18.02.2011

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Please click on the links below to read the articles in this months Business Alert.

Sage 50 Club 

Corporate Tax Reform 

Payroll Update 

Be wise, use electronic payments 

 

Corporate Tax Reform

On 29 November 2010, HM Treasury published a document entitled “Corporate Tax Reform:
Delivering a More Competitive System”, which reiterates the Government’s aim to create the most competitive corporate tax regime in the G20.

It includes the following principles for corporate tax reform:

• lowering rates while maintaining the tax base;
• maintaining stability;
• being aligned with modern business practice;
• avoiding complexity;
• maintaining a level playing field for taxpayers.

In terms of the Government’s approach, the document makes it clear that the direction of reform is to prioritise rate reductions, which will benefit all businesses, over introducing or broadening reliefs. A “main” rate of corporation tax of 24%, which it is intended will come into effect from 1 April 2014, will (based on announced plans in other jurisdictions) give the UK the lowest main rate in the G7 and the fifth lowest rate in the G20.

The document sets out proposed changes, which are explained further below, in the following areas:

• controlled foreign company (“CFC”) rules;
• foreign branch profits and losses;
• the taxation of intellectual property (“IP”) and research & development (“R&D”) tax credits.

The document also states that “the Government … does not intend to make any further significant reforms over the first three years” of the proposed reform programme.

Also on 29 November 2010, HM Treasury published a document entitled “The path to strong, sustainable and balanced growth” in which the Government states that it will “increase the proportion of tax revenues from environmental taxes”.

The 29 November document was supplemented on 6 December 2010 by a written ministerial statement introducing a number of anti-avoidance provisions, and the publication on 9 December of draft legislation covering a range of tax changes to be included in Finance Bill 2011.

CFC rules
Proposed changes to the CFC rules have been under discussion for several years and the rules, and the uncertainty surrounding the proposed changes, are cited as the reason for some high-profile relocations of groups’ headquarters outside the UK. It is therefore ironic that the Corporate Tax Reform proposals were issued the week after Wolseley plc, the FTSE 100 supplier of plumbing and heating products and building materials, transformed itself into a Jersey incorporated but Swiss resident company.

It is proposed that “interim improvements” to the existing CFC rules will be included in Finance Bill 2011 and new CFC rules willbe included in Finance Bill 2012.

Interim improvements to CFC rules
In summary, the proposed changes include:

• An exemption for a CFC carrying on intra-group trading activities where there is minimal connection with the UK;
• An exemption for a CFC with a main business of IP exploitation where the IP and the CFC have a minimal connection with the UK;
• A CFC which does not fully meet the conditions for either of  the above exemptions will be able, in certain circumstances, to apply to HMRC for a reduction of the full CFC charge to reflect the extent to which the conditions are satisfied;
• A three year exemption for foreign subsidiaries that, as a consequence of a reorganisation or change to UK ownership, come within the scope of the CFC regime for the first time;
• Improvements to the de minimis exemption and deferral of the withdrawal of the exemption for certain holding companies. In particular, the de minimis limit for a company which is a member of a large group will be increased to £200,000. Whilst the limit for other companies is to remain at £50,000, the test (for all companies) is by reference to accounting profits (excluding capital gains and losses) rather than taxable profits.

Draft legislation and an explanatory note were issued on 9 December 2010. Responses by 9 February 2011 will be welcomed to allow drafting changes to be made in advance of Finance Bill 2011. The changes will have effect for accounting periods beginning on or after 1 April 2011.

These amendments to the rules represent a move in the right direction in terms of reducing the compliance burden of companies with overseas operations, but the draft legislation still includes a number of uncertainties and the “safe harbour” thresholds, for example for intra-group transactions, may prove unduly restrictive.

New CFC rules
The following summarises the proposed new rules which, subject to the outcome of the present consultation, will apply from 1 April 2012:

• a mainly entity-based system that will operate by bringing within a CFC charge only the proportion of overseas profits that have been diverted artificially from the UK. A number of exemptions will be designed to minimise compliance burdens and focus attention on higher risk entities. In addition, where needed, rules will be designed to address specific sectors including banking, insurance and property;
• a partial finance company exemption which will allow groups to manage their overseas financing operations more efficiently while protecting the UK tax base. The exemption will work by considering the finance company’s debt to equity ratio and applying a CFC charge to the extent that the company has excess equity;
• an exemption for incidental or ancillary interest income which arises within trading companies;
• a new approach to managing the risks arising from CFCs with IP related profits. This will work by identifying those CFCs which present the highest potential risk and then taxing “excessive profits” which have been diverted artificially from the UK.

Responses to the proposals made by 22 February 2011 will be taken into account in preparing draft legislation to be issued in the autumn of 2011 for inclusion in Finance Bill 2012.

Foreign branch taxation
As a result of the changes to the treatment of overseas dividends (which have, generally, been exempt from corporation tax since 1 July 2009), the Government published a discussion document in July 2010 setting out options regarding foreign branch taxation. The following summarises the draft legislation issued on 9 December 2010:

• there will be an “opt in” exemption from tax for foreign branches;
• if the option for exemption is exercised there will be no relief in respect of foreign branch losses;
• the election will be irrevocable after the filing date for the tax return for the first accounting period to which the election applies;
• the election will apply to all the branches of a company;
• the foreign profits will be calculated in accordance with the terms of the Double Tax Treaty with the state in which the branch is located (or by reference to the OECD model treaty if the applicable Double Tax Treaty does not include a non-discrimination article or there is no treaty with that state);
• because there has been a recent change to the OECD model treaty which has not yet been incorporated in any of the UK’s existing treaties, there will be differences in the calculation of the profits of branches located in “full” treaty countries compared with branches in other locations. In particular, the revised model treaty provides for “internal” royaltiesand interest to be taken into account;
• if there is a “full” treaty between the UK and the state in which a foreign branch is located, equity and loan capital will be allocated in accordance with the terms of that treaty; otherwise the capital allocation approach will be used;
• the exemption will not be available to “small” companies in respect of branches in states with which the UK does not have a “full” treaty due to the perceived risk of the loss of tax through the diversion of personal income;
• the exemption will also not apply to profits or losses arising from the long term business of insurance companies, investment companies, the chargeable gains of close companies or, usually, international air transport and shipping;
• relief which has already been given for foreign branch losses will be clawed back by deferring the effect of the exemption from tax until such losses arising in the six years prior to that in which the election is made have been matched with profits. If the losses of a foreign branch in accounting periods beginning after 2005 (on a date yet to be specified) exceed £50 million, the exemption will not apply until all the foreign branch losses have been matched with foreign branch profits;
• the exemption will not apply to the profits of a foreign branch if the foreign tax payable is less than 75% of the UK corporation tax that would be payable on those profits unless a motive test is satisfied or the profits concerned are less than “the entry limit”. For the purposes of the entry limit, profits exclude chargeable gains (and allowable losses) and the entry limit is £200,000 for large companies and £50,000 for other companies.

In a technical note issued on 20 December, HMRC invites comments as to whether there should be a rule requiring exempt foreign branches to minimise their profits by taking advantage of all available reliefs and whether specific antiavoidance rules are needed to cover leasing activities and the transfer of branches between group companies. In addition, views are sought on the allocation of capital allowances and amounts falling within the intangibles regime.

One consequence of the foreign branch profits exemption is that the residence of non-UK incorporated companies will be less important. Currently, a non-UK incorporated company is liable to UK corporation tax on its worldwide income and gains if “central management and control” is exercised here. Care therefore needs to be taken regarding, in particular, who the directors of the company are and where they carry out their duties. In the future, even if a non-UK incorporated company is controlled and managed in the UK, subject to meeting the conditions of the exemption and the potential application of anti-avoidance provisions, the profits of the foreign branch of the company would still not be liable to UK corporation tax. It would, of course, be necessary to exercise the option and there would be reporting and filing obligations.

Comments on the proposals are invited by 9 February 2011. It is intended to include legislation in Finance Bill 2011 and that the new regime will be available for accounting periods commencing on or after a date, yet to be specified, in 2011.

The proposed exemption represents a welcome move forward towards equalising the tax treatment of branches with that of subsidiaries. The transitional rules and anti-avoidance provisions will, however, mean complex adjustments may be required to some structures. This contrasts unfavourably with the relative simplicity of the foreign dividend exemption.

Patent box
The Government confirmed its intention to introduce a preferential rate of corporation tax of 10% on net profits arising from patents. It is proposed that the reduced rate will apply to income arising on patents which are first “commercialised” after 29 November 2010 and that it will apply to “embedded” income included in the price of patented products as well as to royalty income. Companies will have to exercise an election for the regime to apply. Responses to the proposals are invited by 22 February 2011. Further details will be published for consultation in spring 2011 with a view to publishing draft legislation in autumn 2011 for inclusion in Finance Bill 2012.

In a press release also issued on 29 November 2010, Andrew Witty (the CEO of GlaxoSmithKline) said “The introduction of the patent box is a bold and forward-thinking measure” and that “the patent box has the potential to transform the way in which the UK is viewed by companies such as GSK as a location for new investments in high added-value R&D and manufacturing”. He also confirmed GSK’s intention to make new investments in the UK which, according to press reports, will amount to £500 million. Conversely, the following day the Institute for Fiscal Studies stated that their “analysis suggests that the policy will lead to a large reduction in UK tax receipts from the income derived from patents, is poorly targeted at promoting research, will add complexity to the tax system, and it is far from clear that any additional research resulting from the policy will take place in the UK”.

Research and development tax credits
In March 2010, in response to David Cameron’s invitation to “help the Conservatives reawaken Britain’s innate inventiveness and creativity”, James Dyson published “Ingenious Britain: Making the UK the leading high tech exporter in Europe”. The report made the following specific proposals for the R&D tax credit schemes:

• refocus the schemes on high tech companies, small businesses and new start-ups;
• increase the credit to 200%, when the public finances allow;
• improve the ease with which the credit can be claimed.

The Government has rejected the recommendation to restrict the sectors eligible for the credits, and the 29 November report makes no comment on increasing the rate of the credits. Whilst views are sought on whether there are any specific costs which should be brought within the scope of the scheme, it is stated that adding such costs would need to be balanced by savings elsewhere. Indeed, views are sought on any costs which should be excluded and internally developed software is cited as a specific example.

Comments are also invited regarding:

• the definition of R&D contained in guidelines issued by the Department for Business, Innovation and Skills;
• whether there should be a statutory definition of “production” (the costs of which are excluded in calculating the credits);
• further enhancements to promote additional investment in R&D by the smallest companies;
• whether Vaccine Research Relief is effective in incentivising research into drugs and vaccines;
• improvements to the claims process that would make it more streamlined and whether there would be significant benefits from an external auditing process for claims or a more formal pre-clearance procedure of R&D projects with HMRC.

Comments are invited by 22 February 2011.

Interest deductibility
The Report states that the Government has considered options for restricting the corporation deduction given for interest expenses but that it “does not intend to pursue significant changes to the UK’s competitive regime for interest”. The absence of further major changes is welcome following the introduction of the worldwide debt cap for large groups. 

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Payroll Update

From January 2011 employers who ignore the National Minimum Wage rates will be named and shamed.  Introduced in February, for redundancy purposes, the maximum amount of "a weeks pay" increases from £380.00 to £400.00 and in April 2011 NIC Rates increase by 1% for both Employees and Employers.

 

National Insurance Update

Earnings	Employees	Employers
below £102.00	NIL	NIL
£102.00-£136.00	0%	0%
£136.00-£139.00 per week	0%	13.8%
£139.00-£770.00 per week	12.0%	13.8%
£771.00-£817.00 per week	12%	13.8%
Above £817.00 per week	2%	13.8%

Income Tax Update 

Tax	Emergency Coding 747L
20%	£1 > £35,000
40%	£35,000>£150,000
50%	£150,001 +

 

  
Be wise, use electronic payments
The banks have stated that cheques will be withdrawn in 2018, principally because of their fraud risk, whether by chequebook theft, post theft or cheque cloning. While the banks have most exposure, a small business could be threatened if a large cheque was fraudulently diverted, particularly if the problem went unnoticed for a few weeks.

Even now small businesses are recommended to use BACS or a similar electronic payment system. BACS has built-in control mechanisms, including those of authorisation, and provides certainty on payment timing. Why take unnecessary risks? 

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Contact:

Paul Renz, Head of Tax

Paul Thompson, Business Advisory Partner

John Walker, Corporate tax Director