This decision was motivated by the fact that, having concluded that it has been systematically under-estimating income tax and corporation tax receipts, the Office of Budget Responsibility (OBR) has substantially cut its underlying forecasts for public borrowing. It is also calculated to make Britain more attractive to foreign investment during the period of relative political and economic uncertainty created by Brexit.

However, amendments have been made to the UK’s hybrid and other mismatch legislation ‘in respect of certain mismatches involving permanent establishments and the treatment of regulatory capital’. This follows draft clauses, published on 6 July 2018, which confirm that non-resident companies that carry on a UK property business or have other UK property income will be chargeable to corporation tax on income from 6 April 2020. This may require that they incorporate the UK's corporate interest restrictions and anti-hybrid regime when computing their corporation tax liability on rental income.

Changes have also been made to the definition of a permanent establishment for corporation tax purposes, with the impact most likely to be felt by 'non-resident manufacturing and distribution businesses that structure their UK operations to minimise their UK tax footprint'. According to the document, the Finance Bill 2018-2019 introduces an amendment to s1143 of the Corporation Tax Act 2010 (CTA 2010) with the intention to 'deny exemption from permanent establishment to a non-UK resident company for these activities if they are part of a fragmented business operation', with the activities in question including that a company 'either alone or with related entities, whether foreign or UK, carries on a cohesive business operation, either at the same place, or at different places in the UK'; 'at least one of them has a permanent establishment where complementary functions are carried on', or if 'the activities together would create a permanent establishment if they were in a single company'.

The corporation tax rate will remain as follows:

•             financial year 2019 (commencing 1 April 2019)                     19%

•             financial year 2020 (commencing 1 April 2020)                     17%

•             financial year 2021 (commencing 1 April 2021)                     17%

Howard Archer, chief economic advisor to the EY ITEM Club, comments: ‘A modestly brighter picture of the UK economy comes with the OBR raising its GDP growth forecasts for 2019 and 2020, while also making downward revisions for expected public borrowing over the next five years, especially for the current fiscal year 2018/19.

‘The OBR has substantially revised down its forecasts for underlying government borrowing. This largely reflects the OBR coming to the conclusion that it has systematically been under-estimating income tax and corporation tax receipts. This implies that growth is more tax receipts-rich than the OBR had previously reckoned. It also suggests that the government has got better at collecting tax receipts.’

Report by James Bunney