International Tax Newsletter - Spring/Summer 2012 - United Kingdom
CONTROLLED FOREIGN COMPANIES CHANGES
Draft legislation has been published setting out a redesigned controlled foreign companies (CFC) regime that will take effect for accounting periods beginning on or after 1 January 2013.
The aim is to tax income which has been hived offshore into overseas companies which are controlled by UK companies and which pay tax at a lower rate than in the UK. The mechanism employed is to deem UK companies with an interest in the CFC to have received a proportionate share of the CFC’s profits, thereby bringing them within the charge to UK tax.
Entity level exemptions
There are a number of exemptions from the current regime: overseas companies can be exempted based on the size of their profits, the tax rate in their territories of residence and the activities carried out. Some of these exemptions are retained with changes and a company can be exempt from the new regime where:
- the foreign tax suffered by the CFC is at least 75% of the equivalent UK
- the CFC has less than £500,000 of trading profits and £50,000 of investment income per annum
- the CFC is resident in a territory on the ‘excluded territories’ list (subject to conditions relating to the CFC’s amount and type of income and a motive test)
- the CFC has profits of no more than 10% of relevant operating expenditure (including the cost of goods to be delivered to the CFC’s territory of residence but excluding intra-group expenditure).
There will also be a temporary exemption period of up to two years from the date a company becomes a CFC as a result of certain corporate acquisitions and reorganisations.
TRADING PROFITS -- GATEWAY TEST
With regards to non-financial trading profits, a key component of the new regime is the ‘gateway test’ which is designed to test whether profits have been artificially diverted from the UK. If the CFC does not meet any of the prescribed conditions, this test is considered to have been passed and therefore the CFC is covered by the regime.
Previously, the CFC regime worked on an all or nothing basis whereas under the new regime, profits will only be subject to the CFC charge to the extent that they relate to UK ‘significant people functions’ (SPFs).
There will be a number of safe harbours which will completely exempt the attributed profit from a CFC charge.
There will also be an anti-avoidance provision which deems that the safe harbour tests have not been met if the CFC’s group has organised any part of its business in a particular way with the main purpose, or one of the main purposes, to ensure that one of the tests is met.
NON-TRADING FINANCE PROFITS
The tests described above relate specifically to trading profits, but there will be a separate test for non-trading finance income, which seeks to tax only specific financing profits.
If the profits pass through this ‘finance income gateway,’ then a claim can be made to tax only 25% of those profits (making the effective tax rate on them only 5.75% for 2014). It is proposed that the taxable amount will also be limited to the aggregate net borrowing costs of the UK members of the group. For example, if chargeable financing profits are £400m and UK group members have net borrowing costs of £60m this would reduce the CFC charge to apply to profits of only £60m. There will be a full exemption for finance profits arising from a loan funded from qualifying resources
A group will be free to focus on either the entity level exemptions or the gateway test to determine whether, or to what extent, its overseas subsidiaries’ profits are subject to a CFC charge.
UK VAT FROM ‘DOLLAR ONE’ FOR INBOUND BUSINESSES
Historically, non-UK businesses have been able to sell in the UK without registering for VAT unless and until their turnover exceeds the UK’s VAT registration threshold (currently £73,000). However, the rules will change on 1 December 2012, meaning that businesses not established in the UK that are supplying taxable goods and services within the UK must register for VAT there – no matter how small their turnover may be.
The new measure will affect businesses that sell goods and services in the UK from a temporary presence in the UK, e.g., at a trade fair or other event or non-UK traders taking part in a Christmas or specialty market.
Broadly speaking, the changes will not apply to businesses that ship goods or sell services directly to UK customers from abroad, although some of these organisations may already be required to register for VAT in the UK under different rules. Also unaffected are vendors of electronic media sold to private customers in the UK, provided they are already VAT registered -- either in the UK only or under the EU wide ‘special scheme for electronic services.’ However, those that have opted out of the special scheme and are not UK VAT registered could well be required to account for VAT on their sales of electronic media and should seek advice on their position.
Overseas businesses that sell to their customers from a permanent UK presence will not be affected by the new rules and will not need to register unless their turnover exceeds the normal UK VAT registration threshold. However, they would need to consider their UK income or corporation tax obligations.
PLACE OF SUPPLY OF SERVICES FOR VAT
In 2011 there were two VAT developments of interest to UK companies which organise or attend exhibitions, conferences and training events.
JANUARY 2011 CHANGES
For many years, activities of a ‘cultural, artistic, sporting, scientific, educational or entertainment’ nature have formed a specific category when determining the VAT position of cross-border services. Apart from the commercial events listed above, the term also includes a variety of services that involve a ‘physical performance.’
Until 2011, these services were treated for VAT purposes as taking place in the country where the work was physically carried out. This required companies in these sectors to register for VAT in other EU member states where they operated.
The EU VAT rules changed on 1 January 2011 and where this type of service is provided on a B2B basis, it is now deemed for VAT purposes to take place in the country where the customer belongs. Instead of the service provider registering for VAT overseas, the recipient now accounts for VAT on its own VAT return under the reverse charge mechanism.
There are exceptions though: B2C supplies of this nature and B2B admission charges for events continue to be subject to VAT in the country where the event takes place. So far, the biggest challenge the new system presents is to identify which income constitutes an admission charge.
OCTOBER 2011 EUROPEAN COURT RULING
A judgment in the European Court of Justice (ECJ) in the case of Inter-Mark Group has created more uncertainty for the events sector, this time over the VAT position of the hire of stands or space at exhibitions.
For many years, HMRC has treated exhibition stand hire as a temporary rental of land, provided the exhibitor is given the right to a defined area of the exhibition hall. As a result, some exhibition organisers have treated these lets as VAT exempt while others have opted to charge VAT on the hire.
The ‘rental of land’ approach also means that the hire of a stand at a UK venue is a UK supply for VAT purposes so, where VAT is charged, it applies whether the client is a UK- or overseas-based exhibitor. Other cross-border exhibition related services, such as general event organisation, are subject to the post-2011 place of supply rules – i.e., VAT is accounted for by the customer as a reverse charge. Put together, these factors have resulted in an inconsistent application of VAT across the industry.
The ECJ decision says that the VAT treatment of exhibition stands depends on the precise details of the hire and could constitute advertising services, a hire of equipment or ‘exhibition services’ and that the hire of a stand is NOT a supply related to land, meaning the UK’s approach of allowing VAT exemption for defined stand locations could be wrong.
Businesses in the sector should seek advice on their UK VAT position to ensure they are dealing with VAT correctly and efficiently under the current rules.
From April 2012, where a business purchases a second hand building which includes fixtures, it must make a claim for capital allowances in respect of those fixtures before they are sold on, disposed of or transferred to another person (so that a company or business cannot make a claim for assets it no longer owns).
In addition, a new measure is proposed on the interaction between the fixtures rules and the business premises renovation allowances (BPRA) scheme. From April 2012, if a taxpayer sells a building on which BPRAs have been claimed within seven years and, as a result, allowances claimed on expenditure on fixtures are clawed back, the purchaser will be entitled to claim capital allowances on those fixtures instead. It has also been confirmed that the current BPRA relief at 100% will continue until April 2017.
From April 2012, expenditure on solar panels will be treated as special rate expenditure for capital allowances purposes. Where such expenditure is not covered by the annual investment allowance, it will only attract capital allowances at 8%. In addition, where there is expenditure on plant and machinery which is used to generate electricity and the business receives a feed-in tariff payment in respect of that expenditure or incentives as a result of the heat generated, or gas or fuel produced by the plant and machinery; no enhanced capital allowances (100% relief upfront) may be claimed.
Businesses based in special zones will qualify for 100% capital allowances on investment in plant and machinery from April 2012 to March 2017 – these can be identified by contacting Jon Hills as noted immediately below.
STATUTORY RESIDENCE TEST
The legislation to introduce a statutory residence test for individuals has been delayed and will not take effect until 6 April 2013. It is understood that the government is working to clarify a number of the key definitions used in the proposed rules and draft legislation is expected to be published with Budget 2012.
More information on these developments can be provided by Jon Hills, PKF UK, through the EisnerAmper contacts listed at the end of this Newsletter.
International Tax Newsletter - Spring/Summer 2012 Issue