There were a number of announcements in Wednesday's Budget which could have significant implications for Private Equity groups. Some of the key proposals are highlighted below, however, if you would like to discuss these or any of the other announcements in more detail, please contact Andy Brookes or Tom Woodcock.
Interest deductibility
Corporation tax deductions for interest payments will be restricted from 1 April 2017. This announcement was expected and is part of the Organisation for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) project.
A consultation was published towards the end of 2015 and the Budget provided some further details of how the rules will operate. In brief, interest deductions will be limited to 30% of earnings before interest, tax, depreciation and amortisation (EBITDA). Alternatively a group ratio rule can be applied which will restrict interest deductions to the ratio of the groups net interest expense/EBITDA of the worldwide group.
Only larger companies and groups will be impacted as there will be a de minimus threshold of £2 million net UK interest expense before the new rules apply.
Corporation tax losses
Two changes were announced for the use of brought forward corporation tax (CT) losses, both taking effect from 1 April 2017.
Firstly, brought forward CT losses will be available for offset against any income and in any group company, offering more flexibility for groups and simplicity by removing the need to stream tax losses. Secondly, new rules will be introduced to restrict relief for brought forward losses where group profits are greater than £5m. It will only be possible to relieve 50% of profits in excess of £5 million by brought forward losses.
There is a lack of detail on the proposals at this stage, for example, we do not know if the rules will only apply to CT losses arising on or after 1 April 2017, or if it will apply to brought forward losses created before this date. It is expected the government will issue a consultation during 2016 with legislation included in Finance Bill 2017.
Capital gains tax (CGT)
The Chancellor announced a drop in the headline CGT rate from 28% to 20% for higher or additional rate taxpayers and from 18% to 10% for basic rate taxpayers from April 2016. Although this was good news for most, private equity fund managers will not benefit from the lower rates. The Chancellor announced an 8% surcharge on ‘carried interest’ (i.e. the private equity fund manager’s share in the growth of the fund) such that the old rates will effectively still apply.