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


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.


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.


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.


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.

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