In a recent Tax Journal article, Andrew Howard examines UK tax trends over the last decade.
How things have changed.
At the beginning of the last decade attitudes to company taxation in the UK had already begun to change. The corporation tax rate, stable at around 30% for most of the previous decade, had just begun its downwards trajectory to what looks like being the low water mark, its current rate of 19%. At the same time the ability of companies to manage the rate they actually paid had already begun to come under scrutiny. The story of the first half of the decade was a lower rate, but one which needed to be paid. The UK introduced a general anti-avoidance rule in 2013 (which could come as a surprise to the political parties which currently have a GAAR in their manifestos), which made a point of specifically disavowing some old tax cases which were used to justify tax avoidance, most famously Lord Tomlin from the Duke of Westminster case in 1936: 'Every man is entitled if he can to order his affairs so that the tax attracted under the appropriate Act is less than it otherwise would be.' Attitudes also shifted among the judiciary and HMRC has been able to claim a very high success rate in cases where it argued tax avoidance. While political parties routinely make up the numbers by identifying billions to be collected by closing down unspecified tax avoidance schemes, experience on the ground at the end of 2019 is that it is extremely rare to see a company contemplating entering into a tax avoidance scheme.
Meanwhile, in the first half of the decade, on the international front, the UK, following the plan set out in the 2010 corporate tax road map, focused on enhancing the international competitiveness of the tax system, looking to attract and maintain companies that had begun to move their headquarters abroad. The main plank was to continue the UK's move to a territorial tax system by reforming the UK's controlled foreign company rules. The UK would only seek to top-up tax on profits earned by non-UK subsidiaries of UK companies where those profits had artificially been diverted from the UK. Combined with the distribution exemption and the substantial shareholdings exemption, this meant that MNEs could headquarter in the UK and pay very little corporation tax. In the middle of the decade, this led to some US companies 'inverting' to the UK, until US rules changed to prevent this. The roadmap also confirmed the UK's proud adherence to the principle that interest should remain deductible in full in line with the accounts for tax purposes.
In the second half of the decade, the focus on avoidance, enhanced by whistle-blowing leaks such as the Panama Papers, brought scrutiny on the arrangements adopted by 'tech giants'. This meant looking at the way in which tax systems interacted with one another and the gaps that could arise as a result of different transactions or entities being treated differently. Arrangements such as the 'double Dutch' or the 'Irish sandwich' became infamous. The extraordinary achievement of the OECD's base erosion and profit shifting project, in which the UK played a prominent part, was to identify and address these issues and build a reasonable degree of consensus as to how to address them. These changes are ongoing and are just entering arguably their most ambitious phase, with rules aimed at the digital economy looking set to change fundamental principles as to the allocation of taxing rights among jurisdictions and effectively curtail jurisdictions' ability to compete for business by maintaining very low tax rates. Unfortunately this type of seismic change brings significant uncertainty as to how the new rules will be applied in even simple situations. The new trend in UK tax law is to tax by legislation and untax by guidance, however there are still only limited instances of the courts applying the same leeway to the taxpayer as is afforded to the authorities to argue by reference to the purpose of the rules.
From the UK perspective, an important aspect of these international changes was to impose significant limits on the deductibility of interest, hitherto sacrosanct. Combined with domestic changes such as loss relief restriction, erosion of capital allowances and relief for amortisation of intangibles and the imposition of capital gains tax on non-residents investing in UK real estate, this has significantly widened the UK tax base.
The final trend that is worth highlighting relates to tax and good citizenship. This goes well beyond the attitude to tax avoidance described above. The UK authorities have been very keen to bring tax to the boardroom and to change the mindset that tax is just a cost to be managed. Further there are a number of rules, most notably the corporate criminal offence of failure to prevent facilitation of tax evasion, but also to the collection and sharing of account holder information pursuant to the OECD's common reporting standard and led by the US's FATCA, that require businesses to take an active interest in the tax affairs of others they interact with. Large UK businesses are required to publish and be accountable for their tax strategy and businesses' tax affairs are critically evaluated by the growing ranks of environmental, social and governance (ESG) investors.
My hope for this decade would be that having reached consensus on the digital economy, there would be a significant pause in changes to UK tax rules to allow businesses, advisers and tax authorities to adjust to the new tax rules (and to adjust the rules themselves where they are not working) and reprioritise certainty. However, that is not a prediction.
Originally published in Tax Journal
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