In today’s Budget, it was announced that the Government would be proceeding with the reforms to the CFC regime and new exemption for foreign branch profits announced in December, with some changes mainly in response to points raised during the consultation process. A summary of the draft legislation published in December was set out in our earlier Briefing. The revised draft legislation has not yet been published, but it was announced today that there will be a number of amendments.

Implementation of the CFC interim reform measures has been brought forward and will now apply for accounting periods beginning on or after 1^st January 2011, except for the transitional rules for holding companies which will be deemed always to have had effect.

The CFC measures include a three year period of grace for foreign companies which were previously not CFCs but subsequently come within the CFC regime, typically following acquisition by UK shareholders or a group reorganisation. This was intended to apply only to companies coming within the CFC rules for the first time, but will now also apply to companies which were previously CFCs but ceased to be so before becoming UK controlled once again. Presumably the legislation will contain anti-avoidance provisions to prevent groups removing their subsidiaries from the CFC regime temporarily in order to benefit from this three year CFC exemption.

It was previously announced that the threshold for the de minimis exemption would be increased to £200,000 for large groups and that there would be a switch to an accounts-based measure of profits from the current tax-based measure. Today’s Budget notes refer to this as an “alternative” to the current de minimis exemption, suggesting that companies may be able to satisfy either the old or the new minimis test. We may need to wait for the revised legislation to see if this will be the case.

The more radical reforms to the CFC regime are still expected to come into force in 2012. The Budget confirms that the partial exemption for group finance companies will result in an effective CFC tax rate equal to one-quarter of the main rate of corporation tax, 5.75%, by the time corporation tax is reduced to 23% in 2014.

The corporation tax exemption for foreign branch profits will be available for accounting periods commencing on or after Royal Assent to the Finance Act 2011. It will now be extended to some life insurance companies. There will be revisions to the rules preventing diversion of profits from the UK to the exempt branch, the transitional provisions for companies which have previously claimed relief for branch losses and the application of capital allowances.  Details of these changes have not yet been published.

One aspect of the foreign branch legislation that does not appear to have changed is the fact that the election to opt into the regime is irrevocable (subject to a short cooling off period).  The requirement for a company to commit irrevocably to the regime (when there are downsides to doing so such as the fact that foreign branch losses will not be allowable and the election cannot be revisited after a change of control) will undoubtedly make the election less popular than it might otherwise have been.

Where this relief is claimed the rate of SDLT will be determined by the mean consideration for the dwellings (i.e. the consideration for each dwelling will be aggregated, divided by the number of dwellings and then this figure used to determine which rate of SDLT will be applicable to the whole transaction). 

In most cases, particularly where a large number of dwellings are acquired, this new relief will result in a significant SDLT saving, as under the existing rules the SDLT rate is determined by the total consideration for all the dwellings.   This follows the relief’s stated aim of strengthening demand for and reducing a barrier to the investment in residential property.

The relief cannot be used to reduce the SDLT rate below 1%.   There is however no upper limit on the number of dwellings which may be included in a transaction and so the relief will override the existing rule that the acquisition of six or more dwellings is treated as the acquisition of non-residential property.

Interestingly, the previous Labour Government had consulted on introducing this relief in March 2010 and the current Coalition Government had ruled out taking any further action when it responded to the consultation in September 2010 on the basis such a change would be likely to carry a significant cost to the Exchequer at a time when deficit reduction was the Government’s main priority.

The bank levy was introduced with effect from January 2011. It is based on the balance sheets of UK banking groups and building societies; the aggregated subsidiary and branch balance sheets of foreign banks and banking groups operating in the UK; and the balance sheets of UK banks in non-banking groups. Initially, it was stated that the rate of the levy would be charged at a rate of 0.07% with a reduced rate for wholesale funding with more than one year remaining to maturity of half the main rate.  However, those rates were amended subsequently. The levy only applies where the aggregate long and short-term liabilities of the institution or group were at least £20 billion, excluding Tier 1 capital, insured retail deposits, repos secured on sovereign debt, and policyholder liabilities of retail insurance businesses within banking groups.

The bank levy will increase to 0.078% for short-term chargeable liabilities and to 0.039% for long-term chargeable equity and liabilities from 1 January 2012.  The rates of the levy are:

(i)                   0.05% and 0.025% between 1 January 2011 to 28 February 2011;

(ii)                 0.1% and 0.05% between 1 March 2011 to 30 April 2011;

(iii)                0.075% and 0.0375% between 1 May 2011 to 31 December 2011; and

(iv)               0.078% and 0.039% thereafter

for short-term and long-term chargeable liabilities respectively.

As Natasha has already blogged, whilst the increase in the entrepreneurs’ relief lifetime limit to £10m is welcomed, the Chancellor’s decision not to remove or decrease the 5% shareholding requirement, or to include EMI options within the regime, will come as a blow to many companies.  Many lobbied hard on this point in the hope that employees who participate in HMRC approved share plans and other more “standard” share plans could more easily benefit from entrepreneurs’ relief.  I understand that discussions had taken place with HMRC/The Treasury and a proposal put forward that either EMI options would, from the date they are granted, count towards the 5% threshold or that the 5% requirement would be removed in its entirety and the holding period instead increased from 12 months to 3 years.  These proposals obviously fell on deaf ears. 

In relation to disguised remuneration, even before the Budget, we were looking forward to the publication of the final legislation which is due to be released on 31 March 2011 following a detailed consultation exercise and the subsequent release of FAQs on 22 February.  Today’s announcement by HMRC confirms what we were expecting.  The earmarking of cash or assets for employees by trusts or other intermediaries will be treated as PAYE income (and also NIC-able) as will the making of loans to employees by such persons.  We are looking forward to reviewing the proposed specific exemptions to these charges when the revised legislation is released to enable us to analyse the exact impact this new legislation will have on our clients.

Although this is a technical change, as RPI tends to rise more quickly than CPI, this means that the thresholds at which individuals will pay tax will rise at a slower rate than was previously the case.  The Government has itself estimated the aggregate increase in revenue due to these changes up to the end of the 2015/16 tax year to be in excess of £2 billion.

 This is one of a number of measures recommended by the Office of Tax Simplification,  which was established by the Chancellor in July 2010 to identify areas where complexities in the tax system can be reduced.  Clearly, reform of this area will require careful consideration to ensure the changes do not result in the income tax system becoming even more complicated for both taxpayers and HMRC!

The way in which machines are taxed is due to change in 2012/13, with the banded licence fee regime of Amusement Machine Licence Duty (AMLD) being abolished and machine takings no longer being subject to standard rated VAT.  Under the new regime – of “Machine Games Duty” – machine takings will be subject to a gross profits tax and will be exempt for VAT purposes (with the related blocking of input VAT recovery being the most contentious issue, since this is what determines what the true cost of the new regime will be).  But we knew all of that already.

The big question re machines is what will be the new rate of MGD.  There are no answers to this question in the Budget.  We are, however, told that a technical consultation on the draft MGD legislation for Finance Bill 2012 is expected to be launched in autumn 2011.  So perhaps we will find out more then?

In the interim, and as usual, the bands of AMLD are to be increased in line with inflation.  Likewise the gross gaming yield bandings for gaming duty (being the duty which applies to bricks and mortar casinos), will also be increased in line with inflation.

“Is that it? ”,  I hear you say.  Well,” yes”. 

But the big news is that there isn’t anything else relating to online sportsbooks or casinos …. not yet, at least.  Will the UK government look to change the status quo – that we’ve now had since 1 September 2007 – and introduce a secondary licensing regime with duty arrangments which mirror those adopted by the the French or the Italians?  Or will they perhaps opt for a “place of consumption” duty regime as announced by the Irish?  Well, if they are thinking about either of these (or something else), they’re not letting on just at the moment.

So, if you’re sitting in your deck chair in Gibraltar, sit back, relax, and enjoy the sun – while it’s still shining.

The proposal to significantly improve EIS and VCT reliefs, in particular, by increasing the annual investment limit to £10 million from £2 million (albeit with effect from 6 April 2012) should assist games companies in obtaining development finance.  EIS relief becomes much more interesting at this level.  We are currently lobbying for other beneficial changes to make the rules more flexible.   Similarly, the increase in Entrepreneur’s relief from £5 million to £10 million may persuade business angels to invest in games.  Perhaps the changes announced today will go some way towards improving the funding gap and enabling games companies to retain their valuable intellectual property.  But more is needed here -  a meeting of minds between the games developers and VCs/business angels.

Whilst the changes to the R&D rules to increase the SME scheme rate of R&D relief  to 200% from 1 April 2011 and 225% from 1 April 2012 will be welcomed, we would like to have seen further simplification in the claims procedure and an extension of the definition of qualifying spend to apply to more games development expenditure.   

Disappointingly, there was no extension of the patent box to apply to games companies (although a further consultation paper is expected in May).   Whilst we can understand that extending the patent box to apply to all IP may be too costly for the UK, we would favour an R&D or “innovation” box enabling games companies to benefit and to encourage them to hold their IP in the UK.   As ever, due to our previous lobbying, we would have welcomed a targeted games tax relief but it seems that the Chancellor has for now not changed his view that this is “poorly targeted”.