UK: BEPS, GAAP And The Law Of Unintended Consequences

Last Updated: 26 January 2015
Article by Neil Arthur

UK Managing Director and highly experienced accountant Neil Arthur's first blog looks at the ways in which the UK changed in 2014

OECD Discussion drafts

Just before Christmas the OECD issued three discussion draft papers in connection with its Action Plan on Base Erosion and Profit Shifting (BEPS).  These discussion documents are likely to form the basis on which local tax legislation in this area will be framed. Comments on the drafts should be submitted by 17 February 2015.

These drafts are – and, indeed, the whole subject is – complex, but it is one which exercises the minds of Governments over the developed world who are concerned at the perceived export of profits by groups to low tax jurisdictions resulting in a loss of tax revenue. The UK Government is particularly concerned about this and the Chancellor proposed new legislation in the Autumn Statement to counter perceived tax avoidance.

The papers issued covered the following areas:

  1. Interest deductions
    The paper sets out alternatives for restriction of tax relief on interest costs. The two main approaches proposed are (a) a group-wide rule which for tax purposes will limit interest deductions to a proportion of a group's third party interest costs, and (b) limit interest deductions for tax purposes to an amount calculated by applying a fixed benchmark ratio on a company's earnings, assets or equity.
  2. Transfer pricing guidelines
    The aim is to ensure that transfer pricing outcomes are in accordance with value creation.  The draft gives new guidance on (a) identification of commercial or financial relations and the risks arising from these (b) commercial substance of the actual transaction (c) re-characterisation or non-recognition of a transaction.
  3. Transfer pricing of commodity transactions
    The aim of the guidance is to ensure that the pricing of commodity transactions reflects value creation in order to protect the tax base of commodity dependent countries.


There is considerable concern that it is unreasonable to expect SMEs to be ready to implement the new UK GAAP by the beginning of 2016 when the relevant accounting standard is unlikely to be finalised before mid-2015.  The new standards will oblige SMEs to comply with FRS 102, but with a reduced level of disclosures, and will replace the FRSSE with a new standard for micro entities.

Companies currently preparing financial statements under FRSSE will need to make sure their advisors advise them when the new standards are finalised and assess the implications on their financial statements and the need to obtain information required.

What changed in the UK in 2014?

An article by Ed Conway, Economics Editor of Sky News, was published in The Times on 31 December 2014 which caught my eye. He pointed out give key ways in which the UK economy changed in 2014, and which in turn may have passed a lot of people by.

  • The fall in home ownership in UK. Much of Europe has now overtaken UK in terms of percentage of home ownership.
  • Instead of relying on interest rates to control lending, the Bank of England introduced measures to prevent banks from making too many high debt loans to homebuyers. Indications are that this may be a permanent shift in policy.
  • Average real incomes adjusted for inflation have fallen for the past five years, representing the biggest fall since records began. This trend reversed in September 2014 and it looks likely to continue which will be a huge relief to consumers. 
  • The level of consumer indebtedness, which had fallen substantially from 2008, has stopped falling. The OBR is predicting massive increases in personal indebtedness in the coming years.
  • The changes proposed by the Chancellor in relation to occupational pensions were completely unexpected. Under these new rules many pensioners will be able to withdraw their pension funds in full without being forced to purchase an annuity. This will potentially give a huge cash injection into the economy, much of which will probably be spent rather than invested for the future. These changes will have consequences for years to come.

Predicting the effect that these changes will have in the future is very much a crystal ball game and I am certainly not going to try. One thing is for sure: the law of unintended consequences always seems to come into play with some very unexpected results. Let us hope that these consequences will be good ones; we will find out in due course.

Read more about doing business in the UK

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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