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Budget 2016

Budget 2016: Impact on Large Corporates

The measures which will likely impact large corporates the most have their roots in the OECD BEPS project. Martin Lambert, Head of Large Corporate Tax at Grant Thornton UK LLP, commented: "The UK has been a keen supporter of the OECD BEPS project since its inception, so it was not a surprise that the Chancellor today continued to spell out his intention to implement the recommendations coming out of that project.  

A key announcement which will impact large corporates is the proposed restriction of relief for interest deductions. There has already been a consultation regarding this measure, but in view of the huge response to that consultation it is disappointing that the government is pressing ahead with implementing the restriction from April 2017. There are a large number of outstanding issues to resolve, particularly in respect of private equity and their commercial investment structures. We welcome the fact that there is to be further consultation on the detail of this measure during 2016, prior to its introduction. This should give businesses a further opportunity to highlight specific areas which could lead to distortions. The OECD still has additional work to do this year in terms of some more complex areas, including banking and insurance sectors and the UK will be engaged in that discussion. 

"On a positive note, the government has indicated that specific rules for private finance for public infrastructure projects will be included, but these are expected to be narrowly targeted. Additionally, those industries that are highly geared may be protected by a 'group ratio' fallback rule. We welcome the £2m starting threshold, as this should help to make sure small and medium sized businesses are not impacted by this measure. In addition, the existing worldwide debt cap legislation, which seeks to restrict corporate interest deductibility in certain circumstances, will be repealed, leading to some businesses having a reduced compliance burden from next April. 

Many large corporates have brought forward losses, which arose during the recent economic downturn and they will therefore be impacted by the announcement relating to the modernisation of loss relief rules. There are two main parts to this measure, one which is helpful to business and the other which is a restriction:


  • (i)The rules will be updated to allow for increased flexibility regarding the use of brought forward losses against profits arising from other income streams or group companies. These rules will apply to losses incurred on or after 1 April 2017 and be open to all corporate taxpayers. Additional flexibility regarding the use of brought forward losses is a welcome simplification of the rules and brings the UK rules into line with the flexibility offered in some other countries.  
  • (ii) From 1 April 2017, there will also be a new restriction to the amount of brought forward losses which a group can use against its current year profits. The restriction will be set at 50% of profits, ie in any year, a company will only be able to extinguish up to 50% of its taxable profits through the use of brought forward losses. The restriction will only apply to profits in excess of £5m, so is really targeted at large corporates. 

There are already restrictions regarding the use of brought forward losses in banks, and from 1 April 2016, these will be tightened again, such that the amount of profit that banks can offset using losses arising pre-April 2015 will be limited to 25%. 

Whilst we support the goal of modernising legislation, we have concerns regarding the impact of the restriction of using brought forward losses on specific industries. Particular attention will need to be given to industries which undertake big projects based on long term modelling, for example, infrastructure projects. There may be projects currently underway which could become unviable following the introduction of this restriction, owing to the cashflow impact of having to pay taxes earlier than anticipated. We hope that appropriate safeguards for such industries will be built into the rules and welcome the opportunity to be involved in the consultation regarding the detail of these rules during 2016.

An additional measure which is likely to impact a number of large corporates relates to the widening of the definition of the types of royalty payment which will attract withholding tax to include brands and trademarks, and payments associated with a UK permanent establishment. This will bring more payments within the scope of withholding tax from the date of Royal Asset of the Finance Bill 2016. Existing royalty arrangements will be caught and so UK businesses should review existing royalty agreements, as there may well be withholding tax obligations in the future. There is also a new anti-avoidance measure to prevent companies from avoiding withholding tax on royalties where there is a tax avoidance motivation, which comes into effect from today, and is in line with the recommendations of the OECD in the recent work done to counter BEPS.