The December year-end returns are due to be filed soon and so we thought it would be helpful to send a reminder of some of the new challenges that face companies when preparing and filing their corporation tax returns.
The complexities of tax compliance have multiplied in recent years and CW Energy remains committed to ensuring that compliance is achieved efficiently and timeously and that we optimise the tax attributes of each client.
The purpose of this briefing is to share our view of the impact of key recent changes in legislation and practice.
The increased complexity arising from the introduction of new rules on losses, corporate interest deductions and anti-hybrids mean that the routine preparation of CT returns requires greater consideration.
Furthermore, we have recently experienced a substantial increase in HMRC enquiries into submitted returns. These have in some cases tested the link from the accounts figures and tax computations derived therefrom to the underlying obligations to meet costs.
As a result, there is more information required to ensure that returns are complete and accurate and to optimise reliefs and losses and additional questions may need to be asked to validate entries in the computations.
The impact of recently-introduced legislation
We want to highlight the potential impact of the following;
New loss rules; amounts carried forward (effective from April 1 2017)
Whilst the position for Ring Fence losses remains largely unchanged, for losses and deficits being carried forward outside the Ring Fence, the broad effect of the new rules is that carried forward amounts;
- can be set-off against more types of income (than previously),
- can be group relieved to another company,
- cannot cover more than 50% of the profits of the period (after other reliefs) subject to a £5m group allowance de minimis (group aggregate), and
- are utilised at the company’s discretion- a company will be able to choose whether to use brought forward amounts
The £5m ‘group allowance’ (which permits unrestricted use of £5m of brought forward losses per group) is effective only through a nominated company submitting an allocation statement to HMRC showing the amounts of allowance allocated to each company. The nomination of a company must be signed by each company that is a member of the group and which is within the charge to Corporation Tax at the time and will apply for subsequent periods.
In practice, this nomination and the submission of the nomination statement must be made prior to (or at the same time as) submitting the first CT returns containing an allocation of allowance. This means an extra submission to HMRC.
However, a later allocation of the allowance or an amendment thereto can still be made by the nominated company up to the anniversary of the filing date for the relevant period.
The interaction of brought forward amounts, in-year losses and carried back amounts, added to the group options for the in-year and carried forward amounts potentially make optimisation more difficult to achieve. Additionally, options will need to be reviewed right up to the latest date for amending returns and elections.
Finally, the particular impact of the restriction on the use of losses brought forwards means that fluctuating exchange rates can create gains outside the ring-fence trade which cannot be fully covered, and we continue to advise clients to reduce intra-group balances and mismatched currency lending in order to simplify their tax affairs.
For the coming year-end, the new rules give a number of options and may in some cases represent potential planning opportunities.
Companies with a December year-end want to revisit their 2017 filings before the year-end to ensure that the position has been optimised.
Interest restriction rules (effective from April 1 2017)
The new Corporate Interest Restriction (CIR) rules are also effective from 1 April 2017.
Once again, whilst the position for Ring Fence interest deductions remains essentially the same as before, for non-Ring Fence interest deductions the new rules mean that there are both administrative issues and a requirement to test the overall interest deductions being claimed, and potentially restrict them.
There is a per period de minimis such that no restriction applies for the group provided the net interest expense is less than £2m (this is reduced pro-rata for a short period).
The introduction of a restriction based on combined group company data means that where interest is restricted there is an administrative requirement for the group to appoint a company to make an ‘interest return’ to take advantage of the options for choosing the companies subject to disallowance and the amounts for each
It may also be advantageous to make an interest return even if no interest restriction applies to the period unless the group is confident that its net interest expense will not exceed the £2m de minimis in the foreseeable future. This is because such a return allows the group to carry forward excess interest allowances from the period which may have value in later periods and to make certain elections.
In the absence of an interest return, the disallowance is fixed by statute to be proportionate to the net tax interest debits recorded by the respective companies.
As a result, all groups need to consider appointing a ‘reporting company’ to make the ‘interest return’ for the relevant group companies. Generally, the reporting company needs to be appointed and HMRC notified within 12 months (as extended by new rules) of the period end.
The notice must specify the first period of account to which the appointment relates along with a list of the eligible authorising companies and a statement that those companies constitute at least 50 per cent of the eligible companies. The reporting company must inform each UK group company and the ultimate parent of its appointment.
Appointing a ‘reporting company’ means that the company will have to make a return for each period.
HMRC may appoint a company for example where they think a restriction is possible and want to elicit a return.
Interest Returns and restrictions
Returns are required to
- Carry forward interest allowances
- Make certain elections under the CIR rules
- Allocate any interest disallowance to specific companies
- Allocate interest reactivations.
Where applicable, an abbreviated return gives a simple filing option that keeps the flexibility to extend into a full return containing all the elements above if that is beneficial. This option may be chosen in the case where there is no restriction in the period but where there may be the possibility of a restriction in a future period.
Once a reporting company is appointed it will have an obligation to file a return within twelve months of the period end, or if later, three months from its appointment. This latter provision will be used where HMRC appoints a company.
In cases where a group cannot rely upon the £2m net ‘safe harbour’ to cover all the interest deductions, the calculations may be complex, and choices may be required for which basis of calculation is to be used.
The compliance impact of making the calculations and elections in respect of non-Ring Fence interest deductions is potentially significant. Furthermore, where there are restrictions the interaction with loss reliefs will need to be optimised and the potential for the position to be reviewed, amended and recalculated over subsequent periods also adds to the compliance impact.
Anti-hybrid rules (January 2017 effective)
The third measure we wanted to highlight in this note is the anti-hybrid legislation. For transactions from 1 January 2017 companies that are hybrids, make payments to hybrids, receive income from hybrids or transact with or through branches will need to evaluate whether the anti-hybrid rules apply. These rules limit CT deductions or impute income. They can restrict losses but may also create or increase profits.
The rules also apply to certain ‘hybrid’ financial instruments, dual resident companies, and even require consideration as to whether as part of an organised chain of transactions the relevant UK company benefits from a tax mismatch that occurs beyond its immediate transactions.
Whilst the rules are largely limited in their application to intra-group transactions in which a tax mismatch occurs, they require information that has not hitherto been required in making a CT return.
As a general starting point, this means that companies need to identify potential for tax mismatches. Companies need to understand whether group transactions are conducted with hybrid entities (not uncommon in the case of US resident groups) or branches, and also need to understand what the taxation consequences are for the counterparty. Once a mismatch is identified, the detail of the rules needs to be addressed to establish if they adjust the deductions or income otherwise chargeable in the UK.
Other Reporting Requirements and HMRC compliance activity
The recent introduction of requirements for country-by-country reporting, the publication of tax strategies, the Extractive Industries Transparency Initiative, the Extractive Industries Reporting Payments to Governments Regs 2014, and more established Senior Accounting Officer notifications mean that clients falling within these rules have multiple ongoing period-by-period obligations.
As a more recent development, we have seen an increase in HMRC enquiries targeting particular entries in the accounts and computations and asking for the evidence to support the figures.
Typically we find that providing the evidence and reconciliation can be most difficult in respect of;
- Asset expenditure qualifying for capital allowances and investment allowance
- Exchange differences – to differentiate by source
Since HMRC now routinely consider penalties for any error in a return, as a precaution we are now increasing our checks on such entries to verify their nature and treatment and also the extent to which they can be easily supported from accounting data.
The approach CW Energy takes to compliance is that it wants to help clients optimise their tax positions, meet their obligations and avoid the pitfalls from the new rules, with the minimum extra disruption. The new rules require more information and greater consideration of the options than before. Many of the deadlines in the new rules are aligned with the normal end-of-year process, meaning that a company should start the process earlier. We also aim to maintain contact with clients to identify early on the information that is going to be needed and when it will be available, and this briefing is part of that.