After his Autumn Statement, which may be UK Chancellor of the Exchequer George Osborne’s last if the Conservative party fails to be elected in next year’s general election, tax practitioners across the City have been besieged by calls from funds managers and banks nervous about the government’s proposals while real estate lawyers are facing a late night.
Richard Palmer, global head of tax at Ashurst, told Legal Business ‘there were rabbits out of the hat’ and City law firms will be ‘focusing on the raft of anti-avoidance measures’. Mirroring recent changes to tax legislation in Germany, Osborne pledged to half the amount of profits banks can offset historic losses against to lower their tax burden. It is first time that a bar has been put on utilisation of losses on balance sheets in the UK, which have historically been very generous, and will only apply to the banking sector. Shares in all the major banks dropped this afternoon, with Osborne expecting banks to pay an additional £4bn over the next five years as a result of the change.
Speaking to Legal Business, Brenda Coleman, a London tax partner at Ropes & Gray, said: ‘The restriction on utilisation of losses should not be entirely surprising; it was widely expected at the time of the financial crisis and is similar to rules in some other jurisdictions. But it is yet another example of how the banks are being singled out. It is however surprising that the amount of tax expected to be raised is around £700m-perhaps, lower than might be expected.’
Osborne also announced the introduction of the so-called Google tax, a 25% levy on ‘diverted profits’ to ‘make sure that big multinational businesses pay their fair share’. While detail was scarce on how diverted profits will be traced, the levy is a public pleasing measure after US multinationals Starbucks, Google and Amazon structured their businesses in the UK in a way that paid little or no corporation tax.
Richard Winston, a former tax partner at K&L Gates who has now founded US boutique Winston PA, told Legal Business: ‘Companies that establish low taxed entities with proper substance have the right to place their IP in that jurisdiction and charge deductible royalties to affiliated companies located in higher taxed jurisdictions, such as the United Kingdom or the United States. Governments are still having problems figuring out how to move away from “residence-based” tax systems, and when those governments attempt to develop new rules for taxing revenue from easily moveable IP, they usually create more problems than they solve.’
Those with sharp eyes will have also picked up on how the government is set to shut down a typical takeover route that has allowed public takeovers to occur without any tax being paid on the transaction. While it will make transactions easier, Osborne announced that long-held legal techniques of avoiding the 0.5% stamp duty cost on the sale of shares through the cancellation of shares by existing shareholders, with new shares issued and the purchaser paying a sum to the former shareholders, has been canned.
Palmer commented: ‘The Chancellor shutting down schemes of arrangement to take over companies, to avoid paying stamp duty, will mean there will be an increased cost of takeovers. The only surprise is that companies have been able to do this for so long now.’
In another surprise announcement, Osborne spelled out new stamp duty rates that will reduce for 98% of property transactions, while hiking up tax on residential property worth more than £2m from 7% to 12%.
Kyra Motley, an associate in the private client team at Taylor Wessing, said there ‘will be a dramatic impact on prime central London high value residential property, in both the immediate and long term future’.
Lawyers focusing on residential property are likely to be having a busier day than they might have been expecting, too. Motley added: ‘Contracts will need to be exchanged by midnight tonight for purchasers to avoid this new taxation regime. Those purchasing high value properties will likely now be in a rush to exchange contracts in the next few hours.’
tom.moore@legalease.co.uk