The UK Budget Summary

Published 14 April 2016

The Chancellor of the Exchequer presented his 2016 Budget which had a number of items that would be of interest to our local and international clients. These are a few items that have not been discussed in detail earlier in this newsletter.  

Corporation tax

In a continued effort to make the UK attractive to large international corporations the Chancellor announced a further reduction in Corporation Tax. The current charge on profits is 20%, with previously announced reductions to 19% from 1 April 2017 and then to 18% from 1 April 2020. Instead the rate will reduce from 19% to 17% on 1 April 2020. This measure will benefit over a million companies, large and small. It will ensure the UK has the lowest corporation tax rate in the G20.

Royalty payments and the deduction of income at source

A new anti-avoidance rule will be introduced in respect of royalty payments between connected parties. The rule will apply where the payment of a royalty is made to a connected person as part of an arrangement which is aimed at obtaining a tax advantage by virtue of the application of a double tax agreement (“DTA”) other than where obtaining that benefit in those circumstances is in accordance with the object and purpose of that DTA. In these circumstances the royalty payment will be subject to UK withholding tax and the DTA which would otherwise restrict the UK’s taxing rights would not apply. This rule is aimed at structures which are established to take advantage of provisions of DTA, a process commonly referred to as treaty shopping and will not to be limited to just multinational enterprises.

VAT Changes

The growth in online shopping has benefitted the wider UK economy but it has also allowed overseas business to benefit unfairly. Overseas businesses that sell goods (located in the UK at the time of sale) to UK consumers, mainly via online marketplaces, are not always paying the correct VAT and duty. The goods are normally shipped to the UK before sale and stored in fulfilment houses close to their final delivery point. The overseas businesses are unfairly undercutting local compliant businesses trading in the UK.

HMRC’s traditional compliance powers are difficult to apply against businesses based overseas. The new measures will allow HMRC to tackle the overseas businesses who do not comply with UK VAT rules and help level the playing field for all businesses.

The changes will provide HMRC with new discretionary powers that will enable HMRC to target non-compliant overseas businesses and take the most appropriate action on a case-by-case basis. HMRC will then attempt to secure compliance directly with the overseas business by making contact with them. These businesses will have three options namely:

  1. register the overseas business for VAT in the UK
  2. appoint a UK-established VAT representative
  3. place security with HMRC

Where the overseas business continues to be non-compliant, HMRC will contact the relevant online marketplace through which the overseas business is trading. It will put the online marketplace on notice that it may be held jointly and severally liable for the VAT in respect of the overseas business’ future taxable sales through that online marketplace.

Gaming tax

The remote gaming duty treatment on “freeplays” will change and gaming duty bands will be increased.  UK-licensed online casino and bingo operators will be required to pay tax on their ‘free bet’ offers starting next year. The plan is to impose the 15% general betting duty (GBD) on all free or discounted online bets effective August 1, 2017.

Casino and bingo free bets had been spared the GBD when the UK government revised its gambling laws in 2014 to apply the 15% point-of-consumption tax (“POCT”) on online gambling revenue generated from UK punters. The new policy brings casino and bingo bonus offers in line with the rate already applied to sports betting.

The full details of The Chancellors plan have yet to be revealed, but the extended timeline to implementation of the new tax will at least allow operators to tweak their free bet offers to minimise the financial hit.

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