August 01, 2011
From 1 April 2011, the main rate of corporation tax has fallen from 28% to 26%. Further 1% reductions are scheduled for each of the following three financial years so that the rate will be reduced to 23% by 1 April 2014. The small companies' rate has also been reduced from 21% to 20% from 1 April 2011.
A number of changes have been made to the controlled foreign companies (CFC) rules for accounting periods beginning on or after 1 January 2011. These interim measures are being made in advance of a more fundamental reform of the CFC rules in 2012. Highlights are as follows:
- A new exemption for intra-group trading activities and intellectual property exploitation where there is minimal connection with the UK and it is unlikely that profits have been artificially diverted from the UK.
- A choice of two de minimis limits under which a CFC's profits are ignored. Under the existing exemption, a CFC's chargeable profits (calculated under UK tax principles) can be ignored if they do not exceed £50,000. In the future, companies will have the choice of using this test or an alternative de minimis profit level of £200,000 based on the company's accounting profits as calculated under GAAP, but adjusted to exclude distributions treated as exempt under part 9A CTA 2009 and capital gains or losses and to include trust and partnership income. The result is also to be adjusted by applying the transfer pricing rules in relation to related party transactions, unless the amount of this adjustment to profit would be less than £50,000.
Reforms that are more fundamental are expected to be introduced in the Finance Bill 2012. It is expected that the new regime will be mainly entity-based but will only target the portion of overseas profits that have been artificially diverted from the UK. In addition, the profits of finance companies caught under these rules will be taxed at a maximum of a quarter of the main corporation tax rate (i.e., an effective rate of 5.75% by 2014).
For accounting periods commencing on or after Royal Assent to Finance Bill 2011, UK companies will be able to make an irrevocable election to permanently exempt their overseas branch profits (including capital gains attributable to the branch) from UK taxation. Once a company has made the irrevocable election, losses of a foreign branch will not be available to offset against the UK company's profits.
Under these rules, a company's branch profits will become exempt as soon as the tax losses of those branches in the immediately preceding six years have been matched by profits. Special rules will apply to very large losses over around £50m. Branch profits will be determined by reference to the latest OECD model treaty unless a specific treaty applies. New anti-avoidance measures will also prevent the diversion of profits for tax avoidance purposes.
The Government has confirmed that a reduced 10% rate of corporation tax will be introduced from 1 April 2013 on profits arising from certain patents first commercialised after 29 November 2010.
The new UK registration limit is £73,000. However, from 1 August 2012, any business which is not established in the UK but is making taxable supplies of goods or services in the UK must register for VAT – i.e., there will be no threshold in such cases.
The UK offers companies enhanced tax relief against qualifying costs of projects that seek to achieve an advance in science or technology by resolving scientific or technological uncertainty.
- Subject to EU state aid approval, the rate of R&D tax relief available to small and medium-sized enterprizes on qualifying expenditures has increased to 200% (previously 175%) for expenditure incurred from 1 April 2011. From 1 April 2012, again subject to EU state aid approval, the total rate of relief will increase to 225%.
- Larger companies can still claim a 130% deduction for the same type of expenditure.
Individuals who leave the UK to take up full-time employment overseas need to fulfill certain conditions if they are to be deemed non-UK resident. These include having a contract of employment overseas for at least a full tax year and making visits to the UK that total fewer than 183 days in any tax year and average fewer than 91 days a year (over any four-year period).
HMRC has now laid down additional guidelines relating to such workers. These typically are employees initially posted overseas for two or three years. In HMRC's view, unless there are extenuating circumstances, if someone spends ten or more days working in the UK in any tax year, ignoring days when he or she is only carrying out incidental duties, he or she will remain UK resident. This could affect people coming back to the UK for business meetings. It will affect not only the employees but also employers who will have a duty to deduct income tax and, possibly, employee and employer social security payments throughout the employee's period of absence. This issue is likely to be of less significance for those in countries with whom the UK has a double tax agreement although, in many such cases, it still would lead to undesirable consequences.
The current non-statutory rules for establishing whether individuals are UK resident for tax purposes are complex. The Government is commencing consultation in mid-2011 with a view to introducing a statutory definition of residence from April 2012. However, the above guidelines are expected to be subsumed into the new residence test.
Under current rules, non-UK domiciled individuals who have been UK resident in seven out of the last nine tax years can elect to be taxed on foreign income and gains only to the extent that these are remitted to the UK, on payment of a £30,000 per annum remittance basis charge. From 6 April 2012, the charge will be increased to £50,000 for those who have been resident in the UK for 12 or more years and wish to continue to be taxed on the remittance basis.
In addition, subject to consultation, from April 2012 certain remittances of foreign income and gains will not be taxable if the funds are used to invest in UK businesses.
Entrepreneurs' relief reduces the tax rate on individuals and trustees from 18% or 28% to 10%. The lifetime limit on capital gains qualifying for entrepreneurs' relief has been increased from £5m to £10m for qualifying business disposals on or after 6 April 2011.
The UK authorities have offered a number of tax amnesties in recent years ranging from specific offers for plumbers (albeit other individuals could use this particular facility too) and medical professionals to general offers for UK resident individuals with offshore assets. The most useful of these for UK based individuals with assets held offshore is likely to be the Liechtenstein disclosure facility (LDF). Although this facility was negotiated with the Liechtenstein authorities, the LDF is theoretically available to anyone, even those who currently have no connection whatsoever with Liechtenstein.
The LDF allows individuals to create a financial presence in Liechtenstein and then to make a voluntary disclosure of worldwide income which should previously have been taxed in the UK. The terms of the LDF can save users a massive amount of tax and interest on bringing their UK tax affairs up to date.
There are also press reports of a potential deal between UK and Swiss authorities on a facility for settling undeclared tax on assets held in Switzerland. Negotiations have been going on with Switzerland for some months now but no formal announcement of terms has yet been made. Whether the terms of any Swiss facility will be more advantageous than the current LDF — which is available to UK resident individuals with Swiss accounts in many cases – remains to be seen.