23 November 2016

The UK's Spending Review and Autumn Statement 2016

The UK Chancellor of the Exchequer, Phillip Hammond, delivered the 2016 Autumn Statement today. As this was his first Autumn Statement and was delivered in the light of the Brexit vote and the US election result, this is of particular interest both for new initiatives that were as announced, and for policies of his predecessor which were publicly, or quietly, dropped. In particular and as expected the target of eliminating the deficit by end of Parliament was dropped and more spending on infrastructure was announced.

As in recent years, many of the announcements in the Autumn Statement related to changes to the tax system which have been the subject of consultation over the last six months. Although the Autumn Statement contains announcements which potentially impact on the taxation of funds and in particular the companies and assets in which funds invest, only limited details of many of the changes have so far been published. Draft legislation implementing many of today's proposals will be published on 5 December 2016.

It was announced that following the spring 2017 Budget and Finance Bill, the Government will aim to have only a single major fiscal event each year and that will be in the Autumn. One potential advantage is an increase in the time available for consultation on draft legislation with a view to improving the end result.

The private equity sector has reacted positively with Tim Hames, Director General of the British Private Equity and Venture Capital Association (BVCA) saying that "the Chancellor has set out a pragmatic and flexible new approach to fiscal policy. His emphasis on both infrastructure and innovation and his support for regional economies is very welcome."

The main tax announcements from the Autumn Statement of particular interest to the private equity and venture capital sector are summarised below.

In this issue

Funds and investment
Personal tax
Employment and incentives
Business tax

Funds and Investment

Interest deductibility 

A major part of the OECD's "base erosion and profit shifting" (BEPS) recommendations designed to reduce the alleged tax avoidance of multi-national enterprises (MNEs) was the introduction of rules to prevent MNEs from financing entities located in high tax jurisdictions with excessively high-interest loans from group entities located in low tax jurisdictions. Since October 2015 HMRC (the UK tax authority) have been consulting on the implementation of these rules in the UK and today the Government announced their response. As discussed in "OECD and private equity tax" and "The future of interest deductibility in Europe", the original proposals, although targeted at MNEs, potentially led to restrictions on the deductibility of interest payments by private equity portfolio companies, and caused particular concerns for highly geared sectors such as infrastructure and real estate where there is perceived to be little BEPS risk.

It was confirmed that these proposals will be taken forward and introduced with effect from 1 April 2017. The Government will cap the amount of relief for interest to 30% of a group's UK earnings before EBITDA. They will also implement a group ratio based on the net interest to EBITDA earnings ratio for the worldwide group. The use of a group ratio is very much welcomed as that can allow a higher level of deductibility and is potentially useful for private equity and real estate funds. The rule will include a threshold limit of £2 million net UK interest expense and it was indicated that the exemption for public benefit would be wider than originally indicated. However, the detail of the legislation will need to be reviewed carefully to fully assess the impact on lending to PE, infrastructure and real estate funds. In particular, the original proposals did not contain provisions grandfathering existing debt arrangements.


Following a consultation the Government has announced that it will legislate to clarify and improve certain aspects of partnership taxation to ensure profit allocations to partners are fairly calculated for tax purposes. Draft legislation will be published for technical consultation. It will be important for stakeholders to ensure that the resulting changes distinguish properly between trading and investment partnerships and do not place excessive and unworkable compliance and reporting obligations on investment partnerships.

Authorised contractual schemes 

Following a period of consultation, the Government confirmed that it will legislate to clarify the rules on capital allowances, chargeable gains and investments by co-ownership authorised contractual schemes (CoACS) in offshore funds, as well as information requirements on the operators of CoACS.

Stamp Duty and share transactions 

The Office of Tax Simplification has been asked to carry out a review of stamp duty in relation to transactions in shares.

Offshore funds 

UK taxpayers invested in offshore reporting funds pay tax on their share of a fund's reportable income, and Capital Gains Tax (CGT) on any gain on disposal of their shares or units. The Government will legislate to ensure that performance fees incurred by such funds, and which are calculated by reference to any increase in the fund's value, are not deductible against reportable income from April 2017 and will instead reduce any tax payable on a disposal.

VAT groups 

It had been expected that there would be an announcement in relation to VAT grouping following recent European decisions which in particular might address whether partnerships can be VAT grouped. While no substantive proposals were made, it was confirmed the Government will consult on the VAT grouping rules.

Personal Tax


From April 2017, non-domiciled individuals will be deemed UK-domiciled for tax purposes if they have been UK resident for 15 of the past 20 years, or if they were born in the UK with a UK domicile of origin.

In addition, from April 2017, inheritance tax will be charged on UK residential property when it is held indirectly by a non-domiciled individual through an offshore structure e.g. companies and trusts.

SDLT and second homes 

Despite much lobbying, no change to the SDLT regime in relation to second homes was announced.

Employment and incentives

Salary sacrifice 

As expected the Government announced that it would limit the range of benefits that attract income tax and NICs advantages when provided as part of salary sacrifice schemes. However, it was announced that pension saving, childcare, Cycle to Work and ultra-low emission cars would continue to benefit from income tax and NICs relief when provided through salary sacrifice arrangements.

Termination payments 

It was confirmed that from April 2018 termination payments over £30,000, which are subject to income tax, will also be subject to employer NICs. Following a technical consultation, tax will only be applied to the equivalent of an employee's basic pay if their notice is not worked. The first £30,000 of a termination payment, which is not otherwise taxable under the general law, will remain exempt from income tax and National Insurance.

NIC and Income tax alignment 

On 14 November the Office of Tax Simplification published a review on the potential for a closer alignment of income tax and national insurance. They recommended that by April 2020 employees' NICs should be assessed on an annual, cumulative and aggregated basis and employers' NICs should be replaced by a payroll levy. In the meantime, National Insurance secondary (employer) threshold and the National Insurance primary (employee) threshold will be aligned from April 2017, meaning that both employees and employers will start paying National Insurance on weekly earnings above £157.

Valuation of benefits in kind 

The Government announced that it will look at how benefits in kind are valued for tax purposes and in particular will publish a consultation on employer-provided living accommodation.

Employee Shareholder Status 

Following the imposition of a lifetime limit of £100,000 which was placed on the exempt gains that a person could make on the disposal of shares acquired under Employee Shareholder Agreements entered into after 16 March 2016, it was announced that all tax advantages linked to shares awarded under such agreements will be abolished for arrangements entered into on, or after, 1 December 2016.

Business tax

Loss relief restriction 

It was confirmed that the proposals previously announced in relation to the use of tax losses would be enacted  so that from 1 April 2017 businesses will be able to use carried forward losses against profits from other income streams or from other companies within a group. However, there will also be restrictions on the use of losses so that where profits are in excess of £5 million, only 50% of the profits can be sheltered through the use of losses in each year. The £5 million is a group limit. It was indicated that certain amendments have been made to the original proposals with a view to dealing with unintended consequences and simplifying the administration.

Corporation tax reduction 

George Osborne had previously announced that it was intended to reduce the rate of corporation tax from 20% to 17% by 2020. Following much speculation it was announced that this remained the Government's aim.

Substantial shareholding exemption 

Following a consultation it was announced that there would be changes to the Substantial Shareholdings Exemption("SSE") with effect from April 2017 for corporate capital gains made by trading groups which are intended to simplify the rules, remove the investing requirement within the SSE and provide a more comprehensive exemption for companies owned by qualifying institutional investors.


It was announced that the Government will review the tax incentives for R&D expenditure with a view to making the UK an even more competitive place to carry out R&D.

Insurance premium tax 

It was announced that the rate of insurance premium tax would be increased from 10% to 12% with effect from 1 June 2017.

Taxation of non-resident companies' UK income  

The Government is considering bringing all non-resident companies receiving taxable income from the UK into the corporation tax regime. In 2017, the Government will consult on the case and options for implementing this change with a view to ensuring that all companies are subject to the rules which apply generally for the purposes of corporation tax, including the limitation of corporate interest expense deductibility and loss relief rules. While not entirely clear, it is presumed that this only applies to companies which are currently subject to UK income tax on income and in particular has implications for real estate owning companies.


Tackling marketed tax avoidance schemes 

Following a consultation, the Government has confirmed that it will introduce a new penalty for any person who has enabled another person or business to use a tax avoidance arrangement that is later defeated by HMRC and draft legislation is to be published shortly. The Government will also remove the defence of having relied on non independent advice as taking 'reasonable care' when considering penalties for any person or business that uses such arrangements.

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