2012 Autumn Statement and other festivities

Practical Law UK Articles 7-522-9150 (Approx. 23 pages)

2012 Autumn Statement and other festivities

by PLC Tax

A cold Autumn

This is not Autumn; it is December and we know our rights. We are looking for mince pies, yule logs and dreadful jumpers. We want shiny, extravagant presents in little boxes and shinier, preposterous presents in big boxes. We want tinsel and flashing santas, nodding reindeer and dreadful dancing at office parties.

This is not what we have received. Instead, the tax legislation winter fairies have decided that what we needed was More Paper. And so we have received another 1073 pages of tax legislation. This did not go unnoticed. Simon Skinner (Travers Smith) said:

"Size - it matters, we all really know that deep down. When an "Overview" is published that runs to nigh on 300 pages, something has gone wrong."

Making a similar point, Philip Gershuny (Hogan Lovells International) commented: "Quantity is no substitute for quality when it comes to making tax or indeed any other legislation". As Charlotte Sallabank (Jones Day) put it: "plenty to digest in the build up to Christmas!".

The headline grab was the cut in the corporation tax rate to 21%, effective April 2014. This was well received, of course, although Sandy Bhogal (Mayer Brown International) was unclear "whether the lowering of the headline corporation tax rate is enough to convince that the UK is open for business when the small print suggests continued uncertainty and increases in compliance costs".

The GAAR: a christmas cracker

So much better than socks or a jumper (but, speaking personally, not as good as finding Daniel Craig in your christmas stocking), more practitioners commented on the draft legislation enacting the general anti-abuse rule (GAAR) than on anything else. Ashley Greenbank (Macfarlanes) described it as the "centrepiece" of the Autumn Statement measures. A rather exceptional political climate has catapulted the GAAR from the unthinkable to the inevitable and, so it seems, onto the statute books. 'Tis the season for nostalgia, and so Hartley Foster (Field Fisher Waterhouse) was entitled to indulge in recollections of a previous era:

"In 2005, HMRC announced (in somewhat Panglossian fashion) that tax avoidance would be ended by 2008; the Autumn Statement implicitly confirms that, some four years later, this aim has yet to be achieved, and, indeed, probably never will be."

Jonathan Cooklin (Davis Polk & Wardwell) described the GAAR as "akin to a super-purposive construction rule". Chris Bates (Norton Rose) thought the rule would "place heavy demands on advisers’ judgment as they wrestle with understanding the implied purpose in the provisions of a tax code developed in piecemeal form and laden with inconsistencies".

Has anything changed?

There has been some tinkering to the drafting of the GAAR. Murray Clayson's (Freshfields Bruckhaus Deringer) view was that the legislation had "benefited a bit from HMRC's conscientious engagement with industry" and Darren Oswick (Simmons & Simmons) described the changes as "generally welcome". Tom Scott (McDermott, Will & Emery) said "Reference both to contrived or abnormal steps and the exploitation of legislative shortcomings will make it easier (though still not altogether easy) to see the boundaries." The government has also published draft guidance on the application of the GAAR.

But the residual criticism remains

Despite the pervasive air of exhausted resignation (we just can't bear to argue about it anymore), the measure remains unpopular, and a further revision does not change this fundamentally.

The residual fear is that a GAAR will produce significant uncertainty in the marketplace, described by Neil Warriner (Herbert Smith Freehills) as "the last thing that business wants to see". Certainly, it is difficult to be certain that, as currently drafted, the GAAR will not apply to complex commercial transactions in which sensible tax planning has played a part. In particular, the double reasonableness test remains although, as Vimal Tilakapala (Allen & Overy) observed: "[HMRC] has amended the list of factors to be taken into account - which may go some way to putting the focus of the GAAR on artificial and contrived transactions."

Sandy Bhogal thought that "the biggest concern remains the gradual erosion of the rule of law". Richard Carson (Taylor Wessing) also made the following point in relation to the remit of the sub-panel:

"More fundamentally, the requisite opinions of the 3-member sub-panel appear to be confined to the question of whether entering into the arrangements was a reasonable course of action and do not extend to the application of the "main purpose" test. It is questionable whether it makes sense to narrow the Panel's remit in this way, given the inter-relationship between these statutory hurdles."

Michael Flesch QC (Gray's Inn Tax Chambers) thought the government's insistence that the GAAR should operate within the self-assessment regime was "an inappropriate and unreasonable requirement".

William Watson (Slaughter and May) concluded:

"The draft Guidance has many sensible things to say, but there has been no real improvement in the legislation itself. The taxpayer will not necessarily be safe merely because the wider transaction is entirely commercial, nor even where the arrangements are in line with practice accepted at the time by HMRC."

Madam, do have some more

Notwithstanding the GAAR (ostensibly a rule of general application), a significant proportion of the draft Finance Bill 2013 was also devoted to specific anti-avoidance legislation. Lee Squires (Hogan Lovells International) commented that it was "perhaps ironic that the publication of draft legislation and guidance on the GAAR, which Graham Aaronson hoped would reduce the need for specific anti-avoidance provisions and so simplify the UK tax code over time, should be accompanied by a plethora of targeted anti-avoidance rules (TAARs)".

And one for luck...

As well as the GAAR, and the TAARs, and the announcements in relation to multinationals (see Multinationals: welcome guests?) there was another more subtle but potentially hugely significant announcement. As part of the Autumn Statement, the government announced that it would consult on using the procurement process to deter tax avoidance and evasion, with a view to the new arrangements being effective from 1 April 2013. As James Bullock (Pinsent Masons) explained it, the "tax compliance records of private sector bidders could become a relevant factor in the award of government contracts". Ian Hyde (Pinsent Masons) made the point that:

"We not only have specific anti avoidance rules on identified problems ... and the General Anti Avoidance Rule but, perhaps most significantly using the leverage of potentially withholding government contracts to persuade companies to behave. The further the Government gets away from direct legislation and into generic solutions the risks of creating a woollier system of tax administration. A predictable tax system is as much a hallmark of an attractive international destination as a competitive headline tax rate."

Multinationals: welcome guests?

It has been a rather extraordinary year for the multinational in the corporate tax world. Once the preserve of the grey-suited (no sartorial offence to our brethren intended), the tax affairs of the multinational are discussed ("castigated" says Andrew Loan (Macfarlanes)) everywhere, and by everyone and his dog.

It seems it does not matter that participants in the debate demonstrate the intellectual rigour of a donkey if they also have its belligerence. Tax is most definitely no longer the preserve of the qualified adviser.

It is of course important that the public should participate in the debate, but in order to do so they must be well informed. This is not what has happened, and the degree of misinformation purveyed by a vast section of the media is regrettable.

The court of public opinion has in particular become incensed by aggressive tax planning by multinationals, described rather elegantly by Tony Beare (Slaughter and May) as "tax tourism". As a result of massive public pressure (fuelled largely by an unseemly media feeding frenzy and the violently wagging finger of Margaret Hodge MP) Starbucks has taken the simply extraordinary and unprecedented step of offering to pay more UK tax. The move does nothing to encourage belief in a clear and authoritative tax authority or foster adherence to the rule of law.

David Harkness (Clifford Chance) said: "Concepts like "fair share of tax" do not really seem meaningful in the context of trumpeting the lowest rate of corporate tax. It is also important not to lose sight of the other taxes companies pay and collect through operating in the UK and the wider economic benefits they bring."

Quite. Although if all we need to do is to pay a "fair" amount of tax we can ditch the 1073 pages and a lot else besides.

Where is the OECD initiative going?

A number of practitioners referred to the announcement that the UK, alongside France and Germany, would provide additional resources to the OECD. to speed up international efforts to deal with profit shifting and erosion of the corporate tax base at a global level. Shiv Mahalingham (Alvarez & Marsal Taxand UK) was concerned that "aligning with France and Germany to attack MNCs may destroy the goodwill built up with business over the past few years." As David Harkness put it: "one to watch".

Shares, employment, marmite and egg nog: love or hate?

There was a little more yuletide jollity in the world of share schemes, though. Barbara Allen (Stephenson Harwood) commented that "the extension of entrepreneurs' relief to shares acquired pursuant to EMI options ... is most welcomed." Colin Kendon (Bird & Bird) said that "the Government are to be congratulated on allowing the one year holding period for entrepreneurs' relief ("ER") to run from the grant of EMI options rather than from exercise (as proposed previously). The change means "exit only" EMI option plans can continue with no need for option-holders to exercise early in order to start the clock running (thereby avoiding cash flow and risk issues)". Elaine Gwilt (Addleshaw Goddard) made the point that it "put EMI options in much the same position in relation to ER as applied under the old taper relief rules."

But the jolly cheer was not universal. The proposal in relation to shares for employment rights was met with almost universal (but fabulously articulate) derision.

Simon Yates (Travers Smith) (an angry man) put it thus:

"Regrettably the benighted shares for employment rights proposal continues to stagger towards the statute book, much in the manner of a zombie in an old B-movie. After the cheap Conference applause won by Osborne ("Hooray for sacking people! Especially without cause!"), evidently he feels he has too much personal authority invested in pushing it through to submit it to the merciful death it so richly deserves. The pre-announcement gestation of this policy was transparently unencumbered by the input of anyone knowing the first thing about tax, employment or company law."

Nicholas Stretch (CMS Cameron McKenna) also made the point that "the CGT relief for the much debated employee shareholder shares appears to be limited to newly issued shares. It makes little sense to restrict the relief in this manner and exclude transfer of existing shares from for example an employee benefit trust, particularly when it will lead to an unnecessary increase in share capital for many companies and accumulation of shares sitting in an employee benefit trust".

European friends join the party

As Martin Shah (Simmons & Simmons) noted: "A number of the measures proposed in the Autumn Statement and subsequent draft legislation show the ongoing evolution of the UK's tax rules to address issues of non-compliance with EU law." Certainly, a number of the draft Finance Bill provisions had their origins in the EU, but not everyone was convinced that enough of an effort had been made. One of the provisions included changes to the group relief rules to give effect to the decision of the ECJ in the Philips case. Eloise Walker (Pinsent Masons) thought "it would be a wonder if the new draft legislation turns out to be EU compliant". David Milne QC (Pump Court Tax Chambers) agreed, describing the drafting as "canny" but ultimately "vulnerable to yet another challenge in Luxembourg". Dominic Stuttaford (Norton Rose) agreed giving the provisions a "guarded welcome - but a speedier and more positive response would have been even more welcome". Jonathan Schwarz (Temple Tax Chambers) commented that "sailing as close to the wind as it can manage with respect to EU law and disregarding international obligations hardly sets a good example when taxpayers are being pressed not only to comply with UK tax laws but also to refrain from immoral tax behaviour".

Another example of Europe's influence was the further revision of the anti-avoidance rules dealing with the attribution of offshore gains. Paul Hale (Simmons & Simmons) welcomed the raising of the de minimis threshold under the rules from the current 10% to 25%, commenting:

"This will keep the great majority of bona fide offshore funds out of the scope of these rules, but does not put the position of funds which are at the seeding stage beyond doubt - these will have to rely on the non-tax avoidance motive test. It would have been better to exempt funds expressly - and the failure to do so may mean that the provision remains incompatible with the EU Treaty freedoms."

No gifts for banks

The cut in the headline rate of corporation tax was of no use to the banks, for whom it is counteracted by the increase in the bank levy (again). The increase in the full rate had been announced in the Autumn Statement but the increase in the rate for long-term liabilities was an unexpected surprise in the draft Finance Bill 2013 provisions. Adam Blakemore (Cadwalader, Wickersham & Taft) made the point that:

"The bank levy remains a fairly blunt tool in tax policy terrms, albeit currently a politically expedient one, with no direct correlation between the rate of the levy and the actions undertaken by individual banks to stimulate lending to UK businesses."

Lots of property but no mansion tax

There were a series of announcements and amendments relating to the Annual Residential Property Tax and the 15% SDLT charge to property held by companies. Many of these were well-received. John Challoner (Norton Rose) said "The draft provisions on the Annual Residential Property Tax and the 15% SDLT rate are very welcome as they exclude property rental businesses from the charges." Mark Baldwin (Macfarlanes) agreed that "the basic position of taking businesses out of the new regime can only be good". Nikol Davies (Taylor Wessing) was pleased that "the proposed changes do show that the Government is at least listening to responses to consultations".

But Richard Croker (CMS Cameron McKenna) thought that "the proposal to tax UK corporates holding high value residential property to CGT rather than corporation tax so that they pay the same rate, indicates a certain amount of muddled thinking in this area". In a similar vein, Nick Beecham (Field Fisher Waterhouse) commented that "using a charge to capital gains tax to effectively enforce the payment of SDLT is illogical and produces some perverse results". John Christian (Pinsent Masons) was also unhappy that the proposed changes to the SDLT transfer of rights rules would "introduce complexity and uncertainty into commercial transactions. The introduction of a tax avoidance test on top of the heavily rewritten legislation (and the existing SDLT anti- avoidance provisions) is unnecessary".

Still no mansion tax, though. (Cue Vince Cable MP shaking his head pointedly during this portion of the Autumn Statement. Bah humbug.)

Christmas cheer for HMRC

In the context of the current economic environment (threats of a triple dip recession, more austerity measures with the spectre of more to come), the announcement of £77 million of additional funding to HMRC for tackling tax avoidance and evasion is all the more remarkable. It represents real investment in HMRC as compared with all other government departments and was commented upon by a number of advisers. Susan Ball (Clyde & Co) said: "It is good to see that more resources are intended for HMRC: if they have the resources to use their existing powers properly, and do so, they should find them quite adequate."

A number of advisers anticipated that HMRC would use the a significant portion of the additional funds to mount challenges on the transfer pricing arrangements of multinationals. In particular, Richard Sultman (Cleary Gottlieb Stein & Hamilton) anticipated "enhanced HMRC time and effort in investigating and challenging current transfer pricing practices". Geoffrey Kay (Baker & McKenzie) agreed, and considered that the funds would be used to "strengthen HMRC's risk assessment capability across the large business sector. Expect, therefore, a continuing focus from HMRC on transfer pricing compliance". There was a warning, though, from Caspar Fox (Reed Smith) who said that "the Government should not risk undermining the UK's competitiveness for corporates by unilaterally adopting a more aggressive stance on transfer pricing".

And more festive titbits

In the context of other announcements, the revisions to the taxation of oil and gas were well received. Michael Thompson (Vinson & Elkins) described them as "an impressive product of a great deal of consultation and painstaking work on the part of the HMRC/Treasury team and their industry counterparts."

Revisions were also made to the CFC legislation. Conor Brindley (Pinsent Masons) observed that "those improvements are welcome, however the fact that the CFC legislation already requires amendments – it has not come into force yet - does not bode well".

Louise Higginbottom (Norton Rose) commented that the "further reduction in the limits on contributions to pension schemes and the life time limit are understandable, but raise concerns that the added complexity for managing defined benefit schemes may be a further nail in their coffin".

Response to the provisions on disincorporation relief were rather muted. In particular, Mathew Oliver (Bird & Bird) mused that "I was hoping that they might increase the size of company qualifying. At a £100k market value asset limit this really is looking at the smallest businesses".

And a happy new year to whom?

This last year has seen what Michael Anderson (KPMG) described as a "backdrop of unprecedented press scrutiny into the tax affairs of, particularly, businesses headquartered outside the UK". The court of public opinion is increasingly pertinent but not better informed.

Andrew Prowse (Field Fisher Waterhouse) warned that "these are interesting times for tax lawyers, although a chill wind doth blow and tax professionals could quickly become the new bankers." (It seems likely Andrew's point relates to the issue of vilification, rather than pay, sadly.)

A rather appealing illustration of the increasing involvement of the public is found in HMRC's consultation response document to the GAAR. It states:

"HMRC received over 14,000 responses from a range of businesses, representative bodies, trade associations, professional bodies, firms and individuals. Of these, 169 were substantive responses replying to the specific questions raised in the consultation document."

Does this mean that over 13,831 responses received by the government on the GAAR were non-substantive? What did these people have to say? Clearly the public interest is growing.

And as the legislation proliferates, so does the problem. The result is a rather horrible mismatch of understanding between the tax industry and the public. Whilst it must be in the UK's interests to have a competitive tax system that is responsive to public opinion, that public must be properly informed.

Where and how should this misunderstanding be resolved, and on what platform or forum? Who is responsible for facilitating informed debate? If it is in the interests of the multinationals to correct the misinformation, how can they do so? It is clear, for example, that they did not take good advantage of their place before the Parliamentary Accounts Committee.

These are big questions. But fortunately for tax practitioners Christmas comes not once, but twice a year. Perhaps we can resolve these issues by Budget time in March. Now get me some brandy and a mince pie; what's for lunch?

Comments in full

Barbara Allen, Stephenson Harwood LLP

"The Government, in its continuing efforts to foster wider employee share ownership, has proposed a number of legislative changes. It is the extension of entrepreneurs' relief to shares acquired pursuant to EMI options which is most welcomed. Apart from removing the 5 per cent shareholding requirement, the Treasury has responded to representations by starting the 12-month holding period from the date of grant of the option instead of from the acquisition of the shares on exercise, as was originally proposed. This means that private companies can still make the exercise of EMI options conditional on an exit event.

Whilst the Treasury has said that it has no current plans to increase overall participation limits for tax-advantaged share plans, certain recommendations made by the Office of Tax Simplification are being adopted. Harmonising retirement provisions and removing the requirement to include a specified age across CSOP, SAYE and SIP as well as removing anomalies where participants leave as good leavers are all positive steps. For private companies, the scope to use shares which are subject to restrictions opens up new possibilities to introduce a CSOP, SAYE or SIP."

Michael Anderson, KPMG LLP

"The Autumn Statement and draft Finance Bill this year have taken place against a backdrop of unprecedented press scrutiny into the tax affairs of, particularly, businesses headquartered outside the UK. At the same time, the Government is striving to make the UK’s tax regime competitive on a global scale. The Finance Bill was therefore always likely to contain a balance of stimulus and anti-avoidance measures.

A key anti-avoidance measure is of course the introduction of the General Anti Avoidance Rule (GAAR). The new published draft guidance will certainly help taxpayers assess whether the GAAR applies to them although the absence of a clearance mechanism will inevitably lead to uncertainty.

A number of changes have been announced in an attempt to make UK tax legislation compliant with EU law, for example, a change to the group relief rules affecting overseas losses and a new relief to defer the tax payable by a company migrating its residence from the UK to elsewhere within the EEA. Arguably, though, HMRC has not gone quite far enough and this may still lead to further challenges by taxpayers or the Commission."

Mark Baldwin, Macfarlanes

"The changes the government has made to the proposed high-value dwellings regime in response to concerns from businesses (e.g. around the very narrow property developer exemption, and the impact of the proposals on funds and other property letting businesses) are very welcome. Although issues of detail remain to be resolved (and more draft legislation is planned for January) the basic position of taking businesses out of the new regime can only be good. It is disappointing that the draft proposed CGT legislation (which will affect many family holding structures) has not been published. The statutory rebasing (taking pre-commencement gains out of the tax charge) is welcome, but this may be of limited value where interests in an asset holding vehicle also stand at a gain. What the government really needs to do to encourage "de-enveloping" and avoid the allegation that this is really a "non-dom stealth tax" in breach of previous undertakings is to provide a window of opportunity in the form of a relief under which properties can be taken out of company and trust structures into personal ownership free of immediate tax charges without the need for complex structuring."

Susan Ball, Clyde & Co

"The proposed provisions seem well-intentioned and there are some useful ideas for small businesses. The overall impression is that any provision benefitting the taxpayer is dominated by the refinements intended to prevent abuse - this should become unnecessary if the GAAR comes to be trusted by both HMRC and the taxpayer to do its job. I am not confident that this will be the case.

It is good to see that more resources are intended for HMRC: if they have the resources to use their existing powers properly, and do so, they should find them quite adequate."

Chris Bates, Norton Rose LLP

"The consultation process on the proposed general anti avoidance rules (GAAR) produced a torrent of response and it is encouraging that much of what was said has been taken into account in particular in securing that the advisory panel can be seen as independent.

The government have taken a conservative line on commencement so that transactions entered into before Royal Assent in 2013 will be outside the scope of the GAAR, which should reassure taxpayers that their existing tax affairs should be unaffected, although steps forming part of wider arrangements which were planned to take place in the future may be caught.

The greatest concern with the GAAR is that it may lead to uncertainty which will inhibit transactions which are not abusive and lead to extra expense and delay. The draft guidance, which has been published for consultation, is intended to be a key protection against uncertainty, and is generally to be welcomed. The draft guidance recognizes, however, that “subtle nuances” of fact may determine whether the GAAR applies and that will make it difficult to define a clear boundary for its application. The “super purposive” approach to legislation which is required in assessing the application of the GAAR will place heavy demands on advisers’ judgment as they wrestle with understanding the implied purpose in the provisions of a tax code developed in piecemeal form and laden with inconsistencies."

Tony Beare, Slaughter and May

I think that the main point of interest arising this month was the press release and written ministerial statement on tax avoidance and evasion published on the 3rd.

It is clear that, going forward, multi-national groups will be under increased pressure to show that a fair measure of their overall profits are being subjected to tax in the UK and that avoidance of UK tax is going to be both less desirable and more difficult. The new GAAR will obviously play a role in that but it would seem that transfer pricing policies are also going to be subject to more rigorous testing.

It remains to be seen whether other jurisdictions will adopt a similar approach. It will also be interesting to see whether there is any pressure within the EU to limit the tax tourism that inevitably results from competition for business between the various member states. Interestingly, the incremental one per cent. reduction in the corporation tax rate from April 2014, which is part of that competitive approach, should mean that UK tax avoidance is not as attractive as it once was.

Nick Beecham, Field Fisher Waterhouse LLP

Following delivery of the Autumn Statement, HMRC has confirmed that draft legislation for the new regime will be published on 11 December. The consultation process ended in the summer. Some notable representations received by the Government during the consultation process related to the following issues:

The very short available time for restructuring if the new regime comes into effect in April 2013.
Using a charge to capital gains tax to effectively enforce the payment of SDLT is illogical and produces some perverse results – for example under the current proposals, the sale of shares by a non-UK resident individual in a company owning a high-value dwelling will be outside the scope of SDLT and CGT, whereas the sale of the dwelling itself by the company will be subject to both SDLT and CGT.
The need to define precisely how offshore partnerships will be categorised for the purposes of the proposed annual charge and CGT.
A plea for some exemptions from the new regime, for example where there are unconnected investors in a fund which owns a dwelling.

It is to be hoped that the draft legislation will address these and other issues raised.

Sandy Bhogal, Mayer Brown International LLP

The prolonged recession and the knock-on effect to tax revenues has given rise to a convoluted Autumn Statement and a lengthy Finance Bill. Many of the measures were previously announced or part of ongoing consultations and focus on anti-avoidance in the real estate, financial services and international tax areas. It remains to be seen whether the lowering of the headline corporation tax rate is enough to convince that the UK is open for business when the small print suggests continued uncertainty and increases in compliance costs. This is a considerable issue for businesses when considered alongside new international reporting requirements like FATCA and increasing uncertainty with the EU seeking to restrict overly competitive tax regimes whilst not breaching treaty freedoms.

The recent publicity about multi-national tax planning seems to have provided the necessary political momentum to push through the GAAR and has even extended to increased investment in HMRC’s anti-avoidance capacity. These increased resources will likely focus on transfer pricing, permanent establishment and beneficial ownership issues, and the increasing influence of the OECD over UK tax policy should be noted here. However, the biggest concern remains the gradual erosion of the rule of law, with the Finance Bill containing some broad and inappropriately targeted draft legislation which will ultimately need to be clarified by non-binding guidance.

Adam Blakemore, Cadwalader, Wickersham & Taft LLP

A number of balancing acts were being performed by the Chancellor in the tax arena, resonating with the themes of “growth” and “fairness”.

In the current media-fuelled debate regarding the low amounts of corporation tax paid by certain non-UK headquartered multinationals, the focus on enhancing HMRC’s “risk assessment capability for large multinational companies” looked rather downbeat, especially when viewed in the context of recent debates in the Parliamentary Public Accounts Committee. However, when viewed in tandem with the announcement that the UK, along with France and Germany, would provide resources to the OECD to accelerate action to prevent global-level corporate tax base erosion a more balanced approach starts to emerge. Firmer cross-EU action against tax planning by multinationals, perhaps particularly those offering digitally-based services, looks likely to be forthcoming, if not necessarily imminent.

The rise in the banking levy also exposed some of the dilemma for the Chancellor in adopting a balanced approach. The bank levy remains a fairly blunt tool in tax policy terms, albeit currently a politically expedient one, with no direct correlation between the rate of the levy and the actions undertaken by individual banks to stimulate lending to UK businesses. With an introduction of an EU financial transactions tax through the enhanced cooperation procedure looking increasingly likely, the Chancellor may find that any consequent increase in banking business in the City of London could lead to an uncomfortable position of tacitly encouraging intra-EU migration of banking activities to the UK while continuing the markedly unfavourable corporation tax treatment for the banks when compared to other UK companies.

Conor Brindley, Pinsent Masons LLP

"Apart from the GAAR, none of the corporation tax related announcements were particularly earth shattering except for the confirmation that an "above the line" R&D credit would be introduced.

Further minor changes were made to the controlled foreign company (CFC) rules to ensure that they "work as intended, and to counter two tax planning opportunities". Those improvements are welcome, however the fact that the CFC legislation already requires amendments – it has not come into force yet - does not bode well.

Both the exit charge provisions (which apply when a company leaves the UK) and the group relief rules (following the recent ECJ ruling in Philips Electronics UK Ltd) will be amended to comply with EU law.

However, the confirmation that the "above the line" tax credit will be introduced is the main good news, particularly for companies operating in the life science and oil and gas sectors. The relief will move "above the line" – i.e. it will be accounted for as a reduction in R&D costs. Its incentive effect will therefore be felt directly by the scientists performing the R&D It also means that if the credit exceeds the company's tax liability, it will be paid out in cash.

James Bullock, Pinsent Masons LLP

"The Chancellor has confirmed that HMRC would be allocated an additional £77million to target avoidance, evasion and fraud, with the estimated tally being a staggering £22 million a year by the end of this Parliament.

The GAAR is likely to be a key Government weapon against aggressive avoidance. However, the focus on "high risk promoters" with a commitment to develop a "package of penalty and information powers" will also play a significant role in the deterrence of aggressive tax planning.

In addition, there were two fascinating suggestions buried in the small print of the Autumn Statement.

The first is the commitment to "use HMRC's resources to accelerate its resolution of avoidance schemes, including long-standing avoidance schemes involving partnership losses". This could mean that some long running tax enquiries are closed at last according to some form of settlement strategy.

The second is the intention of this Government to consult with the Cabinet Office on the use of the procurement process to deter tax avoidance and evasion. Tax compliance records of private sector bidders could become a relevant factor in the award of government contracts."

Richard Carson, Taylor Wessing LLP

"The GAAR Study Group memorably suggested that the introduction of a GAAR should eliminate "the need for a battery of specific anti-avoidance sub-rules". Nevertheless, the Autumn Statement included the announcement of an array of legislative changes targeted at perceived avoidance using financial products. The new "tax mismatch schemes" rules typify the problem - a target that appears substantially broader than necessary to prevent circumvention of the existing "group mismatch" legislation, coupled with obscure drafting including the open-ended requirement for "asymmetries" (asymmetries as between what?) - surely a recipe for uncertainty. More worrying, however, were the repeated warnings that partnership taxation is now under review - particularly if recent schemes marketed to individuals provoke structural changes to an area of the tax code which generally operates satisfactorily.

And what of the GAAR itself? The most striking features are that the range of taxes covered is unchanged (so IHT is, controversially, included); the "double reasonableness" test remains (with relatively peripheral modifications); adjustments consequential upon a counteraction may not increase a person's tax liability (a welcome change); and the GAAR will apply to arrangements entered into on or after Royal Assent. The new procedural provisions and the role of the Advisory Panel will attract close scrutiny. It is only the taxpayer who is subject to statutory time limits. More fundamentally, the requisite opinions of the 3-member sub-panel appear to be confined to the question of whether entering into the arrangements was a reasonable course of action and do not extend to the application of the "main purpose" test. It is questionable whether it makes sense to narrow the Panel's remit in this way, given the inter-relationship between these statutory hurdles."

John Challoner, Norton Rose LLP

"The draft provisions on the Annual Residential Property Tax and the 15% SDLT rate are very welcome as they exclude property rental businesses from the charges. There was real concern that these punitive taxes would extend much further than the purported targets (wealthy individuals avoiding SDLT by holding their homes through companies) but the exclusions from the charge put most of those fears to rest. Although the draft legislation for the extension of capital gains tax on residential property to non-UK residents has not been released yet, it is understood that property rental businesses will also be excluded from that."

John Christian, Pinsent Masons LLP

"The proposed changes to the SDLT transfer of rights rules will introduce complexity and uncertainty into commercial transactions. The introduction of a tax avoidance test on top of the heavily rewritten legislation (and the existing SDLT anti- avoidance provisions) is unnecessary. This will be particularly difficult to operate as the test looks not only at the purpose of the party claiming sub-sale relief but also at the purposes of other parties to the arrangements. The sub-sale relief is relied on in many straightforward commercial transactions, including by house builders and in development joint ventures, and it is important that those that may be affected by the changes review them and provide feedback on the issues that will arise in practice.

The changes to REITs investing in REITs were previously announced and will allow REITs to diversify their risk and facilitate REIT joint ventures. The conclusion that no changes should be made to accommodate social housing REITs was also announced earlier . It is however surprising that the Government have still not accepted the incompatibility of the REIT regime with residential assets. A social housing REIT was always going to be unlikely because of the yields available but a bigger issue for the sector is the fact that the REIT rules do not work with the residential business model and this is proving an obstacle to the use of REITs in the private rented sector."

Murray Clayson, Freshfields Bruckhaus Deringer LLP

"Two occasions for grudging congratulation.

First, the inevitable GAAR which, while adding quite a few unnecessary extra pages to our heavy statute books, and still doing its best to avoid defining its target as "artificial and abusive" schemes, has benefited a bit from HMRC's conscientious engagement with industry and other interested parties. An example is the (tentative) saving for "established practice" for which HMRC had "indicated its acceptance". And at least now we know from Mr Gauke that, consistent with the fundamental doctrine of the separation of powers, the GAAR Advisory Panel will not include HMRC representatives, albeit that the panel will be "established" by HMRC.

Secondly, we are presented with some reasonably prompt actions to address European law failings in several international tax areas: foreign close company gains, transfers of assets abroad, corporate exit charges and group relief. But (as with this year's CFC reform, and as ever) the reforms, despite ostensible best intentions, don't quite go the whole hog and therefore leave the legislation suffering from residual Euro-weaknesses."

Jonathan Cooklin, Davis Polk & Wardwell LLP

"The raft of measures published yesterday – happily coinciding with WPP’s decision to come back home to the UK – sees the Government balancing competing themes of ensuring that the UK has a highly competitive corporate tax regime (the UK aspiring to be a European corporate tax haven) whilst ensuring that everyone pays their “fair share”. The proposed reduction in the corporation tax rate to 21% is welcome, as is the EU makeover of the rules on exit charges, group relief, transfer of assets abroad and attribution of gains. A host of anti-avoidance measures, aimed both at corporates and individuals, is largely predictable.

The impact of the GAAR, which is akin to a super-purposive construction rule, remains a concern, particularly for those who advise on corporate investment into the UK. Will the GAAR materially impact on the type of tax planning adopted by US multinationals which has recently received so much public opprobrium? Surely that would take a revamp of the architecture of the UK tax regime and a long hard look at the appropriateness of the arm’s length principle. Will the GAAR enable more juice to be squeezed out of high net worth individuals, when around half of all income tax is already paid by just 5% of earners? Time will tell."

Richard Croker, CMS Cameron McKenna LLP

"The most notable development is the announcement relating to the 'fair taxation' of residential property transactions where the Chancellor is pressing ahead with the package of measures outlined earlier this year in relation to 'enveloped' structures, despite what have been profound objections to this course of action from many sources. The extension of CGT to non-resident non-natural persons may continue the drive to deter the future use of such envelopes which is not already achieved by the combination of the ARPT and 15% SDLT, but this may not happen as it seems the sale of the envelope itself will not be subject to CGT. It seems despite the consultation process the government is still convinced this move will help combat SDLT avoidance, although our experience and that of others is this is rarely if ever the motivation for such enveloping of residential property.

Although the additional exclusions for genuine business are welcome, the package is complex and will increase compliance costs for many whilst yielding revenue from a few. It also breaks with some fundamental historic tax traditions in the capital taxation of non residents, albeit in a limited way and apparently for a limited purpose, but somewhat arbitrarily if driven by SDLT avoidance. A number of aspects, including the proposal to tax UK corporates holding high value residential property to CGT rather than corporation tax so that they pay the same rate, indicates a certain amount of muddled thinking in this area, although this will be the subject of further consultation. There are surely simpler ways of clamping down on enveloping such as an SDLT charge on the sale of the envelope, as practised by the transfer tax regimes of other countries - properly targetting the mischief sought to be avoided. Do we need the additional complexity these measures introduce? The opportunity to review the comparative taxation of property belonging to residents and non residents has not yet been taken - perhaps it will have to be in due course?"

Nikol Davies, Taylor Wessing LLP

"Despite repeated calls for greater simplicity, the Finance Bill adds to the complexity of tax legislation and yet again incorporates new targeted anti-avoidance rules despite the proposed introduction of a general anti-avoidance rule.

Nevertheless, the proposed changes do show that the Government is at least listening to responses to consultations. Notably, the inclusion of a property trading, development and letting exemption from the application of the proposed annual charge, capital gains tax and even 15% stamp duty land tax on high value residential property held through non-natural persons is a positive development. The proposed application of capital gains only to disposals of residential property by non-UK non-natural persons (and not to disposals of shares in such entities) and to gains accruing after 6 April 2013 is helpful and should significantly reduce the need for reorganisation of property ownership before that date.

Moreover, the further reduction in the main UK corporation tax rate, the introduction of a repayable R&D credit for large companies and the creative sector tax reliefs (together with the introduction of the patent box), should assist in the Government’s stated aim of making the UK a more attractive place to establish and develop high tech and creative enterprises."

Michael Flesch QC, Gray's Inn Tax Chambers

"The key provision in the revised draft GAAR is the so-called “double reasonableness test” to be applied in determining whether tax arrangements are “abusive”: see clause 2(2). Although this test has been refined, it is still essentially a subjective test. Accordingly, the GAAR will not achieve one of its stated aims, the provision of certainty for taxpayers. Additionally, the Government continues to insist that the GAAR should operate within the Self-Assessment regime. This is surely an inappropriate and unreasonable requirement.

Hartley Foster, Field Fisher Waterhouse LLP

"Plus ça change, plus c'est la même chose may be the epitaph of the Autumn Statement. In 2005, HMRC announced (in somewhat Panglossian fashion) that tax avoidance would be ended by 2008; the Autumn Statement implicitly confirms that, some four years later, this aim has yet to be achieved, and, indeed, probably never will be. There are, however, a number of measures with the objective of curbing "tax avoidance" that have been announced. These include:

A General Anti Abuse Rule ("GAAR"). The Government has taken note of some of the responses to the consultation exercise. It will amend the "double reasonableness" test to seek to ensure that the GAAR is not a "broad spectrum antibiotic", but targets abusive arrangements only; and the commencement date will no longer be 1 April 2013, but will be the date that Finance Act 2013 becomes law. Extensive draft guidance has been published for consultation.
Finance Bill 2013 will give the Treasury the ability to make regulations to extend the information powers under the DOTAS rules.
New penalty rules for the promoters of structures disclosable under the DOTAS rules .
Certain anti-avoidance provisions (in relation to foreign bank levies, tax mismatch schemes, property return swaps, manufactured payments, and income tax relief on payments of patent royalties) come into force with immediate effect on 5 December 2012
a settlement opportunity for "long standing avoidance schemes involving partnership losses"
a consultation on using the Government's procurement process as a way of deterring tax avoidance (which suggests the tax compliance record of private sector bidders will become a relevant factor regarding the award of government)

In addition, an additional £77m has been allocated to HMRC to target "avoidance, evasion and fraud." Closing the tax gap by focussing on monies not accounted for through avoidance, and evasion, is clearly one of the Government's principal ways of raising additional monies. Given the increase in resources and the tools available to HMRC, that is likely to be successful; check-mating the players in the game of tax avoidance (despite the numerous extra pieces on one side of the board) is not."

Caspar Fox, Reed Smith LLP

"No wonder there were not many leaks in the press before the Autumn Statement, there was very little to leak!

The reduction in the corporation tax rate is welcome, and it reinforces my belief that this Government's aim is to get this rate down to 20%. However, the Government should not risk undermining the UK's competitiveness for corporates by unilaterally adopting a more aggressive stance on transfer pricing.

Given its subjective nature, transfer pricing will clearly be a key tool for targeting multinationals which are not paying their "fair share" of UK corporation tax. However, the Government should resist the urge to try and use it to claim some high-profile corporate scalps until the OECD's project on base erosion and profit sharing produces a common approach to this thorny issue. The Autumn Statement suggests that the Government may be seeking to progress matters on both fronts, with it committing more funds to the OECD project and vowing to increase HMRC's transfer pricing specialist resources.

The 11 December draft legislation is more illuminating. A welcome aspect is the announcement that the 12-month holding period for EMI options to benefit from entrepreneurs' relief will start from the date of the grant of the option, not its exercise - this makes the use of EMI options significantly more attractive than they already are."

Philip Gershuny, Hogan Lovells International LLP

"Quantity is no substitute for quality when it comes to making tax or indeed any other legislation. There seems to be no end to the volume of tax material that the Government creates. Because of the volume of it I am also unconvinced the continuous consultation process creates better legislation. I fear it may have become just a box ticking exercise. In this context it's very significant that changes are needed to the new CFC legislation even before it is out of the starting blocks, especially since the introduction of the CFC legislation has been one of the most consulted on pieces of legislation in tax memory. Although I never thought I would say this - bring on the GAAR if one of its aims is to cut down on the amount of legislation – and consultation - that we need. We are all drowning in paper. With regard to the GAAR it is good to see that the Government has listened to comments and has now given guidance on the "double reasonableness test". In the circumstances I think it is a reasonable view to hold that it is going to be a reasonably interesting new year!"

Ashley Greenbank, Macfarlanes

"HMRC is under a lot of pressure "to do something" about organized tax avoidance whether from the Press, the National Audit Office or the Public Account Committee. The Autumn Statement and Government announcements surrounding it were littered with measures which are designed to address these issues including additional resources for HMRC to tackle what it - or the Press - perceives as the most high risk areas: such transfer pricing, offshore avoidance and evasion, collective investment schemes and employment income. We will have to wait for the detail of the DOTAS changes until next year, but the centre-piece of the Autumn Statement measures was the publication of clauses to implement the GAAR and the first draft of the related guidance. The new draft of the rules includes the procedural provisions, but the main clauses show few changes from those published earlier this year: there is still no additional threshold test - whether a scheme is "abusive" is tested by reference to reasonableness not artificiality; the GAAR will still operate as a self-assessment rule - which seems counter-intuitive; and the guidance will remain under the control of HMRC - subject to the approval of the Advisory Panel. One relief is that the start date is now deferred to Royal Assent."

Elaine Gwilt, Addleshaw Goddard LLP

Together the Autumn Statement and Finance Bill cover quite an eclectic group of tax topics. Picking out a few of these topics:

This was generally a pro business Finance Bill - the further future reduction in the corporate tax rate does beg the question whether there should just be a flat rate? But should the Government approach the area differently. Given the recent furore over the lack of corporation tax take from multinationals how long will it be before the idea of an alternative minimum tax will be advanced as a means of underpinning the UK's tax base.
There were the annual targeted anti-avoidance provisions - are they a last hurrah pre the imminent GAAR? I think not.
It is great news the Government listened to feed back from industry on the 15 per cent SDLT rate. It would be further welcomed if the taxpayer did not have to wait until Royal Assent to benefit from the hard fought for exemptions. No surprises with the introduction of the annual charge although similar good news on the exemptions. More worryingly the Government is pressing on with the introduction of CGT for non natural non resident persons in relation to high value residential property - how will they collect the tax? The silver lining is that it will only relate to future gains - I foresee valuers being busy.
Only a very small number of responses to the consultation welcomed the new employee shareholder status. Fundamental concerns have been raised, particularly in relation to upfront tax charges. The main (and more politically controversial) provisions for the new employee shareholder status are being made via the Growth and Infrastructure Bill currently before Parliament.
The Chancellor had already announced that individuals acquiring shares upon the exercise of an EMI option can qualify for entrepreneurs' relief (ER) without having to satisfy the usual 5% tests as to size of shareholding and votes. In a further relaxation, it has been announced that the period in which an EMI option is held (prior to exercise) will count towards the 12 months holding period needed to qualify for ER. This is very good news and puts EMI options in much the same position in relation to ER as applied under the old taper relief rules."

Paul Hale, Simmons & Simmons LLP

Paul Hale welcomed the raising of the de minimis threshold under the attribution of offshore corporate gains rules from the current 10% to 25%. "This will keep the great majority of bona fide offshore funds out of the scope of these rules, but does not put the position of funds which are at the seeding stage beyond doubt - these will have to rely on the non-tax avoidance motive test. It would have been better to exempt funds expressly - and the failure to do so may mean that the provision remains incompatible with the EU Treaty freedoms."

David Harkness, Clifford Chance LLP

The Government is treading a fine line between its goal of having the most competitive tax system in the G20 and the measures announced to ensure multinationals "pay their fair share of tax". For companies that operate here and comply fully with the arm's length standard it doesn't help the debate by comparing tax paid with gross revenue. Proper enforcement of transfer pricing rules is perfectly right, as are challenges to the artificial diversion of profits, but complying with domestic legislation and OECD principles is not tax avoidance. Concepts like "fair share of tax" do not really seem meaningful in the context of trumpeting the lowest rate of corporate tax. It is also important not to lose sight of the other taxes companies pay and collect through operating in the UK and the wider economic benefits they bring. The OECD initiative is one to watch.

Louise Higginbottom, Norton Rose LLP

"The various measures encouraging growth, such as the annual investment allowance temporary increase and incentives for the high tech entertainment sector, should be welcomed. Further reduction in the limits on contributions to pension schemes and the life time limit are understandable, but raise concerns that the added complexity for managing defined benefit schemes may be a further nail in their coffin. Also, they present a major problem for those who cannot afford significant contributions until late in their careers - perhaps with the reduced lifetime limit a case could be made for the annual limit should be removed?"

Ian Hyde, Pinsent Masons LLP

"The Autumn statement reflects the current political climate of trying to clamp down on unacceptable tax avoidance. It is striking how the Government has not only devoted more resources to anti avoidance but also in contrast with years gone by, broadened the range of weapons it intends to use. We not only have specific anti avoidance rules on identified problems (for example on stamp duty sub sales) and the General Anti Avoidance Rule but, perhaps most significantly using the leverage of potentially withholding government contracts to persuade companies to behave. The further the Government gets away from direct legislation and into generic solutions the risks of creating a woollier system of tax administration. A predictable tax system is as much a hallmark of an attractive international destination as a competitive headline tax rate and HMRC have to make sure the new rules pass that test. "

Geoffrey Kay, Baker & McKenzie

"As part of the Government's reaction to the recent furore on tax avoidance, HMRC has secured an extra £77 million of funding, part of which is to be spent on additional resource to identify and challenge the transfer pricing arrangements of multinationals and to strengthen HMRC's risk assessment capability across the large business sector. Expect, therefore, a continuing focus from HMRC on transfer pricing compliance, although compliance or non-compliance with transfer pricing rules has not really been the issue.

The draft legislation includes two measures designed to bring UK rules into compliance with recent ECJ case law. The first provides for deferral of exit taxes on the migration of a company to another country in the EEA, although the deferral will be limited in time, something not contemplated by the ECJ decision. The second relaxes the rules on the surrender by way of group relief of losses by a UK permanent establishment of a company resident in an EEA country."

Colin Kendon, Bird & Bird LLP

"The Government are to be congratulated on allowing the one year holding period for entrepreneurs' relief ("ER") to run from the grant of EMI options rather than from exercise (as proposed previously). The change means "exit only" EMI option plans can continue with no need for option-holders to exercise early in order to start the clock running (thereby avoiding cash flow and risk issues). The one disappointment is that EMI option shares cannot be exchanged for other securities issued on a re-organisation in a manner which retains the exemption from the "personal company" requirement. EMI option-holders who exercise options granted within a year of an exit will not usually qualify for ER.

The Government should also be thanked for dropping the complicated proposals to impose PAYE and NIC on "engaging organisations" making payments to "controlling persons". What was needed (and is now proposed) is a minor change to IR35 to make it clear it applies to services provided by office holders that relate to the office. This change will mean NEDs who also provide consultancy services will continue to provide the consultancy services in their capacity as consultants free of PAYE and NIC.

The Government should also be congratulated on the tidy-up of CSOP, SAYE and SIP and the extension of tax relief to take-overs with a cash element. Taken together these changes are genuinely very helpful indeed. It is hard to remember a Budget in the last 20 years that has given employee share ownership such a high priority."

Andrew Loan, Macfarlanes

"As announced in the Autumn Statement, several personal tax allowances will be increased slightly in the next few years. Limiting increases to 1 per cent each year means that inflation and fiscal drag will continue to be the Chancellor’s best friends in raising the tax take by stealth.

While the likes of Starbucks, Amazon, and Google are being castigated in public for not paying enough tax in the UK, the headline main rate of corporation tax is set to fall again and again, to an attractive 21% from April 2014. The temporary increase of the annual investment allowance to £250,000 will allow many businesses to claim an immediate tax deduction for significant capital expenditure on plant and machinery in the next two years. Presumably businesses taking advantage of this tax planning opportunity will not be accused of being immoral."

Shiv Mahalingham, Alvarez & Marsal Taxand UK LLP

Missed opportunity to reduce the top income tax rate to 40% and restore faith in the UK being open as a centre to attract business.
Aligning with France and Germany to attack MNCs may destroy the goodwill built up with business over the past few years.
Additional resource at HMRC will lead to increased tax enquiries and additional costs for MNCs despite the fact that they may have legitimate and commercial structures in place.
Cutting the CT rate to 21% is welcome alongside other positive changes over the past two years such as the introduction of the patent box regime and CFC reform; however, these measures will be toothless unless the disproportionate attack on legal and commercial tax planning is stopped.

David Milne QC, Pump Court Tax Chambers

"Loss relief surrenderable by non-UK resident established in EEA state"

As the Explanatory Note says, this clause amending section 107 of CTA 2010 is "derived from" the judgment of the CJEU in Philips Electronics UK Ltd C-18/11 on 6th September, but it doesn't fully implement it. The draftsman has been a bit canny ! What the CJEU decided was that our group relief rules were contrary to freedom of establishment, and could not be justified, and for good measure, were disproportionate as well. As they stand,they provide that a non-UK company, resident in the EEA (say in Holland) and trading at a loss though its branch in the UK, can only set those branch losses off against UK profits of a fellow group member resident in the UK if it is not legally possible to set any of those losses off against profits in Holland. The UK said that they were concerned to make sure that the Anglo-Dutch group could not get double relief, once in the UK and once in Holland.

But both the saintly Advocate-General Kokott and the Court held that, in accordance with the principle of balanced allocation of taxing rights, losses made in the UK should be set-off against profits made in the UK, and it was up to the Member State of residence (in this case Holland) to make its own rules for preventing double loss relief (should it so wish). So the result was that the losses of the Dutch company made through its UK branch could be set off against UK group profits regardless of the tax position in Holland . However, this draft clause doesn't go quite that far. It limits the loss relief in the UK by providing that there is no relief to the extent that relief is actually given in another Member State. This is of course much better than having to show that the loss is not theoretically deductible in another Member State, but really, when profits and loss made through activities in the UK are involved, the CJEU says that you shouldn't even have to ask what the tax position in the other Member State is concerned.

So the clause, as drafted, is vulnerable to yet another challenge in Luxembourg!"

Mathew Oliver, Bird & Bird LLP

"On disincorporation relief, I was hoping that they might increase the size of company qualifying. At a £100k market value asset limit this really is looking at the smallest businesses. If HMRC value goodwill aggressively it will be very difficult to qualify. In relation above the line tax credits, whilst the Government is confident that the credit will be accounted for above the line, it would have been useful to have had explicit confirmation from the Big 4 accountants that they will all take this view. This will effectively determine whether or not that is the case. If they are after that result then I'm surprised they included R&D credits under the heading "corporation tax"."

Darren Oswick, Simmons & Simmons LLP

"The changes introduced to the drafting of the proposed GAAR are generally welcome, but are unlikely to satisfy those who argue that the "double reasonableness test" is fundamentally not fit for purpose. One of the most significant of these changes is the explicit inclusion of a reference, in the list of relevant factors, to the arrangements including "contrived or abnormal steps", which at least goes some way to providing the drafting with a sorely needed indication of the level of abuse necessary to engage the GAAR. Of course, the 100 pages plus of guidance will be crucial to the operation of the GAAR and that will take some time to digest."

Andrew Prowse, Field Fisher Waterhouse LLP

"Measures targeting tax evasion and avoidance rightly grabbed the headlines, conveniently coinciding with the public debate on those issues spurred on by the Public Accounts Committee and pressure groups such as UK Uncut. These are interesting times for tax lawyers, although a chill wind doth blow and tax professionals could quickly become the new bankers.

The 1% reduction in corporation tax is welcome, albeit not taking effect until 2014/2015. It's a shame that there was no corresponding announcement on the small profits rate, although the substantial increase in the AIA will be encouraging for those SMEs with funds to invest.

Our AIM team was pleased to see the Government consulting on expanding the qualifying investments for equity ISAs to include AIM shares and securities on other markets. AIM shares already qualify for EIS relief and can be held in SIPPs, and it is right that they be ISAable too. The impact remains to be seen, but it can only be good news for AIM companies and could over time increase the investment pool and improve liquidity. The reduction in the annual allowance for pension contributions to £40,000 from 2014/2015 may leave investors looking harder for a tax-efficient alternative such as ISAs and EIS/VCTs."

Charlotte Sallabank, Jones Day

"The CT rate of 21% for FY 2014 will hopefully further encourage corporates to headquarter themselves in the UK. For once there is no finance leasing anti avoidance included in the Autumn statement. Confirmation of the introduction of a GAAR was, of course, expected and the decision to shelve the proposals to require PAYE and NIC to be applied to payments to controlling persons is very welcome.

The revised draft GAAR legislation looks as though not too much damage has been done to Graham Aaronson's original draft clauses. The inclusion of arrangements that are in line with HMRC practice as non abusive is good news. The decision not to repeal section 75A of the FA 2003 is indicative of HMRC treating the GAAR as another anti avoidance tool rather than as anti abuse legislation which can replace the need for mini GAARs and specific anti avoidance legislation. It also appears unlikely that the introduction of the GAAR will bring about a reduction in the amount of new anti avoidance legislation going forward. The simplification of the rules on manufactured payments as proposed in the Consultation Document is good but the new rules are not operative until 1 January 2014 - the abolition of the requirement to deduct tax at source on MODs is particularly welcome. It is disappointing that the outcome of the consultation on possible changes to the income tax rules on interest did not result in a simplification of the source rules - something of a missed opportunity! Overall plenty to digest in the build up to Christmas!

Jonathan Schwarz, Temple Tax Chambers

Statutory residence test- Self-assessment at its best

The consultation document on the SRT issued on 17 June 2011 by HM Treasury and HMRC stated the belief that that the framework they outlined would allow individuals to assess their residence status simply and without the need to resort to specialist advice. The acid test whether this laudable objective could be achieved, would be the passage of legislation without the need for any Treasury explanatory notes nor any guidance published by HMRC thereafter. If there is confidence that the legislation stands on its own without explanation, the prospect that taxpayers can simply read the rules and apply them without taking specialist advice may be at hand.

The 55 pages of draft legislation (which include split year treatment for years of arrival and departure and temporary non-resident status) are written using at least three different drafting conventions in different parts and make liberal use of legal fictions. HMRC will shortly publish draft guidance to assist individuals on the application of the statutory residence test. HM Treasury and HMRC will need to choose another area of tax reform to experiment with simple self-explanatory tax rules that make tax advisers redundant.

Reform of two anti-avoidance provisions◦(i) the attribution of gains to members of closely controlled non-resident companies, and◦(ii) transfer of assets abroad

Publication of the summary of responses to the earlier consultation document published on 30 July 2012 shows the administration in defiant mood on this topic, despite the stated desire to comply with EU law. The document states nowhere that the Commission is not satisfied with the UK response to its Reasoned Opinions issued on 16 February 2011 and has referred the matter to the European Court of Justice for determination.

The draft legislation persists in using the expression "economically significant activities" notwithstanding the fact that in the Cadbury Schweppes judgement, the ECJ required ‘genuine economic activities’ as the prerequisite for a justifiable anti-deferral regime.

Despite criticism of the proposal to rewrite both regimes to circumvent tax treaties that the UK has concluded as being contrary to international law, the Government has decided to press ahead with the reforms. Sailing as close to the wind as it can manage with respect to EU law and disregarding international obligations hardly sets a good example when taxpayers are being pressed not only to comply with UK tax laws but also to refrain from immoral tax behaviour.

(Jonathan Schwarz is the author of Schwarz on Tax Treaties.)

Tom Scott, McDermott, Will & Emery UK LLP

"On the corporate tax front, the Bill continues the recent dual-pronged approach of combining features designed to enhance further the competitiveness of the system with a relentless attack on artificial avoidance.

The 2014 cut to the rate of corporation tax supplements a regime for inbound and outbound dividends, a more focussed CFC system, and rules for deductibility of interest which, though complex, look increasingly generous compared to recent and pending developments in other jurisdictions.

At the same time, in addition to the usual attacks on specific schemes, the GAAR looms large, but even there the new changes are to be welcomed. Reference both to contrived or abnormal steps and the exploitation of legislative shortcomings will make it easier ( though still not altogether easy) to see the boundaries. And the examples of abusive and non-abusive schemes which are set out for consultation are ( mostly) intuitive-- and happily do not seem to encroach onto structural supply-chain planning of the type currently in the media, for which a GAAR is too blunt a weapon."

Martin Shah, Simmons & Simmons LLP

"A number of the measures proposed in the Autumn Statement and subsequent draft legislation show the ongoing evolution of the UK's tax rules to address issues of non-compliance with EU law. The changes to the transfer of assets abroad and attribution of offshore corporate gains rules have been long anticipated and consulted upon, and will take a significant number of commercial transactions outside their potential scope. There is also the proposed introduction of a deferral mechanism for corporate exit charges, amendments to the group relief rules and further tinkering with the new CFC regime, although one wonders in a number of cases whether the proposals go far enough to ensure compatibility."

Simon Skinner, Travers Smith LLP

The draft Finance Bill is a mixture of the Good, the Bad and the plain Ugly.

Good: there are real signs of a more engaged consultation exercise in some areas, particularly for smaller businesses. Notable merits earned include for the change to extend the holding period for Entrepreneurs' Relief for EMI share options to the date of grant and the canning of the proposal for taxation of Controlling Persons (as an extension to IR35); and both the tax simplification for small businesses and disincorporation relief have real potential for small businesses. Progress looks to have been made on the GAAR too.

Bad: size - it matters, we all really know that deep down. When an "Overview" is published that runs to nigh on 300 pages, something has gone wrong. The possible changes to DOTAS remain troubling, particularly as this is an area that has had wide support as being appropriately proportionate and targeted to date, but the approach of the HMRC in this area gives me hope that the final outcome may not be too horrific.

Ugly: employee owners - why, oh why? Really, I've tried to come up with a justification for this and failed. No one outside the Cabinet seems to believe this is anything other than a monumental waste of time. It only adds to the feeling of rush and an overwhelmed HMRC: publishing a blank ConDoc on so important a measure as changes to the exit charge for corporates, while providing a light moment in an otherwise heavy budget, is just embarrassing and cannot help lift the impression that HMRC needs a serious injection of resource."

Lee Squires, Hogan Lovells International LLP

"Despite the voluminous documentation released on 11 December, there was little of interest to VAT practitioners in the Autumn Statement or draft Finance Bill (unless you happen to act for the operator of a small cable-suspended transport system). The rumours of an increase in the VAT rate proved unfounded.

The UK has put itself on a collision course with the European Commission by opting to retain the reduced rate of VAT on the supply and installation of energy-saving materials in residential accommodation, and it is likely that the Commission will now proceed with infraction proceedings before the CJEU.

A major theme this year (perhaps unsurprisingly given the recent widespread media attention) was combating tax evasion and avoidance. The Autumn Statement was preceded by an announcement on 3 December which appeared to elide tax evaders with tax avoidersinto a new category of "tax dodgers", overlooking the fact that tax avoidance is a lawful (if perhaps "morally wrong") activity.

It is perhaps ironic that the publication of draft legislation and guidance on the GAAR, which Graham Aaronson hoped would reduce the need for specific anti-avoidance provisions and so simplify the UK tax code over time, should be accompanied by a plethora of targeted anti-avoidance rules (TAARs). Given that the GAAR is meant to apply only to the most abusive tax avoidance schemes, it remains to be seen whether this ambition can be realised."

Nicholas Stretch, CMS Cameron McKenna LLP

"The income tax and where relevant NIC relief for shares withdrawn from a SIP or on the early exercise of SAYE or CSOP options before the third anniversary of the date of grant, is oddly limited to cash takeovers by way of general offer only and is not extended to include takeovers by way of schemes of arrangement. This is unhelpful in light of the number of takeovers effected by way of schemes of arrangement.

A further anomaly is that the income tax and NIC relief is only available if the takeover is not contemplated when the award of shares is made. Leaving aside the point of when exactly a takeover is contemplated for the purposes of the relief being withdrawn, the wording of the legislation means that any SIP shares acquired during an offer period, whether it be monthly partnership share purchases, awards of matching shares or shares acquired at the end of an accumulation period, would be fully taxable even though arrangements for those share purchases have been in place long before a takeover was on the horizon.

The CGT relief for the much debated employee shareholder shares appears to be limited to newly issued shares. It makes little sense to restrict the relief in this manner and exclude transfer of existing shares from for example an employee benefit trust, particularly when it will lead to an unnecessary increase in share capital for many companies and accumulation of shares sitting in an employee benefit trust.

The Government has also stated it is 'considering options to reduce income tax and NICs liabilities that arise when employee shareholders receive the shares, including an option to deem that employee shareholders have paid £2,000 for shares they receive'. The tax consequence of this could be that the first £2,000 worth of shares received by the employee would not be subject to an income tax and NICs charge. If so, this would be a very exciting development and may even be sufficient to change the general scepticism of why an ordinary worker would want to forfeit valuable employment rights in return for a speculative capital gains tax saving in the future."

Dominic Stuttaford, Norton Rose LLP

"I am pleased to see that the law is being changed in various cases to remedy EU law issues (see the announcements on exit charges and closely held companies/transfer of assets abroad). There remains the open issue of whether the changes are sufficient for the amended UK provisions to be in conformity with the relevant EU provisions. It is also disappointing that the changes have taken time to come through and particularly in the case of the exit charges provisions, that they are not at least retrospective to the date of the relevant ECJ judgement (which was over a year ago). So a guarded welcome - but a speedier and more positive response would have been even more welcome."

Richard Sultman, Cleary Gottlieb Stein & Hamilton LLP

"A lot has been said recently about multinational corporations adopting transfer pricing policies that divert profits away from the UK. The report of the House of Commons Public Accounts Committee, issued shortly before the Autumn Statement, was scathing about the transfer pricing practices of multinationals and HMRC’s efforts in dealing with them. The official response from HM Treasury was always going to be keenly anticipated.

Yesterday’s draft Finance Bill was silent on specific measures to address this. Of course this is unsurprising given the difficulties the Government would face in attempting to legislate for what it might consider is the “morally” appropriate amount of tax for such multinationals to pay in the UK.

It seems the more likely line of attack in the near term (aside from the media seeking to name and shame well-known global companies) is through enhanced HMRC time and effort in investigating and challenging current transfer pricing practices. The Autumn Statement announced £77 million of additional funding for tackling tax avoidance and evasion. I think we can expect a significant part of that to be directed towards this area."

Michael Thompson, Vinson & Elkins LLP

"The package of provisions published on oil and gas taxation, comprising both draft legislation and a draft "decommissioning relief deed", is an impressive product of a great deal of consultation and painstaking work on the part of the HMRC/Treasury team and their industry counterparts. The aim is to remove, in the context of an industry with hugely expensive long-term projects, some of the tax uncertainties that arise from our ebbing and flowing political system that hamper investment planning and efficient trading of North Sea assets. It is a rare example in a tax context of a potential win/win situation for Government and industry and possibly unique in seeking to create tax certainty by a contractual arrangement. There are a hectic few months ahead for ironing out the wrinkles, but, all in all, things are looking positive.

Much the same people at the Treasury and HMRC are also embarking on consultation on how shale gas exploitation in the UK might be encouraged through the tax regime. So, let’s hope both the environmental and the tax hurdles can be overcome and that our gas prices can start coming down soon!"

Vimal Tilakapala, Allen & Overy LLP

"Perhaps the most significant proposals related to the GAAR. HMRC received many comments on the previous proposals. A number of amendments aim to reflect those comments, although it is disappointing that other feedback has not been taken on board, and overall we remain concerned about the uncertainty the GAAR will cause business. Of particular interest is the central "double reasonableness" test for abusiveness, which had been criticised as being too wide. Unfortunately, HMRC has not amended the wording of the test, although it has amended the list of factors to be taken into account - which may go some way to putting the focus of the GAAR on artificial and contrived transactions.

Meanwhile, HMRC has been listening in the much more informal consultation on the tax treatment of tier 2 capital. It has abandoned the concept of linking the tax deduction to terms in an instrument which are required for the instrument to qualify as tier 2. Instead, a tax deduction will be allowed in respect of instruments forming part of a bank's tier 2 capital resources. This is a very positive development, although there is a little further to go to address the concerns of banks in this area."

Eloise Walker, Pinsent Masons LLP

“At 1073 pages of legislation and explanatory notes, this year’s draft Finance Bill is so far looking like a lot of sound and fury indicating not a lot that’s new, and you have to weep for the trees that have died to print the thing. The drop in the mainline corporation tax rate is nice to see, and everyone will be feeling relief to see it confirmed that the GAAR will not be going live until Royal Assent. There is of course the annual (nay, almost traditional by this point) amendment to the debt cap rules, and an alteration to the new controlled foreign companies rules before they even commence (I’m not sure whether to applaud HMRC for trying to fix quirks in advance or deplore the poor drafting that means they need to). Also to be noted with amusement is HMRC finally bowing to the Court of Justice of the European Union and first permitting the deferral of paying exit taxes when a UK company moves its tax residence to elsewhere in the EU, and second removing some restrictions on when EEA resident companies can surrender losses from their UK branches as group relief in the UK – but given HMRC’s track record in this area, it’ll be a wonder if the new draft legislation turns out to be EU compliant. Here we go again….

For the infrastructure sector, it’s not what is in the Finance Bill but what is missing from it that is a cause for concern - when we heard from the Chancellor that extra funding would be invested in infrastructure, it was exciting to speculate (briefly) that we might be about to see the much lobbied-for infrastructure tax relief become reality. No such luck - it looks like high effective corporate tax rates for infrastructure projects are with us to stay for the time being. What we don’t yet have enough detail on is the planned review of partnerships, and what the Chancellor intends in using the procurement process to deter tax avoidance. It is to be hoped that the Government is not going to kick an already strained sector when it’s down.”

Neil Warriner, Herbert Smith Freehills LLP

"At 1073 pages of draft clauses and explanatory notes coupled with 296 pages of "overview", the key point of interest for business is when will we see some genuine simplification of the tax code!

Obviously the headline is the further reduction in the CT rate to 21%, which is of course welcome, but much of the rest of the material is lengthy and complex.

Business will also be interested in the GAAR drafting, which seems to have been improved slightly but nonetheless retains some of the original features that are a cause for concern because they tend to lead to uncertainty, which is the last thing that business wants to see."

William Watson, Slaughter and May

"For me, the big story is still the GAAR. The draft Guidance has many sensible things to say, but there has been no real improvement in the legislation itself. The taxpayer will not necessarily be safe merely because the wider transaction is entirely commercial, nor even where the arrangements are in line with practice accepted at the time by HMRC. The arrangements do not actually have to be abusive, and I notice that HMRC no longer regards artificiality as a critical marker.

So the question is simply whether the transaction can reasonably be regarded as reasonable. I cannot imagine how a court will go about answering that.

Elsewhere, we have as promised an entirely new tax, the ARPT, which could easily morph into a fully-fledged “mansion tax”; and the extension of CGT in this area is going ahead, odd though it is in policy terms. But it is encouraging to see aspiration become reality with some genuine simplification of the very complex SDLT regime for leases. I also liked the much-improved (though not perfect) solution to the problem of “results-dependency” for banks’ Tier 2 capital."

Simon Yates, Travers Smith

"Regrettably the benighted shares for employment rights proposal contines to stagger towards the statute book, much in the manner of a zombie in an old B-movie. After the cheap Conference applause won by Osborne ("Hooray for sacking people! Especially without cause!"), evidently he feels he has too much personal authority invested in pushing it through to submit it to the merciful death it so richly deserves. The pre-announcement gestation of this policy was transparently unencumbered by the input of anyone knowing the first thing about tax, employment or company law. Then, following the startlingly brief three week consultation period, the Government was forced to publish a response document which amounted to the biggest collective raspberry imaginable for a proposal designed to be helpful. Question after question drew derisive answers from business, and only three respondents out of 209 suggested that they might be interested in taking it up.

It is extraordinary that the government continues to pursue this policy. It is manifestly of no interest to its target market - any last chance of any legitimate take up is surely eliminated by the continued failure to offer relief from the income tax charge that would arise on a buyback of a leaver's shares in the manner envisaged by the policymakers. However, despite provisions disqualifying shareholders connected with their employers, it offers a potentially large tax avoidance opportunity by dangling the carrot of a full CGT exemption to all (the OBR quantifies the eventual cost at £1bn per annum, of which it anticipates much will be attributable to planning). It can only lead to either widespread unintended tax benefits or great legislative complexity (with the associated diversion of precious, and limited, HMRC resources from worthwhile endeavour). This is a failure of government as well as of the government: all should have cause to to reflect on the inadequacies of our mechanisms for formulating and delivering policy if this measure ultimately becomes law.

The residential property wrapper rules also sadly but inevitably stay alive, in defiance of Osborne's Commons pronouncement that "we won't introduce a new tax on property" (OK, he'll introduce two). Happily, after a well-managed and extensive consultation, there are a number of sensibly targeted reliefs for entities acquiring property for legitimate commercial exploitation, but funds waiting to invest in high value residential property will have to wait a little longer: presumably due to constitutional constraints, the 15% SDLT rate will not disappear for them until Royal Assent. Again, though, as one leafs through the voluminous pages of new legislation, one can only regret the amount of scarce governmental resources expended on a measure of (at best) very limited scope, at a time when such resources are in dangerously short supply. It's possible, for instance, that someone at a less overstretched HMRC/Treasury might have noticed that the published condoc on deferring corporate exit charges was blank... "

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2012 Autumn Statement and other festivities | Practical Law