UK: Tax Focus: A Summary Of Current Tax Issues For Companies – April 2012

Last Updated: 9 May 2012
Article by Robert King, Colin Aylott, Antje Forbrich and Rajesh Sharma

A MANSION TAX BY ANOTHER NAME

By Robert King

It is not often that stamp duty land tax (SDLT) hits the front pages – but it certainly did so in the run up to the Budget.

Judicious briefing put across the message that 'rich foreigners' were avoiding SDLT on their Mayfair penthouses by acquiring them through offshore companies. This completely missed the point that, of itself, this did not avoid the SDLT charge (SDLT avoidance was common but not by this means), and that the reason why non-UK domiciled individuals used an offshore company to hold UK property was to keep it out of the inheritance tax (IHT) net. Nevertheless, the following measures were announced for residential property worth more than £2m:

  • an immediate increase in the rate to 7% (previously 5%)
  • a penal charge of 15% for that portion of the acquisition consisting of a single dwelling valued at more than £2m, acquired by a company (and certain other 'non-natural' persons)
  • an annual charge to be introduced from 2013 on such residential properties held in companies, which could be up to £140k pa, further details of which should be available later in May.

The last two measures are aimed at deterring the 'enveloping' of high value dwellings in entities so as to reduce or eliminate SDLT on a subsequent sale. However, the legislation is so wide in scope that it goes well beyond the perceived abuse. It will catch high end property investment funds, normal UK property investment companies, development carried out by joint venture vehicles and many other situations where there is clearly no avoidance of tax involved. It appears that no ground will be conceded on amending the legislation to make it more targeted, which could have serious consequences for such businesses. Also, non-domiciled individuals will now need to reconsider their IHT planning.

REPORTING FUNDS REGIME – INCREASING THE RETURN ON OFFSHORE INVESTMENTS

By Colin Aylott

The reporting fund regime allows UK investors to obtain capital gains tax (CGT) treatment when disposing of investments in offshore funds. For top rate income tax payers, this can lead to a reduction in tax rates on disposals from 50% to 28%. This preferential tax treatment may improve the marketability of offshore investments to UK investors.

UK offshore fund rules

UK offshore fund rules are designed to prevent UK investors avoiding income tax by accumulating income tax-free offshore. Without these rules, investors would pay tax at the more favourable CGT rates when the income is realised on disposal of their investment.

When do they apply?

The rules will typically apply to non-UK open-ended arrangements or collective investment vehicles that allow investors to redeem their interest by reference to net asset value (NAV).

Benefits of reporting fund status

Gains made by individuals on disposal of investments in offshore funds that have reporting fund status are subject to CGT rather than income tax. For those that pay tax at the top rate, this can mean a headline tax rate on disposal of 28% (or 0% if covered by the CGT annual exemption) rather than 50%, significantly improving an investor's overall return. It was announced in the March 2012 Budget that the top rate of income tax will fall to 45% (an effective 30.6% on net dividend income) from 6 April 2013.

In exchange for providing the preferential CGT treatment on disposal, HMRC requires that investors pay income tax annually on their share of the income earned by the fund, whether or not physically paid out by the fund. This means both distributing and accumulation funds may apply for reporting fund status.

Applying for reporting fund status

An application for reporting fund status is made by the fund itself. Having made an initial application to join the regime, the fund is required to make annual filings with HMRC. This annual filing principally comprises a calculation of the income earned by the fund during the period, calculated in accordance with relevant tax legislation.

The results of this calculation must also be made available to UK investors, in a format prescribed by HMRC. UK investors then use this information when preparing their personal tax returns.

VAT – FED UP WITH PASTIES?

By Antje Forbrich

With the 'pasty tax' being all over the papers, are we really moving closer towards a level playing field?

What is normal in the world of food and catering?

The Government's intended removal of 'anomalies' has revived the debate on fair taxation and a level playing field in relation to food stuff and catering. Despite the nation's emotional attachment to zero-rated pasties, it would actually appear quite reasonable to subject hot pasties to the standard rate of VAT – just like all other hot take-away food. However, in relation to food and catering, anomalies seem to be pretty much the rule rather than the exception.

The UK has a derogation which permits slightly different rules to other EU member states. Further, the introduction and invention of new food and drinks over time, as well as the development of case law, makes it difficult to establish the VAT liability of many items with any certainty. Often-quoted examples are the different treatments of cakes versus biscuits and savoury snacks based on potatoes versus maize.

The fact that HMRC may grant different rulings to competing businesses for what would be in fact the same kind of supplies shows that we are currently far away from a level playing field.

Ideally, a full review of 'food' and a redefinition of 'catering' would be needed to provide clarity and a fair competition but as this seems unlikely any time soon, ongoing developments such as the examples below should be closely followed.

The application of the standard rate to all hot food (except freshly baked bread)

This was set out in the Budget and the draft legislation is currently under consultation. Some businesses selling hot take-away food will have to charge more VAT in the future.

The widened definition of the term 'premises'

This was also set out in the Budget and the draft legislation is currently under consultation. Some businesses selling cold take-away food may have to charge VAT in the future.

The application of the Bog case to the UK

HMRC refuses to accept that the CJEU decision in Bog (C-497/09) can apply in the UK. The CJEU held that food should only be standard-rated if there is a predominant service element. This means that food (even when hot) supplied for immediate consumption should not be standard-rated. The first court case in the UK relying on the Bog principles is due to be heard in the Upper Tribunal this summer. Depending on the outcome, this case could have a huge impact on the UK treatment of both food and catering.

Ramifications of the Rank decision

In another decision (C-259/10) (actually about bingo) the CJEU stressed the importance of a level playing field and held that, generally, supplies that are perceived by the customer to be the same, must be treated the same for VAT. In the food world, this must surely mean that a customer pays the same VAT amount on all savoury crisp and chip style snacks and we expect further case law testing that principle.

Campaign for the reduced VAT rate for UK pubs and restaurants

Following successful campaigns in other countries, specifically in France, pubs and restaurants are currently lobbying for a reduced VAT rate for food and drink. While this would certainly benefit the leisure industry, this would be difficult to reconcile with the current VAT law, and a swift victory for this campaign would be surprising.

CONTROLLED FOREIGN COMPANY REFORM

By Rajesh Sharma

Over the last seven years, various changes have been made to the CFC rules as a result of decisions in the European Court of Justice in order to make the UK rules more compliant with EU Treaties. Notwithstanding the changes, a number of multinationals in recent years transferred their holding companies outside the UK to reduce the exposure of group profits to the CFC rules.

To maintain the competitiveness of the UK as a location of choice for multinational companies, substantial changes have been proposed to the CFC rules. The main objective is to reduce the administrative burden on companies and to focus on the artificial diversion of profits from the UK to low tax territories. The new regime applies where a non-UK resident company is controlled by UK resident person or persons. If there are chargeable profits a tax charge will apply to those UK companies having a 25% or more interest in the CFC.

Exemption from the CFC provisions is achieved either by profits being excluded from the 'gateway', or by meeting one five specific exemptions, or by the full or partial exemption of finance profits, so that only companies that have profits artificially diverted from the UK require additional reporting. Profits of a CFC will not be subject to a tax charge if one of the four conditions for the gateway test is satisfied.

  • At no time in the accounting period does the CFC hold assets or bear risks under arrangements with a main purpose of achieving a reduction in UK or overseas taxes
  • The CFC does not have any UK managed assets or risks during the accounting period
  • At all times in the accounting period the CFC has the capability to carry on its business in a commercially effective way if any of its UK managed assets or risks were no longer managed in the UK
  • The CFC only has property business profits or non-trading finance profits.

Non trading finance profits are subject to restrictions so that the CFC rules will apply where the profits are attributable to assets or risks effectively managed from the UK, or the profits arise from investment of capital directly or indirectly from a UK connected company, or the profits arise from an arrangement with a UK connected company or UK PE that avoids the need for distributions and has a main purpose of tax avoidance, or profits arising from certain lease arrangements with tax avoidance purposes. There are separate gateways for companies with trading finance profits, captive insurance business and exclusions for profits arising from certain qualifying loan relationships.

In addition to the gateway, there are entity level exemptions.

  • Temporary period exemption: allowing a non-resident company coming under UK control to be exempt from the CFC rules for an initial period of 12 months and can be extended if notice is given to HMRC and they approve the extension.
  • Excluded territories exemption: territories that are specified in regulations and provided any 'tainted' income does not exceed 10% of the company's accounting profits (or £50,000 if greater).
  • Low profit exemption: where the profits (either taxable or accounting) of the foreign entity are less than £500,000 per annum and the non-trading income does not exceed £50,000.
  • The low profit margin exemption: where the foreign entity makes a low level of accounting profit before deduction of interest by reference to its relevant operating costs. The profit margin can be no more than 10% of these costs.
  • The tax exemption: where the local tax is 75% or more of total corresponding UK tax, after excluding the impact of any local tax privileges. This does not apply to designer tax rate regimes.

Where none of the exclusions apply, UK companies with a 25% or more interest in the CFC are assessed on the appropriate profits of the CFC. The CFC tax charge is reduced for any foreign tax attributable to the apportioned profits and where applicable any other tax relief available in the UK.

A favourable regime for the taxation of income derived from the financing of intra-group companies is available to exempt 75% of qualifying finance profits. If applicable this will result in an effective rate of 5.5% on those qualifying profits with effect from 2014.

The new rules will apply to accounting periods beginning on or after 1 January 2013.

In summary, the new rules represent a significant shift in HMRC's approach to the CFC rules, to consider only that portion of profits which are 'artificially diverted'. The new rules seek to exclude overseas entities from the legislation based on a number of exemptions and safe harbours. Where none of the exemptions are currently available, consideration should be given to the possibility of ensuring effective overseas risk management and decision making capability. In particular, the compliance obligations for small companies should be simplified and the new rules for full or partial exemption of profits derived from qualifying financing activities are welcomed.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.