UK: The Budget, In Full | Autumn Budget - November 2017

COMMENTARY

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BUSINESS MEASURES

Anti‑hybrid mismatch rules

The measure

A small number of technical changes are being introduced to the regime on hybrid and other mismatches (the regime having taken effect from 1 January 2017). At the time of writing, draft legislation for the technical changes has not been published, but the government has set out an overview. There are eight changes mentioned, and these include:

• Amendments to generally disregard taxes charged at a nil rate for the purposes of the regime;
• Amendments to clarify the scope of the legislation in relation to multinational companies (multinational companies in this context generally means entities that have a branch outside their territory of residence). The nature of the amendments is not described;
• Amendments to the definition of tax so that withholding taxes are ignored for the purposes of the regime;
• Amendment to the hybrid payee rules, which could be particularly beneficial to some funds. The current rules could lead to a disproportionate restriction where one investor in a fund partnership views the partnership as opaque. The change will result in there being more proportionate counteraction; and
• Amendment to the double deduction rules although the changes are not clear.

The government states that the changes are not intended to alter the overall scope of the regime.

Who will be affected by this measure?

The anti‑hybrid and other mismatches regime applies to counter mismatches that would otherwise arise in the tax treatment of transactions. Typically this would be in the context of cross‑border transactions within a multinational corporate group.

The changes will impact a smaller number of corporate groups whose arrangements fall within the specific circumstances targeted and some funds. Determining the precise impact will require analysis of the legislation once available.

When will the measure come into effect?

The government states that the amendments concerning the treatment of nil rate taxes, and multinational companies, will have effect from 1 January 2018. The other changes took effect from 1 January 2017 i.e. the commencement date of the current rules.

Business rates changes

The measure

The Chancellor has announced that the annual inflationary uplift in business rates, which is currently linked to RPI, will be linked to CPI from 2018.

Also announced was a change to the frequency with which non‑domestic properties are valued for the purposes of business rates, which will result in revaluations every three, rather than five years.

Who will be affected by this measure?

Business ratepayers.

When will the measure come into effect?

The change from RPI to CPI will take effect from 1 April 2018.

The increased frequency of valuations will commence following the next planned revaluation, currently due in 2022.

Capital gains: depreciatory transactions within a group

The measure

When disposing of shares in a subsidiary at a capital loss, a company must look back and take account of earlier depreciatory transactions that have materially reduced the value of the shares and decrease the allowable loss by this amount. This prevents companies claiming capital losses where there has been no economic loss to the group. Currently, companies only have to look back to depreciatory transactions within the previous six years, but in future the entire history of the shareholding will need to be considered.

Who will be affected by this measure?

Companies that dispose of shares in a subsidiary company giving rise to a capital loss.

When will the measure come into effect?

The measure will apply to disposals made on or after 22 November 2017.

For negligible value claims, the measure will apply to the date of the claim and not any earlier date that might be specified.

Capital gains: Foreign branch incorporation

The measure

Current UK tax law provides for a deferral of capital gains arising where a UK resident company transfers the assets of a foreign branch into a foreign company in exchange for an issue of shares (a 'branch incorporation').

The government today announced a measure to correct an anomaly in the current rules, whereby the gains are potentially crystallised if the UK company subsequently makes a disposal of the shares acquired in exchange for the transfer of the assets.

If the shares are subsequently involved in a share reorganisation this would typically be deemed to involve no disposal (therefore not crystallising the deferred gains). However the UK substantial shareholding exemption (SSE) takes priority over the share reorganisation rules and displaces the no‑disposal fiction. In cases where the SSE applies to a subsequent share reorganisation, the deferred gains might be crystallised. The government has announced that the no‑disposal fiction will be retained for this purpose, notwithstanding that SSE would apply. This should avoid the unintended crystallisation of the gains.

Who will be affected by this measure?

UK resident companies that have claimed capital gains deferral relief on transferring the assets of a foreign branch into a foreign company, where the shares issued are subsequently involved in a share reorganisation.

When will the measure come into effect?

The law change will have effect for disposals on or after 22 November 2017.

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