The fiscal background is one where the UK continues to run the highest annual budget deficit of any major country except Japan (though its accumulated national debt is still lower than in many comparable countries). Currently the deficit runs at about 5% of gross domestic product (GDP), and has therefore been cut to around half its level of five years ago following the devastation wrought to UK tax revenues in the aftermath of the global “credit crunch” around 2008.

The Chancellor of the Exchequer George Osborne confirmed his plans to restore the UK budget to balance by 2018, but this appears to require heavy cuts in some public spending programmes over the coming three years.

Corporate tax rates

It is confirmed that the corporation tax (CT) rate will fall from 21% in the coming fiscal year to 20% from April 1 2016.

Some changes have been announced to the draft clauses for the 2015 Finance Act on the new “diverted profits tax” (DPT) first announced in the pre-Budget report (PBR) last December.  Though it has been unofficially dubbed the “Google tax”, it remains very unclear which commercial sectors could in fact eventually be affected by DPT.

This tax is targeted at any companies who minimize their UK corporation tax through artificial arrangements of their international structures, including those involving the location of group companies holding intellectual property rights in low tax jurisdictions. DPT will operate separately from CT, being charged at a rate of 25% on a slice of profit deemed to have been artificially removed from the UK CT net. In the light of the current European Commission “state aid” review of Luxembourg’s allegedly favourable corporate tax treatment of Fiat Motor Finance, it is unclear whether any international asset finance groups could be affected by DPT in the UK.

The coming Finance Bill will give powers to allow HM Customs & Excise to require country-by-country reporting of corporate tax payments by international companies, according to the agreed OECD model.

The primary enabling legislation for a possible separate CT rate for Northern Ireland, first announced in the last PBR, passed through Parliament this week. If it were to be implemented, it is likely that a rate of only 10% would be adopted, as with the corresponding national rate in the Irish Republic. This does not seem possible in the immediate future, however, given a current hiatus over budgetary issues within the devolved regional government of Northern Ireland.

Investment allowances

The annual investment allowance (AIA), which allows 100% Year 1 write-offs of limited annual amounts of capital spending for each business or related group, was temporarily increased to £500,000 per annum from April 2014. It had been due to revert to only £25,000 from the end of 2015.

Today the Chancellor said that such a reduction at that time would not be appropriate. In effect he committed the present government to a plan to keep AIA at a much more substantial annual amount than £25,000 for the foreseeable future. However, he acknowledged that this decision would rest with the government to emerge from the election on May7, and said that the AIA level from 2016 would be announced in the next PBR towards the end of this year.

Assets funded by finance or operating leases where title does not pass to the customer do not benefit from AIA. However, the customer can utilize AIA on assets funded through hire purchase (HP) or conditional sale. The choice of asset finance facilities for micro-businesses and some other SME customers can thus be conditioned by the level of the AIA.

Among concessions in the tax treatment of UK offshore energy, the supplementary charge on profit (levied in addition to normal corporation tax) is to be cut from 30% to 20%; and there will be a change in the regime for capital expenditure allowances against that charge. From April 2015 62.5% of the cost of annual capital expenditure incurred will be exempt from the tax. This will not benefit any assets funded by conventional leases from outside the oil extraction industry, although some types of asset finance facility analogous with conditional sale could perhaps be eligible. 

Also announced or confirmed in the Budget statement are increases in capital allowances (CAs) for the production of films and certain television programmes, and for capital expenditure by orchestras. However, it seems that conventional lease funding will not benefit from these concessions, as the general restrictions on leasing companies taking advantage of enhanced CAs for specific assets or sectors will remain in place.   

More taxes on banks

While the CT rate has been falling, most asset finance groups in the UK are affected at group level by the bank levy which has been continually increased since its introduction in 2010. The Chancellor today announced an increase of almost a third in the annual levy rate (from 0.156% to 0.21% of each bank’s tax base) from April 2015.

The bank levy tax base is effectively the quantum of wholesale funding by major banks (i.e. total balance sheet after deducting shareholders’ capital and retail deposits, above an exemption limit of £20 billion per group). It affects the global business of banks based in the UK, with some double tax relief in relation to similar taxes imposed by other (mainly European) countries.

In a another new move aimed at banks, the Chancellor proposed that regulatory compensation payments to customers by banks will, from some point in the future,  cease to be deductible against profits for CT purposes.

This would in effect add a penal element to regulatory redress, as opposed to direct regulatory penalties which are already non-deductible. The major compensation payments likely to arise in the future, as in the past, will be on consumer credit contracts such as with the recent heavy compensation reimbursements on payment protection insurance (PPI) premiums.

However, as was also seen in recent years with interest rate swaps, compensation payments in relation to business-to-business finance contracts are also nowadays sometimes ordered by regulators.

Today’s announcements affecting banks come on top of the legislation foreshadowed in the last PBR, deferring banks’ future use of accumulated tax losses. This will allow for only half of any current annual profits to be relieved against carried forward losses with effect from April 2015. Together the imminent and promised changes add up to a continuing campaign to extract more tax revenue from UK banks.

Other announcements

Businesses that are partially exempt from VAT will no longer be able to take account of foreign branches in determining their recoveries of VAT on overheads. Asset finance contracts of the HP/conditional sale type give rise to partial exemption recoveries on overheads, though it seems unlikely that asset finance companies are among the principal targets of this change; and most of those in the UK market would possibly not be structured in such a way that foreign branches would be an issue.

The Chancellor announced a further move towards improving competition in the SME lending market, through broadening access to credit reference data. The British Business Bank will shortly invite expressions of interest from credit reference agencies and finance platforms that wish to be designated by HM Treasury to receive data from banks under powers contained in the Small Business, Enterprise and Employment Bill currently before Parliament.

As announced in last year’s Budget, the rates of company car tax charged on relevant employees are to be changed from April 2017, tilting the relative charges further against cars with higher emissions. This is of course of some interest to the fleet finance market.