UK: Changes To Finance Bill Double Tax Relief Proposals

Last Updated: 15 May 2000

Background

Following speculation in the press, the Government announced in May 2000 that most of the proposed double tax relief (DTR) changes announced in the Budget will remain - as originally drafted - in this year’s Finance Bill. This announcement follows a brief period of consultation with industry. However, a small number of modifications are to be made, which are summarised below. The most significant measure is an extension of the transitional period before some of the new rules take effect.

Outline of the modifications to be made

Restrictions on dividend mixer companies and specification of profits

The restriction (to 30%) of the creditable underlying tax for dividends paid between overseas companies in the ownership chain below the UK parent company, which removes the effectiveness of mixer companies, was due to take effect from 1 July 2000. This is now to be delayed until 31 March 2001 to allow multinational groups more time to pay up dividends under the old rules.

The legislation is also to be modified slightly so that the restriction on the underlying rate of tax does not apply to dividends paid between companies that are resident in the same country, except in cases of abuse.

Although the point was not mentioned in the press release announcing the changes, it has emerged in discussions between KPMG and the Inland Revenue that the restriction on the ability of companies to specify particular categories of profits out of which dividends are to be taken to have been paid, which was also to have applied from 1 July 2000, is similarly to be deferred until 31 March 2001.

Unilateral relief v treaty relief

The Finance Bill provisions which prevent unilateral relief (ie, relief under the UK’s domestic DTR provisions) from being claimed in the situation where a double tax treaty expressly precludes relief are now to apply only to treaties made on or after 21 March 2000.

Foreign consolidated tax returns

The Government’s announcement also confirms that the new rules which clarify how relief for underlying tax is to be allowed if a group of companies is taxed as a single entity in another country will apply wherever the group of companies is situated in the ownership chain below the UK company. As originally drafted these provisions could have been interpreted as applying only where the overseas tax group was held directly from the UK.

Implications for taxpayers

These announcements follow several weeks of intensive lobbying. The Government has stressed that the DTR changes are part of a Budget package of corporation tax measures which include consultation on the possibility of rollover relief from capital gains on disposals of substantial shareholdings held by companies, and the possibility of tax relief for purchased goodwill. These other measures, ‘if introduced’, would now take effect at the same time as the restriction on mixer companies, on 31 March 2001.

The modifications to the Finance Bill, though welcome, fall well short of what had been hoped for. Representations had originally called for the 30% cap on the rate of creditable underlying tax to be withdrawn completely or, at least, for the cap to be set at a level considerably above the UK rate of corporation tax.

However, the deferral of the start date will give taxpayers a further opportunity to pay dividends up to the UK under existing rules, particularly if, due to restrictions under foreign law, they could not have paid up dividends before 1 July 2000.

The delayed start date also extends the scope for further lobbying. The Government has stated that it is eager to continue its dialogue with business on ways of enhancing the UK business environment and making it more competitive. It may therefore still be worth lobbying to mitigate (if not remove) the restriction on the underlying rate of tax; for example, the cap could be set at 50% as was originally proposed in the KPMG representations on the Budget changes.

Complications in applying the new rules will continue to arise from the fact that the measures still have different start dates. For example, the provision clarifying how relief for underlying tax is allowed if a group of companies is taxed as a single entity in another country still applies to dividends paid to the UK on or after 21 March 2000.

For further information, please speak to your usual KPMG tax contact.

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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