This update summarises tax announcements made in the UK Budget on Wednesday 21 March which are likely to be most relevant to our clients. It is not a comprehensive summary and does not cover (in particular) many income tax measures, measures primarily relevant to small businesses or specific industries other than the oil and gas sector, nor does it cover non-tax announcements. More detail on certain specific measures will be available when the Finance Bill 2012 is published on 29 March.
In general, the Budget will be welcomed by businesses operating in the UK and non-UK businesses seeking to invest in the UK. There are also some positive announcements for oil and gas companies operating in the North Sea.
RATES
Mainstream corporation tax
Pursuant to the government's ambitions to create the most competitive tax system in the G20, the mainstream rate of corporation tax will be reduced from the current rate of 26 percent to 24 percent from 1 April 2012 (rather than reduced to 25 percent, as previously announced), with further reductions bringing the rate to 23 percent in April 2013 and 22 percent in April 2014.
North Sea oil and gas
The tax rates relating to UK and UK continental shelf oil and gas production are unchanged, with ring fence corporation tax at 30 percent and supplementary charge at 32 percent (and petroleum revenue tax, where applicable, at 50 percent).
Income tax
The top rate of income tax for individuals is to be reduced from 50 percent to 45 percent from 6 April 2013.
Bank levy
So that the overall tax charged on the banking sector is not reduced by the corporation tax decrease, the main bank levy rate (which applies by reference to certain liabilities on a bank's balance sheet) will be increased to 0.105 percent from 1 January 2013.
CORPORATE TAX
CFC reform
The government has confirmed that significant changes will be made to the UK's controlled foreign company (CFC) tax regime, under which income profits of non-UK companies can be attributed to UK controlling companies. This is another part of the government's plan to deliver a more competitive corporate tax system.
Key points from the latest draft of the legislation are as follows:
- Whereas the current regime adopts an "all or nothing approach" (i.e. all profits of a CFC are apportioned to UK-controlling companies, unless an exemption applies), the new rules will provide that profits of CFCs will only be taxable if they pass certain tests referred to as "gateways," the overall effect of which is intended to take many offshore activities outside the scope of the CFC regime;
- There are certain exemptions for finance profits of CFCs, which may reduce the effective rate of tax relevant to finance CFCs to 5.5 percent or, in certain circumstances, zero;
- Changes will be made to the "exempt foreign branches" legislation, with the effect of applying the CFC rules to foreign branches of UK companies which have elected for exemption.
The new rules will have effect for CFCs with accounting periods beginning on or after 1 January 2013. They are likely to be of interest not only to UK-headed multinational groups, but also to non-UK headed groups looking at their overseas holding company and financing arrangements.
Patent box
The government has confirmed that it will be introducing a "patent box" regime from 1 April 2013, under which a reduced corporation tax rate of 10 percent will apply to patents and similar intellectual property.
OIL AND GAS
Application of supplementary charge to gains
The Finance Bill 2012 will include provisions, already announced with effect from 6 December 2011, to "clarify" that supplementary charge not only applies to oil and gas income, but also to any capital gains which are subject to ring fence corporation tax (the general view being that any such intention had not previously been properly covered by the legislation). A continuing contentious issue is the application of this "clarification" to gains "held over" from pre-6 December disposals which are yet to crystallise.
Restriction on decommissioning relief
As announced in last year's Budget, the Finance Bill 2012 is to include provisions to cap relief for decommissioning expenditure incurred after 21 March 2012 at 20 percent (notwithstanding the recent rise in the supplementary charge on profits to 32 percent).
Fair fuel stabiliser
Also in accordance with their stated intentions in Budget 2011, the government is to proceed in adopting a policy linking the rate of supplementary charge and the rate of fuel duty to the oil price with effect from 21 March 2012. The trigger price is to be set at £45 per barrel (approximately US$75 per barrel), with the consequence that if the oil price falls below this price (to be assessed annually in February), the subsequent Budget will announce a decrease in the rate of supplementary charge and an increase in fuel duty.
Decommissioning relief: securing the government's contribution
Considerable work has been underway for some time, undertaken on a joint basis by industry and government, to try and find a way of giving certainty to oil and gas companies on the rate of tax relief which will apply when decommissioning of North Sea installations occur. Greater certainty is seen as important to reduce the costs of giving security or otherwise provisioning for future liabilities and could potentially free up considerable capital and increase values and investment. The government has now formally announced its commitment to introduce legislation in the Finance Bill 2013 to allow it to sign contracts with companies to provide assurance on the rate of relief they will receive.
Field allowances
In view of the disincentive to development of new high-risk or small oil or gas fields caused by the high rate of supplementary charge, the government has announced its intention to extend and improve field allowances for supplementary charge purposes. The Finance Bill 2012 will include additional powers for HMRC to extend allowances to fields that have already been developed and new secondary legislation will, with effect from 21 March 2012, enhance the small field allowance and provide a new allowance (at £3 billion) to incentivise development of fields in the West of Shetland area.
OTHER SIGNIFICANT ENERGY-RELATED DEVELOPMENTS
Offshore taxing rights: non-oil and gas industry
The government is to engage with industry "to ensure a level playing field" in the taxation of activities in the UK sector of the continental shelf which are not within the scope of the existing oil tax regime (such as wind farms and gas storage). This seems likely to be intended to extend UK tax to non-UK residents engaged in such activities who would not otherwise be within the scope of UK taxation.
Carbon price floor
The government has confirmed that, from 1 April 2013, a "carbon price floor" will be implemented. The effect of this is to tax electricity generators using fossil fuels through the climate change levy (CCL) and fuel duty (currently fossil fuels that are used to generate electricity are generally exempt from the CCL). The tax will be applied through "carbon support price" rates (which are determined by reference to the carbon content of the fossil fuel and take account of the expected price of carbon) which are detailed in the Budget. The Budget also includes details of certain reliefs, including for combined heat and power stations.
ANTI-AVOIDANCE
GAAR
The government has announced that it intends to introduce a general anti-avoidance rule (GAAR), i.e. an overriding anti-avoidance rule which would apply to transactions. A GAAR was endorsed by a consultative group which published its conclusions in November 2011, and the draft legislation produced by that group will form the basis of a formal consultation. Interestingly, whereas the GAAR recommended by the consultative group applied to direct taxes (corporation tax, income tax, capital gains tax, and petroleum revenue tax), the GAAR proposed by the government will also cover stamp duty land tax (SDLT). Legislation is expected to be introduced in the Finance Bill 2013.
Residential property – SDLT and non-residents' CGT
Two significant proposals have been made in relation to SDLT, which apply to residential property (and not commercial property) only: (i) a new rate of 7 percent will apply from 22 March 2012 for residential properties over £2 million; and (ii) a new rate of 15 percent will apply for residential properties over £2 million purchased on or after 21 March 2012 by "non-natural persons." This latter measure is to discourage "enveloping," where high-value properties are put into companies with the intention of avoiding SDLT by selling via a company sale in the future. In order to address the position of high-value residential properties already in such a corporate envelope, the government is to consult on the introduction of an annual charge on such properties valued at over £2 million with a view to imposing such a charge from April 2013.
In addition, from April 2013, the UK capital gains tax rules will be extended to apply to gains on the disposal of UK residential property by non-resident "non-natural" persons. Along with individuals engaging in planning in this area, this could conceivably affect lenders seeking to enforce security.
FATCA
The government has announced that it will publish a discussion document to facilitate co-operation with the U.S. in relation to the U.S. Foreign Account Tax Compliance Act (FATCA) which will apply with effect from 1 January 2014. FATCA has a far-reaching impact as it potentially imposes withholding tax obligations on payments to and by certain non-U.S. "financial institutions" (which are defined very widely and include certain private equity funds and debt issuers).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.