UK Chancellor of the Exchequer Philip Hammond delivered the Budget 2018 to Parliament. The Budget introduced measures to reaffirm the UK’s international competitiveness, including a new measure to impose digital service tax for certain digital activities.
The budget has introduced several tax measures in business tax, including:
- Corporate tax rate - in 2020 the tax rate will be reduced to 17%
- Corporate capital loss restriction - as from 1 April 2020 companies with chargeable gains exceeding GBP 5 million will be able to shelter only 50% of the excess with capital losses, with the remainder giving rise to cash tax.
- Intangible fixed asset regime - the government will seek to introduce targeted relief for the cost of goodwill (the amount paid for a business that exceeds the fair value of its individual assets and liabilities) in the acquisition of businesses with eligible intellectual property from April 2019.
- Permanent Establishment - changes have been announced to the definition of a PE to prevent groups artificially fragmenting their business to take advantage of exemptions to avoid creating a PE.
- Diverted Profit Tax (DPT) - the Chancellor announced changes to the DPT introduced in 2015 to counteract certain contrived arrangements that result in the erosion of the UK tax base.
Digital Services Tax (DST)
From April 2020, the government will introduce a new tax 2% tax on the revenues of certain digital businesses to ensure that the amount of tax reflects the value derive from UK users. The DST will apply to revenues arise from search engines, social media platforms and online marketplaces. Further the key elements of DST are as follows:
- DST will only apply to groups that generate global revenues from in-scope business activities in excess of £500 million per annum. The tax will apply only to income generated from UK users in excess of GBP 25 million, which will ensure that only larger amounts of revenue generated from UK users will be subject to the tax.
- The rules will include a safe harbor provision that exempts loss-makers and reduces the effective rate of tax on businesses with very low profit margins DST also will be an allowable expense for UK corporate tax purposes and it will not be creditable against corporation tax.
- The government made perfectly clear that DST will only apply until an appropriate long-term solution from OECD and G20 is in place
Anti Avoidance Measures
The 2018 budget has also provided changes for the following rules to comply with the EU’s Anti Tax Avoidance Directive (ATAD)
- CFC - two changes to CFC rules. First, an amendment of the CFC control rules so that any interests held by associated enterprises, wherever they're resident, are taken into account when assessing control. Second, non-trade finance profits that are within the scope of the rules as a result of having significant people functions in the UK no longer will qualify for the CFC finance company rules.
- Hybrid mismatches – two changes to this rule concerning the treatment of certain permanent establishments and the treatment of regulatory capital;
The draft legislation detailing the proposed changes is expected to be published on 7 November 2018.
Source: UK Government