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A review of the government's plans for business taxation over the next five years and beyond, by Heather Self and Eloise Walker of Pinsent Masons

The Budget saw the long awaited publication of the 'business tax road map' which is supposed to give us an indication of the government's plans for future tax policy to 2020 "and beyond" (although the beyond bit must depend upon the result of the next general election).

Back in 2010, the Coalition government published the 'corporate tax road map' which provided a clear framework for the direction of tax policy over the following five years. This time round we have a 'business tax road map' - a longer document (42 pages compared to 18), covering a broader range of taxes.

Things have moved on considerably from the 2010 document, when a significant concern was groups threatening to move their tax residence from the UK, partly as a result of the very wide territorial ambit of our then CFC rules. The government's aim then was to create the most competitive corporate tax regime in the G20 and to give business certainty to increase confidence in investing in the UK.

Fast forward six years and the focus is more on "tackling avoidance and aggressive tax planning" and ensuring "a level playing field". Some measures trumpeted in 2010, such as the patent box and our generous interest deductibility rules, are now being modified to appease concerns about international tax avoidance.

The new road map contains a number of changes which will generally increase the tax burden on larger businesses, while providing more support to small and medium-sized businesses.

There is a continued focus on having the lowest corporation tax rate in the G20, with a welcome surprise reduction in the main rate of corporation tax to 17%, although this does not take effect until 2020.

Smaller businesses will benefit from a reform of the stamp duty land tax 'slab system' for commercial transactions and reductions in business rates.

However, restrictions on interest relief and significant changes to the rules for using past losses will hit some larger businesses hard – with banks being clobbered yet again.

The introduction of rules to restrict interest deductibility was inevitable, given that this is a key recommendation of the OECD's BEPS project and the government has been a vocal supporter of the project. The Chancellor proudly announced that "Britain will be among the very first to implement" the OECD proposals – with the interest restriction coming into force in April 2017. Many had hoped that the Treasury would take a bit more time to consider the implications and hang back a bit to see how other jurisdictions reacted. 

We are still waiting for detail of exactly what the UK rule will look like. We know there is going to be a fixed ratio rule limiting net interest deductions to 30% of a group’s EBITDA and that there will be a group ratio rule based on a net interest to EBITDA ratio for the worldwide group. There are lots of different ways of achieving that, though, and we do not yet know exactly what they will go for.

A de minimis threshold of £2 million net UK interest expense will be good for small groups, but not much help (by design) for big business. We also know that there will be a public infrastructure exemption, but we have no more detail on that yet, though, which the infrastructure and energy sectors, in particular, will find frustrating.

We are told that the overly complex and much-hated worldwide debt cap rules will be abolished, but sadly the cap will be resurrected within the new rules in a slightly different form.

We await further consultation on the detail of the interest deduction restriction. Introducing the changes in April next year seems a very ambitious timescale given the complexity and the fact that we have only had a very early stage consultation so far. Rushing in the changes without adequate consultation, and ahead of other jurisdictions, is unlikely to help the competitiveness of the UK tax system.

The road map tells us the good news that the loss relief system will become "more flexible", so that companies will be able to use carry forward losses against profits from other group companies or set losses more widely against other income streams.

However, larger companies will be hit by new rules that will restrict the use of carry forward losses. From 1 April 2017, those groups with profits of over £5 million will only be able to offset 50% of profits against carried forward losses. Banks will be hit harder – they already have the 50% limit to contend with, but from 1 April 2016, banks’ pre-April 2015 historic losses will be restricted to be set off against a mere 25% of profits.

The road map also reveals a potentially significant change to withholding taxes on royalties, coupled with an anti-abuse rule which could give HMRC a new weapon to challenge the complex structures used by US groups in particular.

Withholding tax on royalties will be widened to catch payments in respect of trademarks and brand names with effect from Summer 2016.

An anti-treaty shopping rule will take effect immediately to deny the benefit of a tax treaty where royalty payments are made between connected parties if arrangements have been put in place one of whose main purposes is to secure a benefit that is not in accordance with the object and purpose of the treaty. There is a risk that companies and HMRC will not agree on whether royalty payments are being routed through a particular country for "uncommercial" reasons, leading to an increase in disputes and potential double taxation.

The government is going to review the Substantial Shareholdings Exemption (SSE) with a consultation on the "extent to which it is still delivering on its original policy objective" and whether there could be changes to "increase its simplicity, coherence and international competitiveness". It is always worrying when the government looks at whether something is meeting its original policy objective as this sometimes means "is it too generous?". However, the focus on increasing its competitiveness looks positive and a consultation will give groups the opportunity to raise any frustrations with the way the relief operates. HMRC is also going to review the double tax treaty passport scheme and the suggestion is that they will look to widen its scope, which will be welcomed.

The final piece of news delivered by the road map is that the government will delay the bringing forward of corporation tax instalment dates for companies with profits in excess of £20 million. This was a surprise Treasury cash flow boosting announcement in the Summer Budget. It was due to apply from April 2017 but will now be delayed for two years.  It looks therefore as if, instead of reducing the deficit in 2017, this measure will help the Chancellor hit his target in 2019!

What seems to have been lost in this road map is any real focus on simplification, and on the quality of the tax policy-making process. This Budget was effectively (including the 2015 Autumn Statement) the fourth by George Osborne in just 12 months, and the sheer volume of change in the tax system is undermining the predictability and stability which the government says it wants to deliver. 

Heather Self is a Partner (non-lawyer) at Pinsent Masons with almost 30 years of experience in tax. She has been Group Tax Director at Scottish Power, where she advised on numerous corporate transactions, including the $5bn disposal of the regulated US energy business.  She also worked at HMRC on complex disputes with FTSE 100 companies, and was a specialist adviser to the utilities sector, where she was involved in policy issues on energy generation and renewables.

 Eloise Walker is a Partner at Pinsent Masons specialising in corporate tax, structured and asset finance and investment funds. Eloise's focus is on advising corporate and financial institutions on UK and cross-border acquisitions and re-constructions, corporate finance, joint ventures and tax structuring for offshore funds. Her areas of expertise also include structured leasing transactions, where she enjoys finding commercial solutions to the challenges facing the players in today's market.