Tag Archives: inward investment

Reform of Corporation Tax Losses and Corporate Interest Restriction Regulations

The Corporate Interest Restriction is one of two strands of the Governments modernisation of the UK tax system; with the other strand being the reform of corporation tax losses. My blog of 25 June made reference to the impact of the Corporate Interest Restriction (CIR) Regulations. Although it was mentioned in the context of both inward investment and property investment it is not restricted to those two arenas.

For many years the UK has been at the forefront of the Organisation for Economic Corporation and Development’s best practice, including measures against Base Erosion and Profit Shifting (BEPS). One of the strands of BEPS is prevention of excessive tax deductions for financing costs. Typically the financing would be intra-group with the lender being in a tax advantaged jurisdiction and therefore high levels of intra-group debt or higher interest rates would save the group tax.

CIR for groups with UK interest deduction over £2m

CIR came into force on 1 April 2017 and only has a fiscal consequence for groups whose UK interest deduction is more than £2m. £2m was taken by the UK Government as being a sum which excluded the vast majority of organisations from the legislation. If UK interest is more than £2m then there are formulaic calculations to determine the tax relief which can be claimed. Tax relief can be claimed on sums as great as 30% of EBITDA (as adjusted for tax). The Government acknowledges that this ceiling can be particularly restrictive for certain groups and therefore it is possible to apply a different ratio; one which is more dependent on external financing and UK profitability. However, this alternative strategy needs management and therefore the relevant election should not be made before medium term profit forecasts are developed.

When the interest restriction applies a group company should be appointed to notify HMRC of the group’s interest restriction and how the group wishes for that restriction to be allocated amongst the group companies. In the absence of the election HMRC can allocate the restriction pro-rata between the companies and HMRC’s allocation may not be appropriate for the group’s tax profile.

Corporation Tax Loss Relief

CIR was not the only new matter introduced on 1 April 2017. There was a revision to the fundamentals of corporation tax loss relief which became effective from the same date. Prior to 1 April 2017 unrelieved trading losses could only be carried forward and offset against future profits of the same trade. Other types of losses had their own specific restrictions.

From Spring 2017 there was a relaxation of the use of carried forward losses in a way to generate greater flexibility. However, conversely there was a restriction on the amount of the brought forward loss which could be offset in any one year. The relaxation applies to all corporates with the restriction only applying to larger, more profitable, companies. This mismatch is designed to assist the SME sector.

The relaxation allows losses to be carried forward against total profits of the same company and therefore makes them more flexible. Additionally losses can now be carried forward against subsequent profits of certain group companies, and not just the future profits of the loss making company. Before accessing this flexibility there are certain conditions to be met and those conditions cannot be assumed to be satisfied. They need to be checked.

The restriction occurs if losses exceed £5m. Prior to April 2017 brought forward losses could be offset against subsequent income without a ceiling. From 1 April 2017 the first £5m of brought forward losses can be used without restriction. However if profits of the later period are greater than £5m then only 50% of the profit above £5m can be offset by losses brought forward.

Although the Government feel that setting a restriction above £5m will remove all SMEs from the legislation I do not believe this is the case. It is common for our property development clients to have phenomenal years as sites come up for sale. If there are brought forward losses (e.g. due to the cost of financing in the period of building) then our clients cannot guarantee that all the losses are available for offset against subsequent profits. We are having regular discussions with property clients about sales forecasts and the extent that sales may occur over a number of years. Although a spread of sales is more common for residential development it may also apply to commercial sites.

1 April 2017 was a watershed for corporation tax in the UK with the introduction of both CIR and the group loss relief rules. Undoubtedly there are groups who will benefit greatly from the new rules and also groups which will experience restrictions.

International Secondments of Staff

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As businesses grow and expand into the UK it is quite common to send employees into the UK to oversee the expansion. There are various strategies to ensure that employees coming to the UK can do so tax efficiently.

Detached duty relief

An assignment to the UK may be a short term secondment. The UK allows those on short term assignments to receive certain benefits free of tax. If correctly structured the assignment can permit the individual to receive accommodation without a tax charge and permit flights back to their home country, for them and their family, to be provided free of tax. These make the UK an attractive destination for internationally mobile workers. The social security consequences of the secondment should not be overlooked and will be subject to separate considerations.

Dual contracts

If the individual is to be in the UK for a longer period of time then a split contract arrangement may be appropriate. These are suitable if the duties performed by the individual can be clearly separated between those undertaken in the UK for the benefit of the UK business and those the individual may undertake in other countries for other parts of the international group. Due to certain legislation it is only the UK element of the employment which will be taxed in the UK. Split contracts are a well understood technique which need appropriate circumstances to implement. To be effective they need to be correctly documented and have on-going recording obligations. As with secondment planning we have a number of clients who use this opportunity.

Tax equalisation

Tax equalisation is becoming more popular in the international market. Equalisation seeks to promote mobility amongst the staff by ensuring that they are not disadvantaged by going to another country whose tax rate may be higher than that of the home state. At a basic level equalisation ensures that the post-tax salary of the employee remains unchanged irrespective of the country in which they operate. There are variations on this theme. For example, one way tax equalisation (sometime known as tax protection) is for the sole benefit of the employee. If the tax rate in the overseas country is less than that of the home state, the employee keeps the benefit of the differential whilst the employee is protected should the overseas tax rates be higher than that of the home state.

Cost of living equalisation

Tax is only one aspect of the costs incurred by internationally mobile workers. Different countries have different cost of living and different governments provide different services to their residents. This is leading to the developing concept of cost of living equalisation. This form of equalisation looks at the total cost of living in a country compared to that of the home state and seeks to equalise the two. For example, state sponsored health care is free in the UK whilst some countries require the individual to take out a mandatory insurance plan. Moving to the UK would negate the costs of the insurance plan and therefore the cost of living in the UK would be different from that of another country. Conversely property rental in the UK is higher than many other parts of the world. Cost of living equalisation attempts to take account of these variations.

Anyone for UK Limited?

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Notwithstanding, the public euphoria gathering pace with the Diamond Jubilee celebrations and the 2012 Olympics around the corner, here are the five top reasons why the UK remains such an attractive location to do business;

1. Reputation and economic stability

The UK has a long established trading history and worldwide reputation built on strong ethical business standards and commercial acumen. Whilst the global downturn has stunted economic growth, compared to the rest of Europe
with economic unrest, bailouts, mass unemployment and threats of contagion, the UK appears positively bliss.

2. Company formations

Incorporating a company in the UK could not be easier. For a nominal cost and with a minimum share capital of a humble £1, a company can be incorporated with UK Companies House following a few clicks on-line. Contrast this with
Germany; minimum share capital EUR25,000, Italy ; EUR10,000 and Spain EUR3,000 for a private limited company, not to mention the extra regulatory and administrative burden.

3. Corporation tax rates/tax incentives

Tax will always be one of the
deciding factors in establishing the attractiveness of the UK. With the main rate of corporation tax currently at 24%, falling to 23% from 1 April 2013, UK Ltd enjoys one of the lowest tax rates compared to its main European competitors; Germany, France and Italy all have corporation tax rates in excess of 30%. The UK tax system also offers a wide range of tax/financial incentives including tax treaties with the sole purpose to attract foreign investment.

4. Infrastructure and communications network

UK offers a world class transport network linking mainland Europe and the rest of the world and in Heathrow boasts one of the busiest airports in the World. The UK also has an extensive broadband market and one of the strongest IT infrastructures in the world.

5. Low asset valuations/favourable exchange rates

Cash rich foreign investors continue
to benefit from depressed property valuations post the September 2008 crash. Coupled with the fall in Sterling against other currencies, has there ever been a better time to invest in the UK London property market?

Inward investment in the UK – tax certainty and fairness

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One of the difficulties that Government have is to strike the three way balance between tax certainty, tax simplicity and tax fairness. The recent headlines around Barclays Bank’s tax structuring brings this dilemma into focus.

The UK is seen as having a tax regime which is stable (i.e. certain) and businesses are treated fairly by the taxing authorities. Despite this we have one of the, if not the, longest tax codes in the world. This does not imply simplicity.

The UK is often held as an example of a fair tax system. Many non-British nationals find it hard to believe that we have a self-assessment regime for individuals and corporate which effectively require the taxpayer to self-determine their liabilities. The tax calculation is not necessarily subject to any form of review by HMRC. Compare that with for example the recent European convention on human rights case where a shopkeeper in the Ukraine claimed that their human rights had been violated by the actions of a tax police squad who, during a premises visit, allegedly, assaulted a business employee. Even the concept of a tax police is alien to a UK national.

The UK enhances its reputation for certainty by consulting with the taxpayers before implementing wide ranging legislation and by avoiding retrospective legislation.

Fairness and certainty are two of the many reasons that the UK is an attractive place for inward investment. Our tax code attracts investment with incentives such as tax free perks for immigrating staff, the non-domicile regime, a wide network of tax treaties, the lack of dividend withholding tax and the substantial shareholding exemption. Some of these incentives have been varied in a way which reduces their impact. An example being the introduction of the remittance base user charge. Even when they are varied the changes have been well trailed by HMRC which demonstrates that it is possible to change legislation whilst still retaining the certain nature of the UK’s tax code.

Recent actions to retrospectively close down Barclays tax structuring may be understandable in the context of the tax at stake and the perceived artificiality of the arrangements. My concern is that this retrospective legislation will have a long term disadvantage of reducing the UK’s standing in the area of certainty. Only time will tell.