tax reliefs Archives - London Chartered Accountants Blog

Much has been written about Land Remediation Relief (LRR) and the closely related Derelict Land Relief (DLR). In a nutshell these can provide land owners and property developers relief for up to 150% of qualifying costs of “cleaning up” contaminated land – eg, spend £500,000 and get tax relief against a deemed spend of £750,000. It’s very appealing.

But as they say, all that glitters is not gold and there are a few significant hurdles to get over.

Firstly, the claimant has to own the land. We all know that many deals are done on the back of “options” – where the developer who has invested years (and funds) bringing a scheme together never actually takes ownership of the land. Does this therefore bar him or her from benefiting from this generous tax relief?

Secondly, the landowner must clearly identify the remediation costs. In its most basic form this would mean writing out a cheque for the clean-up, but things don’t always work in this way. The scarcity of development funding has increased the use of barter transactions which allow clean-up operations to be funded by non-cash means, for example, the extraction of minerals or topsoil from the site, or removal of metal structures for scrap value to name just two possibilities.

These make the reliefs seemingly impossible to obtain in certain situations. However, a good understanding of the mechanics of LRR and DLR can help immensely. For example – when negotiating the sale of the option, which may involve the upside of a share of surplus profits sometime in the future, it would be invaluable to know what level of tax relief the building contractor would be entitled to when they remediate the land. Similarly, careful advance planning of barter transactions can ensure that clean-up costs are properly identifiable, thus enabling the land owner to make a claim for tax relief.

Finally, these reliefs are Corporation Tax specific, and available only to Limited Companies. What this does is add yet another ingredient to the already complicated answer to the question “What business structure should we use?”

Many UK-based businesses, particularly at the smaller end of the SME market, support the aims if not the conduct of UK Uncut and applaud the politicians playing a form of class warfare against multinationals over their failure to contribute “fair” levels of Corporation Tax. Are they wrong?

They are. What they’re missing are two fundamental ingredients to the argument – they pay more Corporation Tax than they need because they don’t make full use of the panoply of allowances and structures larger corporates use, and when it comes to the smallest businesses, what they pay in Corporation Tax is merely a replacement – usually discounted – of the Income Tax they would suffer were the company profits taken as personal income.

Why not use the allowances? Fundamentally, most tax breaks are against costs incurred. If the tax break is only worth 24-odd % of the cost incurred to obtain it, only a fool would incur that cost unless there was a sound business reason for doing so. And smaller companies, particularly owner-managed ones, are either reluctant or unable to incur significant extraneous cost – so they don’t get the associated tax breaks.

If, like Starbucks, you give away equity in your own business to your employees, you’ll get a tax break. How many SME’s would contemplate doing that? If, like the same company, you’re prepared to fund an office infrastructure in Switzerland to handle all your purchasing requirements, then some part of your overall profits will be attributable to your Swiss location – hardly realistic for most SME’s.

If you’re prepared to move your corporate headquarters to Eire, incur the establishment costs over there, pay the exit charge on leaving the UK, then yes, you can benefit from the lowest Corporate Tax charge in the EU. But it is hugely complex and comes with an enormous price tag, both in terms of cash and time.

Better still, move to Mauritius. Get a really, really low corporate tax rate. More complex still.

If you think you’re going to be making Capital Gains, emigrate to Belgium – no CGT!

If you’re looking at VAT on distance-selling, try Luxembourg.

Work all over the place, but not in Hong Kong? Get yourself employed by a Hong Kong company, make sure you become resident there, you’re home free! No tax!!

And if you’re French resident, own your own company generating income from Intellectual Property and taking remuneration and dividends in excess of £800K pa – quick! – get out!! – cross the Channel and save yourself, and your company, a fortune!!!

And that’s the case for the Prosecution. It’s nothing to do with the taxpayer, it’s everything to do with the competition between countries to entice business into their territory. Why do they do it? Because business creates employment, and the vast bulk of government revenues are extracted by taxes on income and taxes on expenditure. Better by far to have more than 700 Starbucks here employing 9,000 people than have another 700 empty stores and 9,000 more on the dole. It pays no corporation tax? Legitimately? Not an issue.

There’s nothing “fair” about tax. It’s whatever each government wants it to be. A revenue-collecting device. An enticement. A discouragement. You don’t get foreign companies setting up in your jurisdiction by discouraging them from doing so. One can hear voices off-stage shouting “hurrah! Let them go!! We don’t want those nasty multinationals here!” – they’re plain wrong. We want the employment prospects, and as consumers, it seems we want what they offer.

Where the UK gets its taxes:

Income tax	£155 Billion	26% of tax revenues
National Insurance	£106 Billion	18% of tax revenues
VAT	£102 Billion	17% of tax revenues
Corporation Tax	£44 Billion	7% of tax revenues