There are a number of tax changes on the horizon for large companies and groups of companies. We have set out the key proposals and how these might impact in particular private equity groups below.
Corporation Tax Instalment Payments
In the Summer Budget, the Chancellor announced that larger companies would be required to pay their tax liabilities earlier from 2017. Guidance has recently been published which confirms that for accounting periods starting on or after 1 April 2017, companies with annual profits in excess of £20 million will have their current tax instalment payment dates accelerated by four months.
For groups of companies, the £20 million threshold is divided by the number of relevant companies within the group. For example, in a group of 10 companies the applicable threshold would be reduced to £2 million, such that if any of the companies had profits in excess of this amount they would be subject to the accelerated payment dates.
In April 2015, the definition of associated companies was changed to ‘related 51% group company’. Under the new definition only companies which are under common control by another company will be included. Previously, if two companies were each held directly by an individual they would also be deemed as an associated company.
Currently, companies with annual taxable profits in excess of £1.5 million (reduced accordingly for groups of companies) are required to pay their CT liability in instalments. The instalments are due in months 7 and 10 of the accounting period to which the liability relates and months 1 and 4 of the following accounting period.
Under the new rules, companies would be required to pay all instalments in the accounting period to which it relates and four months earlier than currently e.g. months 3, 6, 9 and 12.
The change in rules will clearly have a cashflow impact for larger businesses which will need to be planned for. For larger groups the £20 million threshold can quickly reduce and many profitable private equity portfolio companies might quickly find that they are subject to the new rules.
With the move towards digital tax accounts, it also appears that all companies will be required to make quarterly reports to HMRC by 2020 on their corporation tax position.
Allowable interest deductions
As part of the Organisation for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) project, an action has been taken in respect of the deductibility of interest for corporates. The OECD believe that there is a significant opportunity for multinational groups to shift profits through the use of interest expense.
HMRC have since published a consultation to address the concerns and put forward some proposals to change the taxation of interest. Some of the key points of the consultation are as follows:
- The new rules will not come into force until 1 April 2017 at the earliest
- The main proposal is to restrict the interest deduction in a company to somewhere between 10% and 30% of EBITDA (earnings before interest, tax, depreciation and amortisation).
- Domestic groups and stand alone companies are likely to be excluded such that the rules will probably only apply to multinational groups.
- A de-minimus threshold is likely to be set such that groups with a net UK interest expense below the de-minimus will be entitled to deduct all of its interest expense. The consultation suggests a de-minimus of £1 million which is expected to remove 90% of all UK companies from the rules.
- Other transfer pricing rules and anti-avoidance rules will need to be applied first before applying the new rules.
- It is likely there will be provisions to address potential volatility in earnings, for example allowing disallowed interest expense to be carried forward.
As both of the above proposals are yet to be enshrined in legislation, some changes could still happen, however, it is anticipated that in one form or another they will both be passed.