UK: Tax Focus: A Summary Of Current Tax Issues For Companies - October 2012

Last Updated: 7 November 2012
Article by Robert King, Richard Mannion, Colin Aylott and Antje Forbrich


By Robert King

When the Coalition Government took office, it announced a fundamental reform of corporation tax. A core underlying principle was 'competitiveness' – the recognition that, in a global market, businesses are mobile and tax has a major influence on where they locate. Half way through its term of office it is worth seeing how the Government has done so far.

The good

On the plus side, corporation tax rates have come down, they will reduce further and the reduction is further and faster than originally planned. However, headline rates are just one element in the total tax competiveness picture. For instance, the UK's controlled foreign companies (CFC) rules were identified as a key deterrent to businesses locating here. Fiendishly complex, they were perceived as no longer fit for purpose. It was the CFC rules that influenced a number of companies to move their tax base out of the UK. After two years of consultation and hard work, the rules have been comprehensively reformed. While the rules are still complex, they do nevertheless deliver a regime that UK-based multinational corporations can operate within but that also protects the UK tax base from artificial diversion of profits abroad. It is worth noting that some businesses that left, for example WPP, have announced that they will be returning, citing CFC reform as the key factor. This is all good.

The bad and the ugly?

On the debit side though, personal tax rates remain high, deterring many entrepreneurs and senior executives from locating here. The tax environment is also highly uncertain, with ever more complex legislation, the impending General Anti Abuse Rule and inconsistent decisions in the courts. The one thing businesses hate more than anything is uncertainty. So it is a mixed picture. Some good progress has been made but, in other areas, we seem to have gone backwards. A cautious 6/10 perhaps?


By Richard Mannion

It is likely that HMRC will re-double its efforts to check that the rules are being followed.

The Public Accounts Committee (PAC) has criticised the BBC for having about 25,000 off-payroll contracts, e.g. using staff operating through personal service companies with the consequence of no PAYE tax deduction at source obligations for the BBC.

This is not really new news because there were newspaper headlines some years ago about the then chairman, John Birt, being paid via his personal service company.

The first point to note here is that no details have been given about the nature of the duties of the 25,000 people in question. It is likely that the majority are genuinely self-employed artists or contractors, in which case there would be no reason to deduct tax at source. However, the BBC is to review these contracts and the PAC will be looking for assurance that the staff involved are paying the correct amount of tax on income received from the public purse.

There has, however, been a wider issue recently about people in senior positions in Government and public bodies who are receiving their remuneration via personal service companies.

Personal service companies are a commonly used vehicle in many businesses. In some cases, the 'employer' insists on their use in order to circumvent the employment protection legislation. Where personal service companies are used the employer does not pay for holidays, sick leave, maternity pay and there will be no question of redundancy payments.

The Government first became concerned about the use of personal service companies in the 1990s because of concerns that individuals operating through such structures were subsequently taking dividends from the personal service company rather than being paid wages that would be liable to national insurance contributions. In 2000 it introduced a very complex special tax charge known as IR35 which effectively required a personal service company to operate a pseudo-PAYE regime if certain conditions were met.

Consequently there will only be a loss of tax to the country if:

  • payments are made to a personal service company that otherwise would have been taxed under PAYE, and
  • the personal service company fails to operate IR35 properly.

No details have been provided to demonstrate that IR35 is not being properly applied although there are indications that HMRC does not currently check many cases a year, presumably because it doesn't have sufficient resources to do so. The PAC noted that HMRC enquiries into the use of personal service companies have reduced from around 1,000 in 2003/04 to 23 in 2010/11.

To summarise, we have a highly complicated tax charge that few people really understand and this charge is in turn a by-product of the UK's over-complex tax system. The most likely outcome of the PAC's concern will be a redoubling of effort by HMRC to police the IR35 system so personal service companies do need to beware.


By Colin Aylott

Community infrastructure levy (CIL) is a new levy that local authorities are empowered to charge on new developments in their area. Existing section 106 (s106) charges will remain, however they will be restricted to site-specific mitigation and affordable housing. There should be no overlap in the use of CIL and s106, meaning no developer will pay twice.

Money raised can be used to support development by funding infrastructure projects. Although few authorities are currently charging, it is expected that many will follow in the short term.

Rates of CIL will be set by each local authority and based on a funding gap, calculated with reference to their own infrastructure plans. The rate bandings for CIL may be zoned and will typically be different for residential, retail and other. The proposed rates will be published in advance and have to be approved locally. CIL may be a significant cost, for example Wandsworth recently proposed a CIL rate for residential of £575/m2.

The key elements of CIL are as follows.

  • CIL is calculated with reference to the increase in gross internal areas of the proposed development from what is currently on the site. This 'net area chargeable' is then multiplied by the relevant rate (£/m2).
  • Generally the liability applies to the owner of the land, or leaseholder, if leasehold interest is greater than seven years, though it can be transferred.
  • The liability arises upon grant of planning permission, and collected upon commencement of the development.
  • There are defined rules for notification of relevant events, and a comprehensive system of penalties for non-compliance.
  • There are various limits to the charge, the most relevant being that any new build, including extensions, is only liable for the levy if it has at least 100m2 of gross internal floor space, or involves the creation of one dwelling, even where that is below 100m2.

Key issues to consider include the following.

  • Try to secure planning permission before CIL is adopted locally.
  • Because CIL is broadly levied on an increase in internal floor space, CIL should be more expensive for greenfield sites than brownfield developments. Measuring existing internal space will now be very important in planning applications.
  • CIL is triggered on grant of planning consent, but subsequent minor amendments requiring consent can trigger another CIL payment. This has been pointed out, but not amended to as it stands, it is best to get the scheme right first time unless you wish to risk paying twice or more.
  • There are a number of notifications and compliance obligations. Project funding, cash flow profitability forecasts, accounts and pricing decisions will need to take account of CIL.
  • Consider CIL mitigation strategies and the interaction with the other mainstream taxes.


There is discretionary relief from CIL in exceptional circumstances, but the indications are that this relief will be used sparingly. There are also specific exemptions from CIL for charitable concerns and affordable housing.

Implications and conclusions

CIL is now with us and here to stay. If your local authority has brought it in then you will need to consider the cost of this for your development and the compliance obligations. Where it hasn't been brought in, it is likely to be soon, but there may be a window of opportunity in the short term.


By Antje Forbrich

The recent CJEU judgment in Field Fisher Waterhouse did not provide a decision but referred the case back to the UK courts. It did, however, offer analysis and guidance on what may constitute a single or a separate supply for VAT purposes.

The background

The taxpayer paid rent on a property and also paid a service charge for building related services. The taxpayer argued that the service charge should not be exempt like the rent. The services should not be regarded as ancillary, but treated as a separate taxable supply resulting in the opportunity to recover the input tax arguably included in the service charge.

The questions

The UK court inquired whether, in order to decide whether there was a single exempt supply or two separate supplies, it was relevant that the landlord was entitled to terminate the lease agreement in case the tenant failed to pay the service charge. Further, the referring court asked how important it was that the services could in theory be provided by a third party.

The judgment

The CJEU reaffirmed the familiar principle that to determine the extent of a supply all circumstances must be taken into consideration. The fact that the landlord may cancel the lease if the service charge is not paid would support a single supply but is not decisive. Nor is it decisive that the services could be provided by a third party. The overall analysis would suggest that the CJEU did not necessarily agree with the taxpayer, however the case has been referred back to the UK courts to determine how closely linked the service elements are.

What now?

The Field Fisher Waterhouse case has been referred back to the UK First-Tier Tribunal. However, we understand that the taxpayer has asked for this case to be stood over behind the Upper Tribunal case of Middle Temple that HMRC is appealing.

Middle Temple not only provided a lease of office accommodation that it had opted to tax, but also recharged an invoice from Thames Water for unmetered water to the tenants. For historic pipe work related reasons, the tenants did not receive the supply directly from Thames Water and Middle Temple successfully argued that the water supply constituted a separate zero-rated supply.

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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