Spring 2017 Budget: key finance law announcements
Key announcements of interest to finance lawyers arising from the Spring 2017 Budget.(Free access)
The Chancellor, Philip Hammond, delivered his Spring 2017 Budget on 8 March 2017. This update summarises the key announcements for lawyers advising on finance transactions, specifically in relation to:
Withholding tax on interest.
Deductibility of interest payments.
Double tax treaty passport scheme.
Taxation of non-residents' profits from trading in and developing UK land.
The Chancellor, Philip Hammond, delivered his Spring 2017 Budget on 8 March 2017. This update summarises the key announcements for lawyers advising on finance transactions.
For a general summary of the key business tax measures and announcements, including those relating to the finance sector, see Legal update, Spring 2017 Budget: key business tax announcements ( www.practicallaw.com/w-006-7178) .
Withholding tax on interest
The government has announced it will introduce an exemption from withholding tax for interest on debt traded on a multilateral trading facility, and will publish a consultation document on implementation of the exemption on 20 March 2017.
For information on withholding taxes, see Practice note, Withholding tax ( www.practicallaw.com/5-201-9175) .
(Spring Budget 2017, paragraph 3.14 and Overview, paragraph 2.14.)
Deductibility of interest payments
As announced at Budget 2016 and following consultation, the government will introduce legislation with effect from 1 April 2017 to limit the tax deductions that companies can claim for their interest expenses.
The new rules will restrict each group’s net deductions for interest to 30% of the earnings before interest, tax, depreciation and amortisation (EBITDA) that is taxable in the UK. The legislation also provides for repeal of the existing debt cap legislation and its replacement by a modified debt cap which will ensure that the net UK interest deduction does not exceed the total net interest expense of the worldwide group. All groups will be able to deduct up to £2 million of net interest expense per annum, so groups below this threshold will not need to apply the rules.
Draft legislation was published on 5 December 2016 and 26 January 2017. In the light of comments received, changes to the proposed rules will be reflected in Finance Bill 2017, including:
Certain unintended restrictions arising from the modified debt cap that could prevent deductions for carried forward interest expense will be removed.
The rules treat interest on debt guaranteed by related parties as related party interest, which can be subject to restriction. This rule will not apply to certain performance guarantees and all guarantees granted before 31 March 2017, nor will it apply to intra-group guarantees in the context of the group ratio rule.
The definition of interest will include income and expenses from dealing in financial instruments as part of a banking trade.
For background information on these measures, see Legal updates, Revised draft legislation on restriction of interest deductibility ( www.practicallaw.com/w-005-6058) and Draft Finance Bill 2017 legislation: key finance law measures: Interest deductibility ( www.practicallaw.com/w-004-8609) .
(Overview, paragraph 1.23.)
Double tax treaty passport scheme
The government will renew and extend the administrative simplifications of the Double Taxation Treaty Passport scheme to assist foreign lenders and UK borrowers. The scheme simplifies, for overseas lenders, access to reduced withholding tax rates on interest that are available within the UK’s tax treaties with other territories.
The Double Taxation Treaty Passport scheme was previously restricted to corporate lenders and corporate UK borrowers. From 6 April 2017, this restriction will be removed and will apply to all types of overseas lenders and UK borrowers.
The government will publish guidance and the revised terms and conditions applying to this scheme on 6 April 2017.
For information on the double tax treaty passport scheme, see Practice note, Withholding tax: Double tax treaty passport scheme ( www.practicallaw.com/5-201-9175) .
(Spring Budget 2017, paragraph 3.14 and Overview, paragraph 2.37.)
Real estate finance: taxing non-residents' profits from trading in and developing UK land
The government has announced that the Finance Act 2016 rules extending the scope of corporation tax to non-residents trading in or developing UK land, irrespective of whether the trade is carried on through a UK permanent establishment, will be amended so as to ensure that profits arising from contracts entered into before 5 July 2016 are not excluded from charge if they are recognised in accounts as relating to a period falling on or after 8 March 2017.
Under the commencement provisions in section 81 of the Finance Act 2016, profits arising from contracts entered into before 5 July 2016 (the date these measures were introduced into the Finance Bill) were excluded. Apparently, the intention was to exclude from charge profits arising from contracts completed within a relatively short timeframe and it was not intended that profits arising from longer term contracts should be excluded.
Accordingly, the commencement provisions will be amended so that all profits recognised in the accounts and referable to dates falling on or after 8 March 2017 will be within the charge. For periods of account beginning before 8 March 2017 and ending on or after that date, a notional period will be regarded as commencing on 8 March 2017 and profits in respect of that notional period will be charged.
These measures will be included in the Finance Bill 2017.
For information on key tax issues for borrowers and lenders in real estate finance transactions, see Practice note, Real estate finance (investment): overview: Key tax issues ( www.practicallaw.com/1-502-7032) and, specifically, Taxation of chargeable gains ( www.practicallaw.com/1-502-7032) .
(HMRC: Income Tax and Corporation Tax: disposals of land in the UK: TIIN; Spring Budget 2017, paragraph 3.21 and Overview, paragraph 1.152.)
Measures unchanged following consultation on the draft legislation
The following measure will be implemented by the government in the Finance Bill 2017, either unchanged following consultation on the draft legislation published on 5 December 2016 or with no significant changes.
Deduction of income tax at source from savings income, see Legal update, Draft Finance Bill 2017 legislation: key finance law measures: Peer-to-peer lending ( www.practicallaw.com/w-004-8609) .
If you don’t yet subscribe to Practical Law, you can request a free trial by completing this form or contacting the Practical Law helpline on +44 (0)20 7202 1220.