Author Archives: Philip Ward

15 Oct 2020

What does the recently announced proposed Premier/Chrysaor merger tell us?

Premier and Chrysaor have announced that they are to merge, in a Press Release issued on 6 October 2020, with further details included in presentations published at the same time. The proposed merger remains subject to shareholder and stakeholder approvals and it is possible that further details may be included in the shareholder circular.

Overview of the merger

The main relevant features of the transaction are:

  • Premier will acquire Chrysaor by issuing new Premier shares to Chrysaor’s existing shareholders; 
  • The enlarged group will settle debt and hedging liabilities through the payment of $1.23bn cash and a further issue of new Premier shares;
  • Premier’s existing letters of credit will be refinanced;
  • The payment to settle debt and hedging liabilities is being funded by draw down of an extended Chrysaor reserves based lending facility;
  • As this is a reverse takeover Premier’s shares will need to be re-admitted for trading on the main market of the London Stock Exchange. 

The transaction is expected, if it obtains the necessary approvals, to complete in Q1 2021.   

For Premier shareholders the main benefit would appear to be that it avoids the risk of losing their investment as a result of the significant Premier debt levels, although existing Premier shareholders are expected to hold only approximately 5% of the merger group (the other 18% allocated to Premier “stakeholders” is ear-marked for the Premier lenders).  

For Chrysaor investors the benefits are more compelling and include access to a c.$4.1 billion pot of Premier tax losses. 

Premier’s tax attributes

Prior to the announced merger Premier has been clear on its tax advantaged status due to its existing ring fence losses and investment allowances.  A significant portion of these losses were acquired on the acquisition of Oilexco more than 10 years ago. According to the announcements the parties are seemingly confident that the transaction can accelerate the use of these tax losses.

In its 2017 accounts Chrysaor had $1.5 billion of tax losses.  Published accounts of Chrysaor for 2019 show that it had current tax liabilities.  This suggests that the existing Chrysaor asset base is likely to be able to utilise the Premier pool of allowances in relatively short order. 

Interestingly the transaction that Premier announced in June with BP to purchase their Andrew and Shearwater interests will now not go ahead. There may be a number of reasons for this but in the press, Tony Durrant (Premier CEO) was recently quoted as saying:

……. the [BP] deal would have been a “good transaction” for Premier Oil as a standalone business ..However, he said the BP deal would have “diluted” the tax “synergy” created by the combination with Chrysaor.”

We understand that one of the factors which had helped facilitate BP and Premier being able to agree a deal was the ability to use Premier’s losses against Andrew and Shearwater profits. It appears, based on this statement and the merger Press Release, that there is an expectation that Premier’s tax losses can now be fully utilised by the activities of the enlarged Premier/Chrysaor group, such that the tax synergies that made the BP deal “work” no longer apply.  

In order to access Premier’s brought forward tax losses, legacy Chrysaor assets will need to be transferred to legacy Premier companies, and any incremental tax advantage will only start to accrue after such transfers.  The group will therefore need to navigate the anti- avoidance rules that can restrict the use of brought forward tax losses where there is a change in ownership. Given, the 2017 changes now mean that the anti-avoidance rule can bite if a loss maker has major changes in its trade in the five years after a change of ownership, and the statement that loss utilisation is to be accelerated post-merger, we would expect the parties to have had some engagement with HMRC on this issue. There is however no mention of this in the Press Release. 

As pointed out in our April 2020 Newsletter, HMRC have published some helpful guidance in their manuals on the application of the major change rules, and the fact that they will potentially give clearances. This has encouraged potential investees to look at acquiring companies with losses, whereas in the past, the uncertainty of the application of these rules would have led them to not even consider it. 

It seems clear that the “acquisition” of Premier would fall squarely within the category of transactions, as set out in the guidance, for which HMRC say they would not look to apply the rules: being the acquisition of a “genuine, viable and commercially carried on trade”. However it seems unlikely, given the potential value involved, that the Parties will have been content to simply rely on the published guidance.  

Summary 

This deal is another example of where a transaction can deliver value through the effective use of tax attributes. There are a number of different techniques that can be used depending on the respective tax attributes of the parties and the profile of the assets.

CW Energy has extensive experience of structuring such commercially driven arrangements and would be pleased to discuss how such techniques can be applied to your circumstances.

CW Energy LLP
October 2020

30 Oct 2018

2018 Autumn Budget

The Chancellor delivered his 2018 Autumn Budget today.

In the Chancellor’s speech there was a welcome confirmation that North Sea tax rates would remain unchanged, together with an announcement that the Government would launch a call for evidence on creating a global centre of excellence for decommissioning in Scotland.

Within the detailed announcements there was nothing further directly applicable to the upstream oil & gas sector, other than the Finance Bill contains the previously announced “late life” asset proposals on transferable tax history (TTH) and PRT relief for decommissioning expenditure.

These issues have been dealt with extensively in previous Newsbriefs – see our 16 July 2018 Newsbrief at the time the draft legislation was published https://cwenergy.co.uk/finance-bill-and-decommissioning/, and our 22 November 2017 Newsbrief on the 2017 Autumn Budget, when these proposals were first set out https://cwenergy.co.uk/2017-autumn-budget/.

Since publication of the draft clauses this summer there have been a number of workshops, attended by Government officials and industry, to work through the draft clauses in detail. As a result of this work a number of changes to the original clauses, predominantly those relating to TTH, have been made. These changes do not however alter the fundamental operation of TTH: rather they ensure, in some cases, that the rules work as Government intended, but also the scope of HMRC to retrospectively amend or deny a TTH election has been limited, to give buyers and their financiers more certainty that the TTH will be available.

Comment: 

We think the workshop process has, in general, been very productive and, although there are still some differences of view between the industry and Government representatives, the final legislation will be more “fit for purpose” as a result.

The TTH and PRT relief changes are thought to be a useful additional “tool in the tool kit” when constructing commercial deals, but will not be appropriate or necessarily relevant for all deals, and it remains to be seem how often they will be used. 

 

CW Energy LLP

29 October 2018

If you would like to discuss the Autumn Budget, please contact your normal CWE contact.

16 Jul 2018

Finance Bill and Decommissioning

Decommissioning developments; more options.

Draft clauses for the next Finance Bill were published recently which included  a number of measures directed at the oil industry,  intended to assist sales of “late life” assets. 

In particular the Finance Bill includes legislation to give effect to the long awaited transferable tax history (TTH) scheme, and proposals to deal with the PRT treatment of “retained” decommissioning obligations following a licence sale.

These changes are to be effective for field transfers obtaining OGA consent on or after 1 November 2018.

TTH

For corporation tax (CT) and supplementary charge (SCT) the TTH changes are intended to facilitate the transfer of mature field interests to companies which would otherwise be unable to obtain effective relief for decommissioning costs on the transferred assets, because they would  not have paid enough corporation tax.

The effect of the TTH rules is that a seller will be able to transfer some of its past tax payment history on a licence sale. This transferred history acts as if it were tax paid by the buyer such that the buyer will be able, subject to the detailed restrictions in the legislation, to obtain a repayment of CT and SCT paid by the seller.

The draft legislation closely follows the approach set out in the outline which was published at the time of the Autumn 2017 Budget (see our newsletter dated 22 November last year, https://cwenergy.co.uk/2017-autumn-budget/). The requirement for independent verification of the amount of TTH being transferred has, however, been dropped; with the TTH amount now being capped by reference to the decommissioning cost estimate set out in the most recent decommissioning security agreement (DSA) for the transferred field.

The legislation does allow TTH to be applied to intra group transfers but only where the field interest transfer is in anticipation of a subsequent third-party asset or corporate sale which must complete within 90 days of the intra group transfer completing. The legislation also permits TTH to be transferred by the original purchaser to a new purchaser on the onward sale of some or all of the acquired field interest.

TTH must be attached to a particular field. However once activated it is treated in the same way as if the profits representing the TTH were earned by the buyer in the accounting periods in which they actually accrued to the seller, and  can be accessed by decommissioning losses from any of the buyer’s fields, subject to the normal loss offset rules.  

Activation of TTH only occurs once the purchased field has  finally ceased production and only to the extent the cumulative profits from the purchased field are less than the purchased field’s total decommissioning costs.  The buyer’s profits from the field must be tracked each year with the amounts included in the relevant tax return. The buyer must also appoint a “senior tracking officer” who must certify to HMRC annually that the tracked profits have been computed in accordance with the legislation.

Comment 

There is no doubt that the TTH scheme is an innovative proposal to help with  the difficulties that can prevent the transfer of late life assets, and it is clear that the Government has listened carefully to the representations made by industry. The draft legislation includes a number of features which will mean that the scheme can have the widest application possible, including the generous limit on TTH which can be transferred, and the ability for the scheme to apply to hive downs, and on-sales.   

However, the key restriction on TTH is that it can only be activated to the extent that the decommissioning costs incurred in respect of the transferred field assets exceed the profits from that same field. 

This restriction has been introduced to prevent tax history effectively being traded as a commodity or to enhance seller’s own decommissioning relief.  We therefore  expect TTH to be used relatively infrequently and that alternative structures will continue to be commonplace in asset and share sales, reflecting the particular circumstances of the seller and buyer and the asset in question.

There are a series of detailed administrative provisions which could be onerous, but it is hoped that these will not deter the facility being used where appropriate.  

There remain a number of areas of uncertainty such as the interaction of the rules with Investment Allowance. A number of workshops are to be held with Government to review the detailed legislation.

PRT 

The PRT changes deal  with two distinct  commercial structures for transferring field interests with the intention that in both cases it will be the buyer who will be able to obtain PRT relief for its “share” of costs.

The first part of the measure deals with a situation where the buyer “incurs” decommissioning costs following the acquisition of an interest in a field but under the commercial arrangements all or part of the cost is to be funded by the seller. The changes ensure that the PRT subsidy rules will not apply in such cases and the buyer will be able to obtain relief.

The second part of the measure is aimed at arrangements where the obligation to incur decommissioning is not passed on to the buyer but retained by the seller, for example as a result of the seller remaining a party to the JOA or DSA. 

This new rule provides that the seller is not to be treated as incurring expenditure where  it is not a licensee in the field area at the end of the transfer period, but any such expenditure is deemed to be incurred by the buyer.

Comment 

The switch off of the subsidy rules is a welcome modification. Interestingly the switch-off does not apply if the asset changes hands by means of a share sale but it is generally easier to refute any contention that an adjustment to the sale price for the shares is a subsidy for the target company.    

The second measure is clearly aimed at preventing a seller being able to obtain effective PRT relief against their historic profits in preference to the buyer’s future profits (and so “missing out” a period of profits which have been subject to 0% PRT). 

Although in our experience the possible PRT “upside” available if a seller retains decommissioning is rarely a material consideration in structuring the deal, HMRC have been concerned that the introduction of the 0% rate for PRT and the ability for 0% periods to be missed out undermines the integrity of the PRT system. 

Although this legislation will deny relief for a seller who retains the decommissioning obligation without retaining an interest in the licence we assume HMRC are confident that this will not give rise to a claim under the DRD on the basis that a seller who was not a licensee would not have had a claim under existing law.  

As with the TTH rules there are a number of uncertainties with how the new rules will operate, for example, the precise scope of the deeming rule when sellers retain the decommissioning obligation while not remaining as a licensee.  

Final comment

We will be reviewing the draft legislation in full over the next few weeks and will share further comments in due course.

13 Jun 2018

Loss Streaming Latest

HMRC – 2    Taxpayers – 1

The taxpayer has been unsuccessful in their appeal against the Upper Tier Tribunal decision in the Leekes loss streaming case.

This case was discussed by CW Energy in our Newsbrief of 16 March 2015 and also on 22 July 2016.

The Court of Appeal have closely followed the reasoning in the UTT holding that the effect of section 343(3) ICTA 1988 is that the successor to the trade previously carried on by another company under the same ownership was only entitled to set losses transferred to it against the profits the predecessor would have earned, absent the transfer.

The Court rejected the argument that the streaming provisions only apply where there are transfers of part of the activities or part of the trade of the predecessor and saw no difficulty in the fact that the legislation only explicitly appears to provide for the need to apportion costs and income in the case of such part transfers.

The reasoning behind the decision of the Court is that they perceived that allowing losses to be set against the successor’s profits other than those transferred in would have given the successor an unwarranted benefit as compared to the position of the predecessor had no such transfer occurred. It seems that the court believe that to find in favour of the taxpayer would have provided an opportunity for tax avoidance. The key argument in refuting this perceived benefit, which does not seem to have been put by the taxpayer, is that it would have been open to the group to have injected the activities carried on by the successor into the predecessor in which case the losses of the predecessor would have been available to shelter the combined profits, on the basis that the activities would have almost certainly have been treated as carried on as a single trade.

The provisions under consideration are the pre-consolidation provisions now found in Part 22 CTA 2010, however given the grounds for the decision it seems clear that this decision equally applies to the current wording.

It is hoped that the taxpayer will appeal and that the Supreme Court will look to place more emphasis on the precise wording of the relevant section which we believe favours the taxpayer’s interpretation rather than HMRC’s.

This continues to be a very important decision for the oil and gas industry, and the loss streaming rules remain a trap for the unwary when considering restructuring whether following an acquisition or indeed simply in cases where an existing group structure is being reworked.

If you would like to discuss the issues raised in this note, please contact your normal CWE contact.

19 Jul 2017

Finance Bill (no 2) 2017

Corporation Tax loss reforms

Impact on ring fence losses  

Readers will be aware that the Government is proposing some quite significant changes to the rules dealing with the use of carried forward losses. Draft clauses were included in the Finance Bill published earlier this year. These provisions were however pulled from the truncated Bill which has passed into law, but revised legislation to be included in the Finance Bill to be published after the summer recess, has recently been reissued. These revised draft clauses are substantially the same as those included in the original Finance Bill, but government has taken the opportunity of the delay to correct some of the anomalies in the previous draft which related to the use of ring fence losses.

We reported In April on a number of potential anomalies to the ring fence loss rules. In particular, we viewed several items as inconsistent with the principle which we thought had been proposed by government, that the offset of ring fence losses against ring fence profits would not be impacted by the reforms. The changes that have been made are as follows

  1. The RFES rules have been amended such that pools can include post 1/4/2017 losses. A number of other changes to these rules are included to cope with the new loss carry forward rules.
  1. The transfer of trade rules which allow trade losses to be transferred from the predecessor to the successor company are to be preserved not just for pre 1/4/2017 losses but also for ring fence losses arising after this date, including decommissioning losses.
  1. The extension of the review period from 3 to 5 years included in the previous draft is to be applied to the ring fence when considering whether there has been a major change in the nature or conduct of a ring fence trade.

 

Decommissioning losses have however been carved out from this extended period in the latest version of the legislation recognising presumably that the Finance Act 2013 legislation needs to be preserved to prevent potential claims under Decommissioning Relief Deeds.

The fact that the ring fence has not been completely carved out from this change is particularly disappointing given the representations that have been made by industry on the adverse effect these rules have. To now make them worse seems perverse. The application of the rules in general continues to be discussed with HMRC as they are seen as a major impediment to getting the dwindling North Sea resources in the right hands to assist with the government objective of maximising economic recovery (MER) and this issue is currently being dealt with as part of the ongoing consultation on late life assets. It seems unlikely that a blanket exclusion will be introduced but its hoped that some helpful guidance will come out of these discussions.

There are a number of further changes to the original draft wording with restrictions introduced which apply to the offset of ring fence losses against non ring fence profits, essentially to bring these rules in line with the non-ring fence loss rules. These are however thought to have limited practical application.

We will continue to review the changes and will update readers in due course

03 Jan 2017

Staff Changes

Ian Hack, Director

We are pleased to announce that Ian Hack, who joined CW Energy in 2012 after a long career with HMRC, has been made a Director of CW Energy LLP. This promotion recognises Ian’s increasingly strong contribution to the business since joining the firm.

 

 

Janusz Cetnarowicz, Partner

 

We are also pleased to announce that Janusz Cetnarowicz, who was a director and founder member of CW Energy Tax Consultants Ltd in 1990 has been appointed a partner of CW Energy LLP with effect from 1 January 2017.

 

 

 

Finally we record that after over 26 years with CW Energy Stewart Norman has retired from the business. Stewart was a founder member and has been an integral part of CW Energy since inception and we wish Stewart and his family a long and happy retirement.

With the changes announced today we believe that CW Energy continues to be in a strong position to offer clients the very best advice and support.

23 Nov 2016

2016 Autumn Statement

The Chancellor delivered his Autumn Statement today.

There were no new fiscal measures directed at the oil industry apart from an announcement that petroleum revenue tax (PRT) administration is to be simplified with immediate effect.

The PRT administrative changes are: firstly, that the PRT opt out election process is to be simplified; and secondly for participators who choose not to opt out the returns process will be simplified.

Non-taxable field election

It has been possible to opt out of the PRT regime, and the field to become a non-taxable field, for a number of years, but only if it could be demonstrated that there was no reasonable expectation of PRT profits on the field.  The reduction in the rate of PRT to zero percent from the beginning of the year did not of itself extend the number of fields which could take benefit of the election under the current law.  Going forward there are to be no conditions attached to the making of an election, other than that the election must be in writing and will be irrevocable.

A consequence of making an election is that no loss accruing in the field can be claimed as an unrelievable field loss (UFL). This is unchanged from the previous rule.

As under the current rules, only the responsible person can make the election, and he must first have obtained the agreement of all other participators for it to be effective.

The Treasury Press Release covering this matter states that HMRC will discuss with any field owners making such an election alternatives to providing the data currently required in the PRT 1A return covering certain non-arm’s length sales of liquids. Provision of such data will however be on a voluntary basis.

The election will have effect for all chargeable periods commencing after the date the election is made.

Comment:

We presume that any fields where there is a possibility of recovering PRT which has been paid in the past, or where there is a possibility that a UFL might arise in respect of the field for any partner, will not make the election. It is possible that partners in a field may have different positions which may frustrate the election being made. Indeed, it is important that companies who are contacted by the responsible person in a field should critically assess whether there are circumstances where a UFL could be created even where it appears that losses generated by decommissioning will not exceed historic field profits.  

Although the relevant legislation will not be enacted until Royal Assent of the Finance Act 2017 (typically towards the end of July next year) the amendment to the existing legislation is stated to have come into effect today, and it is understood that HMRC will accept that elections made before the end of 2016 will have effect such that PRT returns for CP1 2017 will not have to be filed (although the returns due in February 2017 for CPII 2016 will still have to be filed). 

Removal of PRT reporting requirements

For those fields which don’t take advantage of the new election (and for all taxable fields in respect of CPII 2016) the returns which have to be submitted for each field are to be simplified. This does not require legislative change.

It will no longer be necessary to calculate oil allowance, nor will it be necessary to calculate instalment payments or payments on account. In both cases this information will be of no relevance given the rate of PRT has been permanently reduced to zero for all chargeable periods, commencing 1 January 2016 and subsequent. Nor will volumetric units need to be converted into metric tonnes.

This change is made with immediate effect and will therefore apply to any returns that need to be submitted next February in respect of CPII 2016.

The Press Release issued states that the HMRC return forms will only be updated at some time in the future, but the parts of the forms relevant to these matters can simply be left blank when submitting the CPII 2016 and later returns.

Comment:

These changes are welcome for companies who decide they still want to file PRT returns for particular fields, although the simplification is fairly minimal, and it is not thought that this will give rise to any significant compliance cost savings. The industry had requested a number of other changes such as annual returns, and deferral of filing deadlines. Such changes would require legislative change and it appears that the Government have taken the easy option which is unlikely to have any real benefit to industry. It is hoped that the other changes requested will be implemented by Government in due course. 

Other matters

There are a whole raft of other issues which industry has raised with Government as being important in achieving MER, such as the extension of the Investment Allowance regime for infrastructure tariffs, transferability of corporation tax capacity, and a number of technical PRT issues mainly around decommissioning.

Industry is also still awaiting the Statutory Instrument to be laid before Parliament, to give effect to the extension of the scope of the Supplementary Charge Investment Allowance relief to certain non-capital discretionary operating expenditure and to expenditure on leased assets. This measure is effective from 7 October 2015 and will be relevant to companies filing their 2015 corporation tax returns over the next 5 weeks if they have not already done so.

Comment:

It is disappointing that none of the other issues raised by industry have been addressed at this time. The Press Releases do not even give an indication that any of these other matters are still under consideration, but it is hoped that progress can be made over the next year on a number of these issues with some much needed changes hopefully being introduced in Finance Act 2018. 

CW Energy LLP

23 November 2016

 

07 Sep 2016

Finance Bill finishes third reading in the House of Commons

The Finance Bill 2016 completed its third reading in the House of Commons yesterday (6th), and has now been passed on to the House of Lords. As it is a money bill, its terms cannot be amended by the House of Lords so the committee stage, report stage and third reading there are just formalities. 

The first reading in the Lords also took place yesterday and the second reading and remaining stages are scheduled for 13th September, after which the Bill should receive Royal Assent.

Thus as of today the Bill has been “substantively enacted” for the purposes of IFRS and UK GAAP, and the rates set out in the Bill can now be applied. For ring fence companies the Bill confirms the 0% rate of PRT enacted under the Provisional Collection of Taxes Act (in section 140 of the Bill) and applies the Supplementary Charge rate of 10% with effect from 1st January 2016 (section 58 of the Bill).

For companies who do not have a December year end the profits of the accounting period straddling 1st January 2016 are apportioned on a time basis.

For companies that report their results quarterly, the quarter to 30th September will reflect the lower rate of SCT.

Our comment: 

Although the reduction in tax rates is welcome overall, for many companies this will result in a tax charge resulting from the reduction in value of their losses carried forward.

 

24 Aug 2016

Changes to Derivative Contract Rules

Changes to derivative contract rules – reminder of time limit for non-large companies.

  • Deadline fast approaching for small and medium sized companies to make election
  • Some companies may not be grandfathered even though fair valuing has been the policy
  • Election should be made if there is any doubt otherwise companies will be taxed on fair value movements

Detail

Readers will recall from our newsletter of April 2015 that there are strict time limits to make the election to operate the disregard rules for companies making the transition from old UK GAAP to new UK GAAP and as a result of adopting fair value for the first time (new adopters) for accounting periods commencing on or after 1 January 2015.

For large companies these limits were 6 months from the commencement of the accounting period, or if the company held no derivatives at the end of the last period 6 months from when the first derivative was entered into in order for the disregard to apply to that and subsequent derivatives.

However, the time limit for small and medium sized new adopter companies is 12 months from the end of the first accounting period to which the new accounting policy applies. Thus for those companies with a December year end the deadline is 31st December this year. Any small or medium sized companies should elect without delay as the year end is fast approaching.

Companies eligible to be grandfathered (i.e. those already within the existing regime) are treated as having made the election under the transitional provisions.

Whilst some companies may believe they are grandfathered because of previously having a policy of fair valuing derivatives, if those companies have not actually entered into any derivatives in the past they would still need to make the election before they enter into any derivative contract in order for the disregard rules to be effective for that derivative.

This could apply to for example to a group company where the group as a whole adopted IFRS but the company itself had not in fact held any derivatives, perhaps because it was new or had previously not traded.

It would therefore seem to be good practice that a company which has any doubt whether it is covered by the grandfathering provisions should make the election to apply the disregard without delay.

If you would like to discuss this subject further, please get in touch with your usual CWE contact.

31 May 2016

Reform to loss relief, and changes to SSE and DTTP – new consultations published

Proposed changes to the use of carried forward losses and potential amendments to the existing Substantial Shareholding Exemption regime were announced at Budget 2016. Consultation documents are now available for comment.

In addition, a new consultation on a possible simplification of the Double Taxation Treaty Passport (DTTP) scheme was announced on 26 May 2016.

CW-Energy-1

Reform to corporation tax loss relief:

  • New rules apply from 1 April 2017
  • Use of losses carried forward restricted to 50% of profits
  • £5m group-level allowance
  • Losses carried back not affected
  • More flexibility on use of carried forward losses
  • Changes not be applied to Ring Fence.

Reform to Substantial Shareholding Exemption:

  • Number of options to simplify the existing regime
  • Changes to further promote the UK as a holding company location
  • Options include: removing the trading requirement at the level of the investor group, increasing the qualifying activities that an investee can undertake; reducing the 10% shareholding requirement, and waiving the investee trading requirement condition post the disposal.

  DTTP scheme review:

  • Simplification of the administrative burden
  • Expansion beyond corporate to corporate lending
  • Funds and partnerships could be included.

If you think the new rules could affect your business and you would like to discuss the details or would like help in putting together a representation, please get in touch:

Here’s the detail with comments from your CW Energy experts:

Reform to loss relief, changes to SSE and DTTP – new consultations published

The government published three consultation documents on 26 May 2016 concerning the reform to corporation tax loss relief, reform of the Substantial Shareholding Exemption (SSE) regime, and the simplification of the existing Double Taxation Treaty Passport (DTTP) scheme.

Reform to corporation tax loss relief

At Budget 2016 the Chancellor announced changes to the use of corporation tax losses, in particular proposing a restriction to the use of losses carried forward together with more flexibility on using carried forward losses against different sources of income.

Last Thursday a consultation document was published asking for views from interested parties on the detailed proposals. It is expected that the new rules will apply from 1 April 2017.

The government does not intend the reform to apply to carried-forward losses relating to ring fence oil and gas activities.

The rules will apply to trading losses, non-trading loan relationship deficits, UK property losses, management expenses, and non-trading losses on intangible fixed assets. Capital losses are however excluded. However, the use of losses against trading and non-trading profits will be calculated separately.

The proposal is to restrict the use of losses carried forward to 50% of total profits arising in the period after 1 April 2017, subject to a de-minimis £5m allowance. The restriction will apply after the use of group relief. Carried back losses will be excluded from the restriction, and be available to offset any profits remaining after a loss carry forward restriction has applied.

The £5m allowance will operate on a group level. That is £5m of profits within the group can be sheltered by carried forward losses without restriction, with the taxpayer having a free choice over which profits to use in this way.  The restriction will then be applied to the remaining profits (after group relief claims have been made).

It is envisaged that there will be a step calculation for arriving at the losses that can be used. Pre 1 April 2017 losses will be used in priority to post 1 April 2017 losses.

Unused losses which have been subject to the restriction can be carried forward in the usual manner.

CW-Energy-3

On a positive side, there will be increased flexibility over the usage of post 1 April 2017 losses carried forward against the taxable profits of different activities and the taxable profits of group companies. however, the “schedular system” for computing corporation tax profits will remain unchanged.

Comment:

The restriction to using losses is clearly unwelcome, particularly for cyclical businesses, so we are pleased that the government intends to protect ring fence activities. However, companies with non-ring fences activities could be significantly affected and may want to consider making representations.

The consultation closes on 18 August 2016 and the government expects responses in the form of answers to a number of questions addressed in the consultation document.

Download a copy of this Government Consultation Document

Reform to the Substantial Shareholding Exemption (SSE)

A potential reform to the SSE regime was also announced by the Chancellor at Budget 2016, however at that time it was unclear what sort of changes could be expected.

The current consultation contains a number of proposals regarding the possible simplification of the regime with an intention of further promoting the UK as a holding company location and attracting further inward investment. The government wishes to remove some of the impediments to the current rules applying without providing a blanket exemption.

The current regime exempts chargeable gains arising on the disposal of shares in certain circumstances. For the exemption to apply a number of conditions must be met, amongst which are a requirement that the investment was at least 10% of the investee, and that the investor and investee were both broadly trading groups.

Amongst options for change in respect of which the government is seeking views are the following:

  • To remove the condition that the company making the disposal must be part of a trading group
  • To expand the qualifying nature of activities that an investee can undertake
  • To make less fundamental changes to the current investor and investee tests
  • To amend the ordinary share capital requirement so that partnerships could also benefit from the exemption
  • To reduce the substantial shareholding requirement which is currently 10% To extend the qualifying ownership period from 2 to 6 years.

Comment:

The possible changes are not thought likely to have a significant impact on companies involved in oil and gas activities.  However, the removal of the trading requirement for investor groups would be a welcome removal of a level of uncertainty that can exist in certain transactions.

The consultation closes on 18 August 2016 and the government expects responses in the form of views to a number of options contained in the consultation document.

Download a copy of this Government Consultation Document

Double Taxation Treaty Passport (DTTP) scheme review

The consultation is aimed at renewing and extending the scope of the DTTP scheme. The government is not intending to change the existing legislation and instead it is asking for views on how the current administrative procedure could be simplified.

As background, borrowers in the UK are obliged to withhold income tax (WHT) at the basic rate (currently 20%) on payments of interest to overseas lenders (on loans of over a year in duration). If the lender is resident in a territory with which the UK has a tax treaty, the rate of WHT may  be reduced.

The DTTP scheme was introduced so that an overseas lender was not required to produce proof of residency and other official documents to HMRC for each new loan in order for the payments to be made without WHT or at a reduced rate under the Treaty. Under the scheme the overseas corporate lender applies for a “treaty passport” which can be used to make multiple loans to UK borrowers.

Currently the DTTP scheme applies only to corporate to corporate lending. The main proposal is to extend the scheme to encompass funds and partnerships including overseas partnerships.

The government is also seeking views on the operation of the renewal process as well as the application of sanctions for misconduct.

The consultation closes on 12 August 2016 and the government expects responses in the form of answers to a number of questions addressed in the consultation document.

Download a copy of this Government Consultation Document

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