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Finance Bill 2015
Banking & Capital Markets
Finance Bill Implications
Headlines
Following on from last week’s Budget announcement, today has seen the publication of
Finance Bill 2015, which is expected to receive Royal Assent on 27 March 2015. We do
not expect to see any significant changes between the Finance Bill and the final
legislation.
Most of the main changes in the Finance Bill affecting the banking industry are in line with
previous announcements. They include: an increase in the bank levy rate, restrictions on
the utilisation of tax losses and the deductibility of VAT relating to foreign branches. All
these are changes which are likely to increase the tax burden on the industry.
Today saw the publication of the new diverted profits tax (DPT), the introduction of which
was first announced in the 2014 Autumn Statement. DPT is intended to apply to
multinationals (including banks, capital markets businesses and other financial sector
groups) which generate profits through business activities in the UK but where there are
arrangements which divert taxable profits away from the UK.
Not all developments announced to date are included in Finance Bill 2015 but they may
appear in another Finance Bill later this year, with further legislation expected following
May’s General Election. These measures include: a corporation tax disallowance for
compensation payments for mis-selling of products such as payment protection insurance,
changes regarding the automatic deduction of income tax by banks and increased
flexibility of the ISA rules. However, the new ‘principles-based’ targeted anti-avoidance
rules that were expected as part of the ongoing modernisation of loan relationship and
derivatives were not included and will presumably fall to be included in a post-election
Finance Bill.
Bank levy rate increase
Finance Bill 2015 includes provisions enacting the announced increase in the rate of the
bank levy. The rate will be increased from 0.156% to 0.21% for short term chargeable
liabilities and from 0.078% to 0.105% for chargeable equity and long term liabilities. The
increased rates will apply from 1 April 2015. For banking groups with accounting periods
straddling this date, their chargeable equity and liabilities should be apportioned between
the periods falling before and on or after 1 April 2015, with the appropriate bank levy rate
applied to each notional period. The instalment payment provisions have also been
amended for accounting periods straddling 1 April 2015 to ensure that the increased rates
are ignored for the purposes of calculating any bank levy instalments due prior to 1 April
2015, and that instalment payments due on or after 1 April 2015 are adjusted to reflect the
increased rates.
Bank loss relief restriction
The legislation published today includes some
changes to the new bank loss relief restriction rules
which were originally announced in December 2014
reflecting the result of the consultation. As
announced, the Government will restrict the amount
of banks’ annual taxable profits that can be offset by
carried-forward losses to 50% from 1 April 2015 (i.e.
for losses accrued as at that date only).
As trailed at the Budget, a new allowance for
affected building societies will also be introduced.
The allowance provides for building societies to use
a carried forward loss of up to £25mn without
applying the new restriction.
An additional provision has been inserted into the
targeted anti-avoidance rule (TAAR) which now
requires the presence of arrangements the main
purposeof which is to secure a corporation tax
advantage in order for the rule to apply. This should
narrow the scope of the TAAR.
A number of representations were made to HMRC
during the consultation that the original legislative
mechanics were drafted in a way which made it
unclear how the new provisions were intended to
interact with group relief. The issue is whether the
rules required the taxpayer to consider a
‘hypothetical’ question (namely how much group
relief could in theory be surrendered to the bank) or
a ‘real world’ question (namely how much group
relief has actually been surrendered to the bank). We
understand that HMRC’s intention is that this should
be the latter ‘real world’ test and we hope that this
will be confirmed in the final form of the relevant
guidance when this is published. In addition, the
legislation has now been amended to the effect that
the amount of loss that is available for surrender by
way of group relief is to be ascertained after the
determination of the amount of losses that a bank is
able to carry forward, thus removing some perceived
circularity in the original drafts on this point.
Corporate debt and derivatives
The consultation on reforming the taxation of
corporate debt and derivative contracts has been
ongoing for some time now and has already given
rise to some legislative change. Some draft Finance
Bill clauses were released in December 2014 as part
of the project. The changes are intended to align the
tax treatment of financial instruments more closely to
the amounts going through companies’ profit and
loss accounts. The previous clauses also included
new ‘principles-based’ targeted anti-avoidance rules
that were expected to come into force from 1 April
2015 but it is unclear whether these measures will
now be deferred, given that the provisions, as with
the majority of the draft Finance Bill clauses
Banking & Capital Markets Finance Bill Implications
previously released, have not been included in the
Finance Bill.
Diverted profits tax
The Finance Bill today includes full updated
legislation for the new DPT, the introduction of which
was first announced in the 2014 Autumn Statement.
The new tax will be charged at a rate of 25% and will
come into force from 1 April 2015.
DPT is intended to apply to multinationals which
generate profits through business activities in the UK
but are party to arrangements which divert taxable
profits away from the UK.
Following the publication of draft DPT legislation on
10 December 2014, representations were made by
industry and advisors (including EY). Partly in
response to these representations, a number of
changes have been made to the draft legislation.
The structure of the final legislation published has
been significantly reworked and there have been
some significant changes in the details of certain
aspects of the rules. Many of the key changes had
been previously announced by HMRC in a briefing
note of 20 March 2015.
► Changes have been made to the ‘insufficient
economic substance’ test. However, these
changes are more limited than anticipated. It
appears that considerable uncertainty will remain
regarding the application of this test in a financial
services context, in particular with regard to the
quantification of the ‘financial benefit’ of a
transaction.
► The requirement for taxpayers to notify HMRC of
potential liability to DPT have been significantly
narrowed from the original draft. This will be
welcomed by many taxpayers, as concerns had
been expressed that the notification rules in the
original draft legislation imposed a notification
requirement in many cases where no charge to
DPT would ultimately arise.
► The legislation published today expands the
scope of the avoided permanent establishments
rule to include sales to non-UK customers that
relate to UK business activity, and to sales of
property (including land).
► UK-parented groups or sub groups have suffered
a UK CFC charge could still be subject to a DPT
charge. Credit will, however, be available where a
company has paid a CFC charge.
HMRC has indicated that updated guidance notes on
the application of the DPT rules will be issued in due
course, and these may provide more clarity on the
application of the rules.
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Economic substance
It was the stated intention of the Government that the
arrangements to which DPT should apply are ones
that lack economic substance and are designed to
reduce UK tax.
The draft legislation published on 10 December 2014
included an ‘insufficient economic substance test’,
which could be failed where any of three separate
conditions were met. The first two of these assessed
whether the tax reduction from a transaction was
greater than the non-tax ‘financial benefit’ of the
transaction, and the third test compared the
contribution of a person’s staff to the ‘economic
value’ of a transaction.
Representations had been made that this test was
particularly difficult to interpret. In particular, in the
context of banking and capital markets businesses
which enter into transactions to use capital efficiently,
or engage in the transfer of risk, it is unclear how the
contribution of economic value by staff should be
assessed.
In addition, where financial services sector
businesses enter into transactions because they are
required to do so by their regulators, it is unclear how
this should be factored in to an assessment of the
‘financial benefit’ of a transaction. So, for example, a
banking group might establish a shared services
centre in order to meet a regulator’s requirement for
recovery and resolution planning but chose to locate
that company in a low tax jurisdiction.
HMRC stated in its briefing note of 20 March 2015
that amendments would be made to the legislation to
make it clear that the insufficient economic
substance test would not failed where the majority of
income earned by a company, in relation to a
particular material provision, reflects ongoing work
carried out by the company. Based on this briefing
note, it may have been inferred that the final
legislation would create delineation between profits
arising from labour and profits arising from passive
asset holding and that profits arising from labour
would fall outside the ‘insufficient economic
substance’ test.
Although the Finance Bill published today does
include amendments to the insufficient economic
substance test, these changes appear to be more
limited than anticipated.
The structure of the test is substantially unchanged
from that included in the original draft legislation. In
particular, it is still the case that the test may be
failed where any of the three conditions mentioned
above are met. The only substantial change is to
narrow the scope of the test which looks at the
contribution of staff; this now operates such that
Banking & Capital Markets Finance Bill Implications
where the income attributable to the ongoing
functions or activities of the person’s staff exceed the
other income attributable to the transaction, then this
test will not be failed.
However, it remains the case that the two ‘financial
benefit’ tests must also be passed. If the ‘financial
benefit’ of a transaction exceeds the tax reduction
arising from the transaction, then these tests may be
failed, resulting in the insufficient economic
substance test as a whole being failed. Thus, where
there are uncertainties regarding the quantification of
‘financial benefit’ in a banking and wider financial
services context, these appear likely to remain.
We await publication of the updated HMRC
guidance, as it is possible that this, once available,
will provide further clarity in this difficult area.
Narrowing the notification requirement
The assessment and collection procedure is based
on a duty on the taxpayer to notify. The notification
rules included in the draft legislation released in
December were widely criticised for being too broad
and potentially imposing a notification requirement in
a wide range of cases where no ultimate DPT charge
would arise.
The Finance Bill provides that there will be no duty to
notify for an accounting period if:
► HMRC has confirmed that there is no duty to
notify
► it is reasonable for the company to conclude that
sufficient information has been supplied to enable
HMRC to decide whether to give a preliminary
notice for that period and that HMRC has
examined that information (whether as part of an
enquiry into a return or otherwise), or
► it is reasonable for the company to conclude that
no charge to DPT will arise. However, if the only
reason why it is reasonable for the company to
conclude this is the possibility of future transfer
pricing adjustments (which may reduce or
eliminate the DPT charge), it will still have to
notify.
Where the tax mismatch test is applicable, an
arrangement which passes the test (i.e. tax has been
paid on the relevant amount at 80% or more of the
UK rate) will not be subject to the notification
requirement. HMRC has amended the legislation so
that, in the first period after the legislation comes into
force, the last date for notification will fall six months
after the end of the relevant accounting period. For
subsequent periods, notifications will be required to
be made within three months of the end of the
period.
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The draft legislation has also been amended so that
once the company has notified for one period, it does
not have to notify for the next period provided that
there has been no change in circumstances material
to whether a charge to DPT arises. This will also
apply where a company has not notified because it
has previously supplied sufficient information and
there has been no material change in circumstances.
These changes represent a welcome relaxation of
the notification rules that under the original draft
would have required many companies to notify each
accounting period even where it was clear that they
would ultimately not be liable to DPT. Taxpayers
were potentially faced with the possibility of having to
make multiple notifications in respect of transactions
where ultimately no liability was expected to arise.
Avoidance of a UK taxable permanent
establishment
DPT is intended to address contrived arrangements
which avoid a UK permanent establishment (“PE”) of
a non-UK resident company, and in such cases
applies a charge as if there were an actual UK PE.
The avoided PE rule was limited, in the draft
legislation, to cases where there is activity in the UK
in connection with supplies of goods or services to
UK customers. As announced in the HMRC briefing
note of 20 March 2015, the scope of this rule has
been expanded by removing the reference to UK
customers.
The effect of this change should be that the location
of any customers of the non-UK resident company is
no longer relevant in determining whether the rule
applies; under the amended legislation, the
existence of activity in the UK in connection with
supply of goods, services or property will be
sufficient for the avoided permanent establishment
rule to potentially apply (provided that the relevant
conditions are met). Banks may need to revisit their
position given they no longer have to identify UK
customers in order for the tax to apply to them.
extent they are already taken into account in
computing corporation tax profits.
Furthermore, the legislation has been amended to
provide an exclusion where UK-related expenses
(i.e. those referable to UK activity) are below a de
minimis amount of £1mn. This helps to address low
risk situations where the UK sales threshold may be
exceeded. This new exemption is welcome since it
should take out of scope circumstances where
executives visit the UK to oversee local subsidiaries
that are fully within the charge to UK corporation tax.
The meaning of ‘excluded loan relationship’
DPT will not now apply where the tax mismatch
outcome is solely a result of differences in the way
that debits and credits of a loan relationship are
brought into account. This will also cover ordinary
derivatives used solely to hedge these excluded loan
relationships. It had been hoped that all derivative
contracts would be excluded from the tax mismatch
test rather than just hedging transactions since this
would have been a welcome simplification of the
rules particularly for the banking and capital markets
sector where derivatives are so commonly
employed, even in relatively straightforward
scenarios.
Clarifying rules for giving credit for tax paid
The right for a company to claim credit for overseas
tax paid on profits in respect of which a DPT liability
arises has been extended so that credit can also be
given for foreign tax paid by another company on
those profits (eg where there is tax consolidation), as
well as tax paid on those profits under both UK and
overseas CFC regimes.
Partnerships
The draft legislation of 10 December 2014 did not
specifically address the question of how the DPT
rules should be applied in the context of structures
involving partnerships. The Finance Bill clarifies the
position by including a number of new provisions
which set out how the rules apply to partnerships.
The legislation has also been amended so that it
applies to supplies of services, goods or other
property, whereas the original draft legislation
applied only to supplies of goods or services. This
amendment is intended to clarify that sales of land
and buildings can also give rise to an avoided PE.
Specifically, it provides that where a foreign company
is a member of a partnership, the avoided PE rule
applies as if the trade of the partnership were carried
on by the foreign company and supplies by the
partnership are supplies of the foreign company.
The avoided PE rules do not apply if the UK sales
are less than £10mn (the sales threshold test).The
original draft legislation aggregated connected party
sales from UK activity when applying the £10mn
sales threshold test. This has now been amended so
that, in calculating whether the threshold has been
breached, connected party sales are ignored to the
Similarly, where a UK company is a member of a
partnership, for the purposes of the rule regarding
entities lacking economic substance, any provision
made or imposed by the partnership is treated as
being made or imposed by the UK company. Finally,
the legislation deems the income or expenses of a
person to include that person’s share of the income
Banking & Capital Markets Finance Bill Implications
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or expenses of any partnership of which it is a
member.
Anti-loss refresher provisions
The legislation included in Finance Bill 2015 is the
materially same as that published following the
Budget. These rules are aimed at preventing groups
from implementing ’loss refresher’ transactions
whereby they convert carried-forward trading losses,
non-trading deficits and/or management expenses
into more versatile current period losses. The
legislation applies to all groups, including banks and
the wider financial services sector. It will be
necessary for groups to consider whether the
changes have any impact on any deferred tax assets
in respect of accrued losses.
The new rules apply where the arrangements have a
main purpose of creating new profits to use up
brought forward losses while also generating a
current year loss to reduce other profits in the group.
Furthermore, the rules only apply where it is
reasonable to assume the tax benefit of the
arrangements exceeds any commercial benefits of
the transaction.
The provision comes into effect where profits that
arise on or after 18 March 2015 are set off against
brought forward losses. The rules can, therefore,
have effect for arrangements entered into prior to 18
March 2015 where these give rise to profits on or
after this date. These provisions should be
considered with respect to any arrangements that
financial services groups undertake to accelerate the
utilisation of carried-forward losses as a means of
strengthening their regulatory capital position.
There are specific rules which provide for the
interaction of this new restriction with the targeted
anti-avoidance provisions within the new bank loss
relief restriction rules (see above).
R&D tax credits
Consistent with the Autumn Statement and Budget
announcements, the Finance Bill contains provisions
which increase the rate of the above the line R&D
tax credit from 10% to 11% from 1 April 2015.
Country by country reporting
The legislation published following the Autumn
Statement has been included unchanged in Finance
Bill 2015 to implement the OECD recommendations
on country-by-country reporting, which included a
reporting template developed by the OECD as part
of its Base Erosion and Profit Shifting (BEPS)
initiative. Multinationals including banks and other
financial services businesses with a parent company
Banking & Capital Markets Finance Bill Implications
in the UK will need to make an annual report to
HMRC showing for each tax jurisdiction in which they
do business (i) the amount of revenue, profit before
income tax and income tax paid and accrued; and (ii)
their total employment, capital, retained earnings and
tangible assets.
The legislation will allow the Government to make
regulations at a later date once the OECD has
completed its further work on how the reports should
be filed and how the information in them may be
shared between relevant countries.
Of course, from 1 July 2014, UK Banks have already
been reporting country-by-country data under the UK
regime which transposed the Europe-wide regulatory
requirement under Capital Requirements Directive IV
(CRD IV) although the data is being reported in their
financial statements or on their websites rather than
to HMRC. Banks will need to continue to focus on
ensuring that their systems will be ready for these
additional reporting obligations.
Late paid interest
The measures previously announced on 3 December
relating to ‘late paid interest’ remain unchanged in
Finance Bill 2015. Those measures, insofar as they
applied between related companies, are to cease to
apply to loan relationships entered into on or after
3 December 2014. The rules remain in force, to a
limited extent, in relation to existing loan
relationships. However, deductions for amounts that
accrue from 1 January 2016 will be given on an
accruals basis in all cases and only amounts that
accrued prior to that date will be capable of being
deductible on a ‘paid’ basis. In addition, any material
change in the terms of an existing loan, or in the
identity of its creditor, prior to 1 January 2016 will be
capable of bringing the new rules into effect early.
There are corresponding amendments to the
legislation on deeply discounted securities entered
into between connected parties.
Sale and leaseback
As expected, legislation has been included in the
Finance Bill that is intended to ensure that where an
asset is acquired without incurring expenditure, an
entitlement to capital allowances cannot be created
by a sale and leaseback or connected party
transaction. The legislation will have effect from 26
February 2015 once enacted.
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