Is the UK’s tax system becoming more attractive?
CFOs should reconsider the role the UK can play in tax planning amid incoming changes
By Joanne Bentley is tax partner and Ed Wright is a director in international tax practice, Deloitte | CFO UK | Published 12:03, 19 July 12
Recent, significant tax reforms, ushered in by chancellor George Osborne’s declaration that “Britain is open for business”, are prompting many to reconsider the role that the UK can play in their group’s business activities.
Activities which in the past may have settled in Switzerland, Luxembourg, the Netherlands or Ireland can today be an ideal fit for the UK. Meanwhile, investing in offshore operations from the UK is significantly more attractive than it used to be. So, what’s changing and how should businesses react?
Chief among these changes is the reform of the controlled foreign companies (CFC) regime, coming into force from January 2013. The rules have been totally rewritten and within this the government has recognised that, while CFC rules still need to apply to overseas financing activity, the tax paid will be more pragmatic at 25 percent of the corporation tax rate. In 2014, this will mean a CFC effective tax rate of 5.5 percent on such income.
This reform, together with other tax changes, means that a number of business activities are now better supported by the UK tax environment.
The new CFC rules mean that there is more flexibility to structure investment in overseas businesses from the UK without attracting a punitive UK tax charge or complexity. For UK-owned groups, this in particular allows for greater flexibility in providing funding from a tax-advantaged location.
The changing UK tax regime opens up new business model possibilities and chief financial officers should reconsider the role the UK can play. For example, those with complex cross-border supply chains should review the possibilities relating to shared service centres, procurement models and franchising arrangements.
Groups with UK and many European patents or patentable assets at their core should benefit from the introduction of the new patent box regime – an effective 10 percent tax rate on UK patent-derived income which takes effect from April 2013.
It will benefit most industries and when combined with other tax benefits, can make a compelling case for choosing the UK over other IP development locations. Significantly, in the UK system, patents do not need to be a critical part of the business for all related income to qualify, so businesses should investigate the link between their patents and income streams.
What actions to take now?
Groups should review how they own and fund operations held from the UK. Would the relocation of certain functions to the UK be value enhancing? Groups should also consider commercial restructurings of their offshore businesses, as the UK CFC rules will in many cases no longer pose an impediment to wholly offshore commercial activities. Next, groups considering significant commercially driven internal or external transactions should get up to speed with the changes and structure in such a way that maximises the benefit from them.
Finally, engage with HM Revenue & Customs now on both proposed offshore finance company arrangements and commercial activities of offshore subsidiaries, as HMRC has indicated it is prepared to provide pre-clearance in some circumstances.
Of course, in assessing these opportunities groups should be mindful of a number of outcomes. Stakeholder interest in tax is climbing steadily, and groups should bear in mind that their tax strategy may result in attention either from the press, shareholders, pressure groups, or all three.
Many groups will already have a UK presence of some kind. However there will be costs associated with growing that presence or establishing it outright, such as legal and tax support, people and office space. There will also be costs associated with tax compliance and audit requirements.
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