UK has not historically set out to compete with countries
such as Holland and Denmark, which set their cap at international
businesses with extremely permissive taxation structures,
reckoning that the gain from extra employment and trade would
outweigh the loss of tax, the UK has nonetheless been an acceptable
place in which to have your headquarters, if that was where
it needed to be.
Thus, large international
companies with listings on the London Stock Market, or which
had British origins, could put up with being based in the
UK even if it wasn't ideal from a tax point of view, because
the rules for the treatment of overseas profits were reasonably
flexible. In particular, it was possible to 'mix' highly-taxed
profits from some overseas markets with lowly-taxed profits
from other markets, generating a blended rate which would
offset the maximum amount of mainstream UK corporation tax
and reduce double taxation. It was also possible to retain
profits in overseas companies in many circumstances without
incurring UK taxation.
Over recent years
this convenient equation has been thrown into doubt, with
the Finance Act 2000 in particular worsening the UK's tax
regime for international companies to such an extent that
some large ones, such as Vodaphone and BAT threatened to move
their base of operations out of the UK altogether.
The 2001 budget
contained some detailed measures to improve the ill-thought-out
onshore mixing rules contained in the Finance Act 2000, the
promise of further consultation on the bigger issue of a possible
participation exemption for income and capital gains, and
the threat of a further tightening of the CFC (Controlled
Foreign Corporation) rules. Indeed, enabling legislation in
the 2002 Finance Act allowed the British government to alter
the tax treatment of controlled foreign companies in jurisdictions
which are considered to allow 'harmful tax practices'.
changes to the taxation of CFCs were brought forward in the
2005 budget. The 2005 Controlled Foreign Companies (Excluded
Countries) (Amendment) Regulations aimed to prevent CFCs from
manipulating their profit location in order to evade taxes,
to stop them from secreting income in non-corporate entities,
and to exclude them from receiving the benefits of the CFC
regime if they are not liable for tax in another country.
The measures came into full force on March 31st.
spokesman for the Inland Revenue (as HM Revenue & Customs
was known at the time) explained that: "All of the changes
made are a reaction to schemes including some that were identified
via the disclosure rules. The government could not have allowed
significant amounts of tax to remain at risk."
There are three
main issues which have traditionally dominated the international
tax competitiveness argument in recent years:
This is mostly
the 'mixing' question. The Finance Act 2000, after changes
made in response to pressure from business, allowed some types
of 'onshore mixing', that is, companies could mix highly-taxed
and low-taxed income streams in the UK, but there are so many
limitations ('anti-avoidance' provisions) that what started
as a good idea, to allow companies to do at home what they
had previously had to do in offshore or tax-privileged overseas
countries such as the Netherlands, became an expensive straight-jacket.
For example, the mixing privilege only extended to the first
layer of subsidiaries, unless the intermediate company was
in the UK, which would have forced on many groups a complete
global restructuring, with other uncalculable tax consequences.
(called 'pooling' by the Treasury) was also limited to 30%
for many foreign income streams, with some allowance for tax
paid up to a maximum of 45% in some special circumstances.
The 2001 Budget however went a long way towards allowing flexible
mixing of income streams, mostly removing problems caused
by the 'first layer only' problem.
Revenue (now HMRC) notes below which explain the detail
of the amended system included in the Finance Act 2001.
February 2005, in advance of the budget, UK Paymaster General
at the time, Dawn Primarolo, announced a package of new measures
to 'prevent tax avoidance by companies', including a rule
that relief for foreign tax on income received as part of
a company's trade would be restricted to the UK tax on the
net profit derived from that income. The change was initially
due to enter into force on Budget day. However, the Treasury
saw fit to bring the rule forward so that it would apply to
income received from February 10.
budget itself in March 2005 contained threatening wording:
disclosure rules have revealed a number of areas of the tax
system at risk from high levels of tax avoidance. International
transactions have emerged as a particular concern, with increasing
globalisation presenting new opportunities for those attempting
to avoid their obligations."
on the action taken in the 2004 Pre-Budget Report, the Government
is introducing two new anti-avoidance rules which will allow
the Inland Revenue to issue a notice to counter a tax advantage
in specific circumstances where a UK tax avoidance motive
is present. These new measures will tackle arbitrage, where
companies seek to gain a tax advantage by exploiting differences
within and between tax codes and excessive claims for double
Revenue (now HMRC) notes on the future of UK corporate
taxation as envisaged by the tax authority at that time.
2. Controlled Foreign Companies
The Finance Act
2000 tightened up on the definition of control, and changed
the detail of the various tests concerned with the character
of income, ie whether it should be permitted to remain in
the foreign jurisdiction or not. Business protested (it was
this that caused Vodaphone to make its threat rather than
loss of offshore mixing), but the Treasury has not backed
down on the CFC regime.
the 2001 Budget did not contain any loosening of the CFC rules.
Indeed, buried in a footnote of one of the Inland Revenue's
budget documents was a threat to tighten the rules still further:
the Finance Act 2001 contained new rules against 'artificial
avoidance schemes, which exploit a loophole in one of the
exemptions from the UK's Controlled Foreign Company regime'.
The UK Finance
Bill, 2007, implemented changes to the Controlled Foreign
Company regime made in response to the previous year's high-profile
Cadbury-Schweppes decision by the European Court of Justice.
CFCs were not mentioned in the Chancellor's March Budget speech
that year, the Treasury released a detailed response to the
ECJ's decision, which commentators said represented the minimum
that the Government could have done to comply with Cadbury.
new provisions restricted the application of CFC rules to
profits arising from the activities of employees but not of
capital, meaning that they will only become significant in
respect of trading operations in a 'low-tax' EU or EEA territory.
The ECJ did not make such a distinction. To the disappointment
of many tax advisers, the Treasury had not provided for an
advance clearance mechanism for the CFC regime. In addition,
the Treasury stiffened the effective management test, making
it more difficult for EEA-based companies to satisfy the Exempt
United Kingdom tax legislation, the profits of a foreign company
in which a UK resident company owns a holding of more than
50% (known as a controlled foreign company, or CFC) are attributed
to the resident company and subjected to tax in the UK, where
the corporation tax in the foreign country is less than three
quarters of the rate applicable in the United Kingdom. The
resident company receives a tax credit for the tax paid by
the CFC. That system is designed to make the resident company
pay the difference between the tax paid in the foreign country
and the tax which would have been paid if the company had
been resident in the United Kingdom.
have traditionally been a number of exceptions to the application
of the legislation, inter alia where the CFC distributes 90%
of its profits to the resident company or where the ‘motive
test’ is satisfied. In order to obtain the latter exception,
a company must show that neither the main purpose of the transactions
which gave rise to the profits of the CFC nor the main reason
for the CFC’s existence was to achieve a reduction in
UK tax by means of the diversion of profits.
Schweppes plc is the parent company of the Cadbury Schweppes
group which operates in the drinks and confectionery sector.
The group includes, inter alia, two subsidiaries in Ireland,
Cadbury Schweppes Treasury Services (CSTS) and Cadbury Schweppes
Treasury International (CSTI), which are established in the
International Financial Services Centre (IFSC) in Dublin,
Ireland, where in 1996 the tax rate was 10%. Those two companies
are responsible for raising finance and providing that finance
to the group. In the view of the UK courts, CSTS and CSTI
were established in Dublin solely to take advantage of the
favourable tax regime of the ISFC and in order not to fall
within the UK tax regime.
2000 the Commissioners of Inland Revenue, taking the view
that the CFC legislation applied to the two Irish companies,
claimed corporation tax from Cadbury Schweppes of GBP8.6m
on the profits made by CSTI in 1996. Cadbury Schweppes appealed
before the Special Commissioners of Income Tax, maintaining
that the CFC legislation was contrary to Community law, in
particular in the light of freedom of establishment. The Special
Commissioners asked the Court of Justice whether Community
law precluded rules such as the CFC legislation.
the ECJ: 'The Court recalls that companies or persons cannot
improperly or fraudulently take advantage of provisions of
Community law. However, the fact that a company was established
in a Member State for the purpose of benefiting from more
favourable legislation does not in itself suffice to constitute
an abuse of the freedom of establishment. Therefore the fact
that Cadbury Schweppes decided to establish CSTS and CSTI
in Dublin for the avowed purpose of benefiting from a favourable
tax regime does not in itself constitute abuse and does not
prevent Cadbury Schweppes from relying on Community law.
Court notes that the CFC legislation involves a difference
in the treatment of resident companies on the basis of the
level of taxation imposed on the company in which they have
a controlling holding. That difference in treatment creates
a tax disadvantage for the resident company to which the CFC
legislation is applicable. The CFC legislation therefore constitutes
a restriction on freedom of establishment within the meaning
of Community law.
regards the possible justifications for such legislation,
the Court points out that a national measure restricting freedom
of establishment may be justified where it specifically relates
to wholly artificial arrangements aimed solely at escaping
national tax normally due and where it does not go beyond
what is necessary to achieve that purpose. Certain exceptions
in the UK legislation exempt a company in situations in which
the existence of a wholly artificial arrangement solely for
tax purposes appears to be excluded (for example distribution
of 90% of a subsidiary’s profits to its parent company
or performance by the SEC of trading activities).
regards the application of the ‘motive test’,
the Court notes that the fact that the intention to obtain
tax relief prompted the incorporation of the CFC and the conclusion
of transactions between the CFC and the resident company does
not suffice to conclude that there is a wholly artificial
arrangement. In order to find that there is such an arrangement
there must be, in addition to a subjective element, objective
and ascertainable circumstances produced by the resident company
with regard, in particular, to the extent to which the CFC
physically exists in terms of premises, staff and equipment,
showing that the incorporation of a CFC does not reflect economic
reality, that is to say it is not an actual establishment
intended to carry on genuine economic activities in the host
is for the Special Commissioners to determine whether the
motive test lends itself to an interpretation which takes
account of such objective criteria. In that case, the legislation
on CFCs should be regarded as being compatible with Community
law. On the other hand, if the criteria on which that test
is based mean that a resident company comes within the scope
of application of that legislation, despite the absence of
objective evidence such as to indicate the existence of a
wholly artificial arrangement, the legislation would be contrary
to Community law.'
in July 2008, it emerged that Vodafone had won a key legal
battle against the UK tax authority in a judgment that cast
major doubt on the compatibility of the UK's controlled foreign
companies (CFC) regime with European Union law.
Justice Edward Evans-Lombe ruled in the High Court on 4th
July that Vodafone does not have to pay UK corporation tax
on income attributed to its Luxembourg holding company Vodafone
Investments Luxembourg Sarl (VIL). Consequently, he ordered
HMRC to shut an ongoing tax inquiry into Vodafone's tax for
the year to March 2001.
estimated that the court victory has saved it more than GBP2bn
(USD4bn) in tax and interest that it might have been ordered
to pay had the judgment gone against the company.
the ruling also had ramifications that go much wider than
Vodafone's corporate arrangements, and several UK-based multinationals
with subsidiaries in favourable EU tax jurisdictions such
as Ireland, Luxembourg and the Netherlands, who are said to
be under a similar type of scrutiny from HMRC, are likely
to be breathing a sigh of relief as a result.
case dates back to 2002 after Vodafone set up VIL to dispose
of its shares in the German telecommunications group Mannesman,
which it acquired in 2000. VIL is also used to circulate cash
and profits around the group and as a vehicle to fund other
argued that under the UK CFC rules, it had the right to tax
the difference between rate a subsidiary pays in a low tax
jurisdiction overseas and the rate it would have paid on that
income in the UK - a principle that it attempted to apply
in the Vodafone case.
Justice Evans-Lombe referred back to a precedent set in 2006
by the European Court of Justice (ECJ) in the case involving
Cadbury-Scweppes, which said that the UK CFC rules were incompatible
with EU law because they were too restrictive and should only
be applied in cases where companies set up artificial arrangements
aimed solely at avoiding tax.
the UK Treasury moved to amend CFC regulations in the wake
of the Cadbury-Schweppes ruling, Justice Evans-Lombe argued
that these amendments had not gone far enough to address their
incompatibility with EU law, and he urged the government to
revisit the legislation.
my judgement, the CFC legislation must be disapplied so that,
pending amending legislation or executive action, no charge
can be imposed on a company such as Vodafone under the CFC
legislation," he said, going on to add that:
seems to me that all UK taxpayers, including Vodafone, were
and are entitled to be told by legislation, of which the meaning
is plain, what the tax consequences for them will be if they
decide to incorporate a controlled foreign company in a (EU)
UK government was in the process of reviewing its stance on
the taxation of multinationals' international income at the
time of the July ruling, but tax experts said that the latest
judgment had thrown the situation into chaos, and may have
left the UK with a completely unenforceable set of CFC legislation.
High Court has expressed ‘some doubt’ as to the
efficacy of sticking plaster amendments introduced in 2006,”
Mark Persoff of Clifford Chance, the legal firm was quoted
as saying by the Financial Times. “This means, as matters
now stand, the UK probably has no enforceable CFC legislation
so far as EU/EEA subsidiaries are concerned.”
Cussons, a tax partner at PriceWaterhouseCoopers, described
the ruling as a "blockbuster judgement."
is big news because there are thousands of UK companies with
foreign subsidiaries in the European Union," he told
the Telegraph. "There will have been CFC tax paid over
the years, hundreds of millions of pounds per annum, and potentially,
upon claims being made, all that tax is up for grabs,"
Act 2009 foreign profits package was expected to be implemented
during 2009 and included:
dividend exemption for most foreign dividends irrespective
of the level of shareholding
cap, a comparison of a UK tax group’s gross intra-group
finance expense with the global group’s net finance
expense after excluding gross external finance expense of
the UK tax group, with some corresponding UK taxable income
para 13 looks to whether any group company, and not just
the borrower, is part of arrangements whereby there are
increased debits or reduced credits, and is currently very
company regime to be modified to remove the ADP exemption
and holding company tests, with a further review after Budget
consent to be repealed and replaced by a retrospective quarterly
2009, Stephen Timms, Financial Secretary to the Treasury,
announced that the government had amended its proposed changes
to the taxation of foreign profits in an effort to simplify
circulated by Timms on April 30 explained that changes to
the debt cap element of the reforms would be inserted into
the 2009 Finance Bill, which was published on the same day,
following discussions with business.
legislation in the bill has been subject to extensive consultation
over the past year, and we have worked to ensure the responses
are accommodated, where possible, and the bill is as complete
as it can be,” Timms wrote.
original form, Clause 34 and Schedule 14 of the 2009 Finance
Bill determine the scope of the corporation tax charge on
both UK and foreign company distributions. According to the
relevant Budget Note, the result of the reforms, due for introduction
on July 1, 2009, will be that the great majority of distributions
will be exempt from corporation tax. The Schedule also contains
anti-avoidance rules to prevent abuse of distribution exemption.
35 and Schedule 15 of the Finance Bill make provision for
the restriction of the tax deduction available for finance
expenses of groups of companies (the 'debt cap'). The effect
of the new measure is to limit the aggregate UK tax deduction
for the UK members of a group of companies that have net finance
expenses to the consolidated gross finance expense of that
stated, however, that “a couple of areas” of the
proposed reforms “have given rise to significant comment.”
These include the exclusion for financial services and the
targeted anti-avoidance rule. “We plan further discussions
(on these two aspects of the reforms) before the final legislation
is published,” Timms explained.
are also points of detail relating mainly to further exclusions
and interaction with other parts of the tax code that have
not yet been reflected in the Bill because of time constraints,”
Timms continued. “Proposed amendments to be made during
the passage of the bill for these straightforward areas will
also be published on HMRC’s website.”
allowing groups to state they are satisfied that their tested
expense amount, if calculated, would be less than their
available amount for any particular period of account of
the worldwide group.
definition of the available amount will be amended to include
calculation of the UK measure and worldwide measure –
providing a method whereby the comparison is made using
the functional currency rather than sterling.
will be made to cater for exempt financing income received
by charities, non-departmental public bodies, educational
establishments, local authorities and health service bodies.
a company brings into account a loan relationship debit
on a paid basis, rules to disregard any amounts accrued
but unpaid for periods of accounts of the worldwide group
before the debt cap applies.
consequential amendment to Schedule 28AA to make clear that
this Schedule applies before the debt cap to any amount
of financing expense of financing income.
consequential amendment to ensure that profits of a controlled
foreign corporation apportioned to a UK group company are
not doubly taxed in respect of any finance expense amount
payable to that CFC.
2010, The UK government published a discussion document on
proposals for reforming the UK tax treatment of CFCs.
set out in the discussion document are intended to enhance
the competitiveness of the UK, while providing adequate protection
of the UK tax base. The discussion document sets out the overarching
framework of the new rules and proposals for how monetary
assets and intellectual property could be treated.
aim to address growing concern from business that the UK's
CFC rules are too complex and reverse a steady flow of companies
shifting their tax bases to jurisdictions considered to have
more business-friendly tax regimes such as Ireland, Luxembourg
attempt to achieve this, the discussion document sets out
proposals for a more targeted CFC regime to catch profits
being artificially diverted to low-tax jurisdictions, rather
than a "one size fits all" approach.
document also outlines possible approaches to reform the treatment
of intellectual property with the aim of more effectively
targeting situations "where there is a risk of erosion
of the UK tax base."
CFC rules generally target income from IP on the grounds that
it is passive income from a mobile asset. The government is
therefore concerned that there is a risk that UK tax can be
avoided through the artificial movement of intellectual property
(IP) into a low tax jurisdiction. Business, however, has emphasized
that many offshore IP companies undertake genuine and effective
management activity with the aim of maintaining or increasing
the value of their IP, and that a new CFC regime should reflect
the extent to which active management of IP takes place offshore.
for a new regime would be to identify companies that carry
on sufficient IP management activity offshore and to exempt
these companies from the CFC rules. However, the paper also
suggests that an additional tax charge be applied in certain
circumstances, for example where IP is transferred out of
the UK before its value can be accurately determined.
document also highlights the need for the new CFC rules to
interact efficiently with current UK transfer pricing rules,
and points out that the proposed "patent box" regime
announced in last month's pre-budget report, which will offer
a reduced rate of corporate tax on patent income, will have
a bearing on the reforms.
Secretary to the Treasury Stephen Timms said: “Modernizing
these rules is crucially important to maintaining and enhancing
the UK’s attractiveness as a base for global business.
This report, drawing on our discussions with businesses, is
a key step in designing a system that better recognizes the
way multinationals operate today, while protecting our tax
reform is the second part of the foreign profits package.
The first part was introduced in Finance Act 2009 and included
an exemption for foreign dividends and an interest restriction
period for this discussion document began on January 26 and
ran to April 20, 2010. The government released a further document
on the proposals along with draft legislation later in 2010.
Bill 2011 included interim improvements to the CFC rules,
exemption for certain intra group trading transactions;
exemption for CFCs with a main business of intellectual
property (IP) exploitation under certain conditions;
profits exemption of GBP200,000 as long as non-trading income
does not exceed GBP50,000;
- a statutory
three-year exemption for certain foreign subsidiaries.
further consultation, major changes to the CFC rules are expected
to be announced in the Finance Bill 2012 and to apply from
later in the year. The major points of the changes are:
exemption of overseas activities as long as the activities
are not designed to artificially reduce the UK tax base;
exemption for finance companies - up to three quarters of
finance profits to be exempt;
regime is to apply to foreign branches of UK companies and
gains, including property income, will be excluded;
profits exemption of GBP500,000 as long as non-trading income
does not exceed GBP50,000;
profit margin exemption if the adjusted accounting profits
are below 10%;
if the profits are derived in a territory where they will
be subject to at least 75% of UK tax.
The government has designed a
'gateway' to assist companies in establishing if the profits
from the foreign subsidiary fall outside the scope of the
CFC rules. The latest version of the gateway was published
on February 29, 2012, and can be found at: http://www.hm-treasury.gov.uk/controlled_foreign_companies.htm.
3. Capital Gains Tax On Disposals Of Substantial Shareholdings
In the UK, capital
gains tax for corporates has been to a great extent a voluntary
tax, in the sense that there was usually some kind of structure
for a deal which would avoid it - but the consequences in
terms of loss of economic efficiency were often severe, and
it takes teams of expensive professionals to optimise on each
occasion, making a participation exemption more attractive.
A number of foreign countries have this, including several
EU member states.
has traditionally come at this from the opposite direction,
of course, in order to preserve the existing tax base, although
there were glimmerings of light in the Government's consultation
document, reflecting a Blairite take on UK plc:
in technology are fast opening up new markets and increasing
international competition. The Government's aims are to ensure
that in the new global economy the UK is seen as an attractive
place in which to do business, and UK businesses can compete
'To achieve these
aims, the Government is promoting innovation and modernisation
in UK business, as well as working to make the UK a more competitive
environment for businesses generally.'
' Certain aspects
of the current tax code for capital gains can hinder businesses'
international competitive position and distort their commercial
decisions, forcing them to adopt structures that they would
not have needed otherwise. It may also act as a disincentive
to companies that are investing to innovate and modernise.
In particular, it can result in a charge to tax where a company
sells a shareholding in a successful business that it has
developed in order to invest in further developing the business
or in developing another business.'
' To address
these problems, the Government is considering introducing
a substantial relaxation in the taxation of corporate capital
gains by introducing a new tax relief for companies alongside
the existing rollover relief so that the charge to tax is
deferred where a company realises a gain on the sale of a
shareholding in a business or assets of that business; and
invests the proceeds in developing that business or another
business or acquires shares in another business.'
But then the
Treasury took over, and started talking about trading companies
v non-trading companies, taper relief, etc etc. The whole
emphasis was on a carefully limited loosening of the current
rules; although to be fair the Government did propose to reduce
the definition of 'substantial' from 30% to 20%.
In April 2002,
the UK government announced plans to put in place (with effect
from April 1) a participation exemption meaning that, in certain
circumstances, a UK company would not be subject to UK tax
on gain from the sale of shares in a subsidiary in which the
UK company holds a 'substantial' (10% or larger) share.
exemption also aims to prevent UK companies from recognizing
taxable losses on the disposal of shares in circumstances
where the exemption applies.
One of the reasons
for the relative lack of action on international company taxation
in the UK has been the series of European Court of Justice
rulings in defence of 'freedom of establishment' which threatened
to drive an express train through the ability of EU Member
State governments to apply national tax regimes to their resident
September 2004, for instance, the ECJ
ruled to allow a Finnish investor to collect a tax credit
in his home country for a dividend received from an overseas
firm. Under Finnish tax law, foreign dividends do not carry
a tax credit, whilst domestic dividend payouts do. However,
the ECJ announced that this was in contravention of European
laws on the free movement of capital, and ruled to allow the
taxpayer in question, Petri Manninen, to claim a 10% tax credit
for the dividend paid out by a Swedish company.
of KPMG's EU tax group in London, Chris Morgan, suggested
that although the case related to an individual, there were
likely to be ramifications for corporate taxpayers as well.
"The implications of the case are pretty huge - confirming
the ECJ's position on the tax treatment of domestic and foreign
dividends - which will be of financial benefit for both individuals
and corporates throughout the EU, including the UK," he explained.
in March, 2005, came the initial result of the much-followed
Marks and Spencer case. Marks & Spencer had argued that UK
provisions on group tax relief were in breach of European
law, as they prevent an EU-based parent company from offsetting
losses incurred by subsidiary companies in other member states,
thus violating the principle of freedom of establishment,
a reading of the situation with which Advocate General Mr
Poiares Maduro agreed.
Union finance ministers however vowed to find a "defence mechanism"
to counter the likelihood of tax revenue shortfalls should
the British retailer ultimately be successful in its legal
bid to offset losses made by foreign subsidiaries against
tax. The issue formed one of the main talking points during
an Ecofin meeting of EU finance ministers. "There is great
concern about this," remarked Jeannot Krecke, Economy Minister
of Luxembourg, which was the then holder of the rotating EU
presidency. He went on to add that EU ministers "will try
to find a defence mechanism" against such claims.
AG stated that the risk of significant falls in tax revenues,
as Germany had been arguing, was not a justifiable defence
of the current system. But he also argued that firms should
not be able to offset tax loses against profits in the country
where the parent company is based if they can also offset
losses in the country where their subsidiary is based - which
may offer an escape route to governments.
Advocate General's opinion was supported later that year by
the full ECJ.
UK Treasury's relative powerlessness in terms of corporate
tax legislation was rammed home forcibly in April 2006 when
European Court of Justice Advocate General, Leendert Adrie
Geelhoed, gave an opinion in favour of four UK companies who
had claimed that corporation tax charged on dividends received
from EU subsidiaries was illegal under EU free movement of
1973 and 1999, when the UK scrapped its Advanced Corporation
Tax system, which allowed UK companies to pay up dividends
domestically at a favourable rate, dividends from non-UK EU
subsidiaries of UK companies were charged at higher rates.
the four companies in the present case, British American Tobacco,
British Petroleum, Aegis Group and Imperial Chemical Industries,
were claiming refunds of 'only' some hundreds of millions
of pounds, the UK government warned during court proceedings
that the total cost of an adverse ruling might be as high
GBP7 billion if many companies applied for refunds, and -
following Germany's example - that the ECJ should therefore
reject the companies' case on the grounds that the UK's financial
stability could be affected. Mr. Geelhoed denied this reasoning.
first sight, UK plc should have been having a party based
on the Advocate-General's ruling, but companies worry that
the Government might react in ways which could cost them more
than they will save through the ruling.
issue was the highly complex system of 'onshore pooling' in
which foreign dividends are mixed with domestic ones according
to an intricate set of rules before final taxation rates are
December 2006, the European Court of Justice followed the
earlier Advocate General opinion, and ruled that ACT operated
illegally between 1973, when the UK acceded to the EU, and
1999, giving rise to the prospect of substantial rebates to
companies which had paid this tax in the past.
Treasury warned that such a ruling could leave it open to
repay claims totalling GBP9 billion, although draft blocking
legislation which would limit a company's claims to six years
would reduce this to about GBP2 billion, the government estimated.
Court referred the matter back to the UK courts to determine
whether the UK rules operate to achieve this parity.
March 2007, Gordon Brown surprised many by announcing a 2%
reduction in the rate of corporation tax (to 28%) and a 2%
cut in the basic rate of income tax, representing the first
major cut in these taxes in many years.
According to the then Chancellor, this would bring the UK's
corporate tax rate below both the OECD and EU15 average. However,
tax experts suggested that while Brown had given with one
hand, he would claw back much of this lost revenue with the
other through changes in capital allowances.
to the Treasury, the reform of the capital allowance regime
would "better reflect true economic depreciation,"
by ensuring that business investment decisions reflect commercial
rather than tax considerations. But for manufacturers and
companies with large property portfolios, the changes could
well cancel out any benefit brought by the cut in corporate
2008, capital allowances for plant and machinery were reduced
from 25% to 20%, allowances for cars, electrical and cold
water systems and other items was reduced to 10%. At the same
time, an annual investment allowance (AIA) of GBP50,000 was
introduced. The AIA allows investments of any type up to GBP50,000
to be fully deductible for tax purposes. Furthermore, a business
is free to chose the type of investment against which the
AIA is to be used.
AIA was increased to GBP100,000 from April 6, 2010. However,
this increase will be reversed and reduced to GBP25,000 from
the 2012 tax year. At the same time the rates for capital
allowances will be reduced from 20% to 18% and 10% to 8% for
main rates and special rate expenditure respectively.
tax, meanwhile, was reduced to 26% in 2011. The Chancellor,
George Osborne, said the budget was designed to set the UK
on the route "from rescue to reform, and reform to recovery".
Mr Osborne went on to say that: "By
2014, corporation tax will be reduced to 23%."
Below is the
text of the two Inland Revenue Budget 2001 documents describing
changes to the corporation tax regime in the UK:
BN 24: Double Taxation Relief
to double taxation relief were announced in the Pre-Budget
of on-shore pooling rules for DTR to allow relief for rates
of foreign tax paid up to 45% even if this was at more than
one level in a chain of companies; and changes to the way
in which the mixer cap is calculated. These will be supplemented
companies to claim relief for less than the full amount
of foreign tax if they so wish. This will mean that the
mixer cap is not triggered in relation to a particular dividend,
so that eligible unrelieved foreign tax (EUFT) arising on
other dividends may be credited against the UK tax payable
on it. This will also help companies which try to keep the
rate of tax at or below 30% but which subsequently find
that the actual rate is above that figure;
the rate of underlying tax attributable to dividends from
UK subsidiaries held by an overseas holding company to be
equivalent to the UK corporation tax rate at the date that
the dividend was paid; and
Finance Act 2000 where it refers to "accounting periods"
ending on or after 21 March 2000 in the provision that extends
double taxation relief to non-residents trading here. This
will be changed to "chargeable periods" to ensure
that the provision works properly for non-residents other
the last bullet point, these changes apply for dividends paid
to the United Kingdom on or after 31 March 2001.
Revenue has had very useful discussions with business about
the DTR regime. The Government intends that this dialogue
will continue both on specific issues and to ensure that the
DTR regime fits with other elements of the system for taxing
in FA2000 were left to be dealt with by regulations. These
were detailed provisions on the mixing of dividends within
a country and for surrendering eligible unrelieved foreign
tax around a group.
further discussions with business, it will now also be possible
to claim relief for part only of the foreign tax. In addition
the rate of underlying tax on dividends paid from UK subsidiaries
via an overseas holding company will be deemed to equate to
the main rate of corporation tax.
changes mean that:
it will be possible to pay a dividend from a high-taxed company
through a chain of companies without worrying whether the
rate of underlying tax will exceed 30% and produce an amount
of EUFT which would taint other, lower taxed, dividends within
the chain. This will mean that it will now be possible for
the mixed dividend to be pooled with others onshore so that
EUFT arising elsewhere can be used against it, as provided
in Finance Act 2000;
Many groups hold one or more UK subsidiaries below an overseas
holding company. UK tax paid by UK sub-subsidiaries held in
this way has always been treated in the same way as foreign
tax for the purposes of double taxation relief. A dividend
from the overseas holding company will be taxed in the hands
of its UK parent, and if it includes an element of already-taxed
UK profits then UK tax already paid on them will be available
However the rate of underlying tax is based on a different
calculation from that of taxable profits. If the rate of underlying
tax is less than the rate of corporation tax additional UK
tax would be payable on the portion of the foreign dividend
which represented profits already subjected to UK tax, and
if more, then EUFT might arise. To prevent such anomalies
the rate of underlying tax paid on a dividend from a UK subsidiary
paid to an overseas holding company will be deemed equal to
the rate of corporation tax in force when the dividend was
FA 2000 introduced a general rule allowing any non-resident
with a branch in the UK to claim credit relief for foreign
tax paid on the profits of the branch, and this applies in
relation to "accounting periods" ending on or after
21 March 2000. However only companies have "accounting
periods". To ensure that the change works for persons
other than companies, the start date will be amended to refer
to "chargeable periods".
which receives a dividend from an overseas company may claim
a credit against the UK tax payable on the dividend for tax
paid on the profits of overseas company and its subsidiaries.
Pre FA 2000, if the tax exceeded the UK tax payable on the
dividend, the UK recipient could not get relief for all the
foreign tax. Offshore intermediate companies were therefore
set up to mix high-and low-taxed dividends so that they came
into the UK at an averaged rate. FA 2000 introduced provisions
to prevent this. Since then the Revenue has been consulting
with business and studying the effects of the new provisions
announced today and on 8 November will mean that the FA2000
provisions operate in the way in which they were intended
to work. They will significantly benefit UK groups who acquire
or already have existing business structures where tax in
excess of 30% is paid at several levels in that structure,
or tax at rates both below and above 30% are paid at different
2: A Competitive and Modern Tax System for Multi-Nationals
and Large Business
The Government is committed to further reform of the company
tax system to ensure long-term stability and strengthen the
competitiveness of business, the Chancellor confirmed today.
will be taken forward to secure a competitive environment
for business that, with globalisation, can change very quickly:
paper will be published in June that will set in a broader
context the current proposals for a relief on gains arising
on the disposal of substantial shareholdings. Considerable
progress has been made on developing this relief. The further
consultation will allow consideration of detailed proposals.
It will also provide the opportunity to consult business on
possible associated reforms aimed at producing a flexible
and competitive tax system for parent companies based in the
A new technical
note published today by the Inland Revenue gives details of
a proposed new regime for providing relief to companies for
the costs of intellectual property, goodwill and other intangible
assets. The technical note builds on earlier detailed discussion
with business on the design of a more up-to-date regime, and
includes draft legislation.
to the regime for double taxation relief (DTR) announced in
the Pre-Budget Report will be supplemented by further measures
to make the system more flexible for UK-based parent companies.
The Government has consulted further with business about the
DTR regime over the last year and intends that this dialogue
will continue, both on specific aspects and to ensure that
the DTR regime fits with other elements of the system for
on these announcements, the Paymaster General, Dawn Primarolo,
said: "These take forward the Government's reforms of
the company tax system, and the consultation we now propose
offers business an excellent opportunity to shape the outcome."
also announced a range of measures aimed at providing a more
modern environment in which businesses can thrive:
- A consultation
document 'Increasing Innovation' examines the case for further
measures to boost UK innovation and to seek views from businesses
and others on the design of a new tax R&D tax credit
aimed at encouraging innovation by larger companies.
on the design of a new, targeted tax credit and related
measures to encourage development and distribution of vaccines
and drugs and to tackle the major killer diseases of the
of out-dated requirements for the deduction of tax on most
intra-UK payments between companies of interest, royalties,
annuities and annual payments;
to protect the tax base while facilitating business efficiency
and promoting competitiveness.
Revenue's Technical Notes of June and November 2000 consulted
on a deferral relief for gains realised by companies on substantial
shareholdings in trading companies. A large number of helpful
responses were received. In addition there have been many
meetings between representatives of the business community
and Inland Revenue and Treasury officials.
relief that has emerged would be much more flexible than that
originally envisaged. The present form of the relief is outlined
in the Budget Note (REV BN 23) which sets out the significant
changes that have been adopted as a result of consultation.
considers that the introduction of such a deferral relief
would provide a significant advantage to UK companies. Multinationals
with UK bases would then benefit from a parent company tax
regime that provided: one of the lowest rates of corporation
tax among major industrialised countries; generally, relief
for interest expense on loans funding investment in the UK
or overseas; a system for crediting overseas tax that can
substantially relieve tax on foreign dividends; and the opportunity
to defer the charge to tax on the disposal of a substantial
shareholding in a trading company or group.
now announced will give a further period to assess the detailed
deferral proposals and allow them to be considered in a broader
The UK today
is a very attractive location for multinational business for
tax and non-tax reasons. The Government is committed to ensuring
that this remains the case and recognises that, with globalisation,
the competitive environment can change very quickly. A reform
package should therefore look beyond the immediate future
and reflect the need for flexibility. In this context the
Technical Note that was published in November floated the
alternative of an exemption, rather than a deferral, for most
company gains on substantial shareholdings in trading companies.
Many of those
who responded to the Technical Note felt that an exemption
for gains would be preferable, but recognised that this could
have far-reaching implications. One of the main questions
that arose was whether an exemption for gains on substantial
shareholdings could be introduced without changes elsewhere
in the system and this will be important in the further consultation.
some felt that an exemption for gains might point to an exemption
for foreign income as well. And some were concerned that,
in evaluating the options, it should be clear whether the
Government's view was that any wider changes might involve
some restriction of interest relief where loans were funding
The introduction of an exemption for gains and foreign source
dividends, together with some form of interest restriction,
would bring the UK system closer to that of many other European
countries and a reform of that sort could enhance the competitive
position of UK companies. But while some UK based multinationals
would welcome such changes, others more affected by an interest
restriction would probably not. And for Government, the possibility
of a new restriction on interest deductibility raises important
important issues for the future direction of company taxation.
Business has expressed considerable interest in a broader
discussion of this nature and the Government considers that
it is right that there should be a full and open discussion
of the issues. The Chancellor therefore proposes to publish
a further consultation paper in June, which will launch a
period of open discussion on the changes that should be introduced
and the wider implications for the competitiveness of businesses
based in the UK. Underpinning that consultation is a strong
presumption in favour of introducing a major new relief for
capital gains on the sale of substantial shareholdings in
Finance Bill 2002.
to double taxation relief were announced in the Pre-Budget
Report (details in Inland Revenue Press Release REV5/2000).
In response to further consultations, further changes are
to be made to the provisions in Finance Act 2000. Full details
are in the Budget Note (REV BN 24).
in Finance Act 2000 were left to be dealt with by regulations.
These were the detailed provisions for the mixing of dividends
within a country and for surrendering eligible unrelieved
foreign tax around a group. The regulations are now on the
Inland revenue website, and business will have a brief opportunity
to comment at them (until 19 March) shortly after which they
will be made and laid before Parliament.
In the Pre-Budget
Report, the Chancellor said that the Government would be looking
at measures aimed at boosting investment in R&D across
business. Last year, the Government introduced new R&D
tax credits to encourage research and development by small
and medium sized enterprises (SMEs). This provided SMEs with
an additional deduction for qualifying current R&D spending
over and above the amount deducted in the accounts by raising
the effective rate of relief from 100 per cent to 150 per
publication of "Increasing Innovation", the Government
is seeking views on the design of a new tax incentive aimed
at encouraging innovation by larger companies.
paper describes what would be involved in the design of an
incremental R&D tax credit incentive. An incremental R&D
tax incentive would reward businesses in proportion to their
additional R&D expenditure above current levels.
outlines the issues that would need to be considered, including
eligibility criteria, base periods and amounts, how groups
might be dealt with, the treatment of sub-contracted expenditure,
and the interaction with the existing SME reliefs. Two main
options are described, a CT incremental credit and a wages-based
invites views from businesses and other interested parties
on the full range of issues that need to be resolved for such
a tax incentive to be successfully introduced. The consultation
paper can be found on the Internet at: www.inlandrevenue.gov.uk/budget2001
and Protecting the Tax Base
is aware that the requirements of the tax system can lower
profitability and reduce competitiveness. Unnecessary and
outdated tax rules that detract from business efficiency are
to be cut. These include abolishing outdated requirements
for the deduction of tax on intra-UK payments between companies
of interest, royalties, annuities and annual payments. This
will increase competitiveness and reduce administrative burdens
is grateful for the responses to the Technical Note issued
at PBR about corporate debt, financial instruments and foreign
exchange gains and losses. The reform and simplification proposals
were broadly welcomed. Most respondents felt careful consideration
of the details over a reasonable time scale was needed. The
Government will therefore publish a consultation document
in the summer that further develops the ideas raised in the
Technical Note in light of the representations.