replaces the single payment scheme for farmers.

Section 62 corrects a tax law rewrite error to prevent companies claiming capital gains rollover relief on the disposal of tangible assets where the proceeds are reinvested in an intangible fixed asset.

Avoidance involving losses

Section 63 is intended to make it clear that an anti-avoidance rule, restricting the use of capital losses by companies to reduce income profits, applies to all artificial arrangements in which a chargeable gain accrues.

Other measures

The first article in this AccountingWEB series summarised the main income tax provisions in Part 1 of Finance Act 2014.

The remaining articles will summarise the key provisions on other taxes and administration matters, and will focus on tax reliefs and the measures set out in parts 4 and 5 to counter and deter the promotion and use of tax avoidance schemes.

 

Andrew Goodall is a freelance tax writer.