Unlocking tax relief potential
UK companies face many legislative challenges but tax opportunities can be a big help, writes Helen Brown
Over the years, the UK has continued to drive towards a more competitive Corporate Tax (CT) regime. This has been achieved by various means, including lowering the headline rate to 17 per cent from April, 2020, which will be among the lowest rates of the G20 countries. Compare this to a rate of 28 per cent from a decade ago and it is encouraging for foreign investors.
The UK also has generous tax incentives to encourage innovation in the form of Research & Development and Patent Box relief. There have been changes in the legislation too, designed to encourage utilising the UK as a “holding company” location, including some relaxations to the Substantial Shareholdings Exemption (SSE) legislation which, in many cases, now make it easier for UK holding companies to obtain CT relief when selling subsidiaries and other investments.
Although generous incentives have been put in place, there are inevitably challenges that Uk-based companies will face in order to comply with the ever-changing legislation.
HMRC is not in the business of giving with one hand without taking with the other. Since 2017, in particular, a raft of complex tax legislation has been introduced. For companies to maximise any tax planning opportunities and ensure compliance with the laws, they need to be aware of the impact of this legislation, together with any mitigation strategies.
From 1 April, 2017, HMRC introduced the Corporate Interest Restriction (CIR) legislation. The CIR is based on the Organisation for Economic Cooperation and Development’s (OECD) best-practice recommendations for limiting a perceived tax base erosion by means of excessive tax deductions for financing costs. The legislation is designed to discourage groups from over-burdening UK companies with excessive debt to obtain tax deductions on interest charges.
The CIR rules can seriously limit UK interest deductions for CT and generally applies if your UK group, or standalone entity, expects to deduct more than
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£2 million net interest per annum (including certain finance costs).
The UK’S CIR rules arguably go beyond the scope of the OECD’S intentions, as the restriction will apply just as equally to a standalone Uk-only entity with private equity funding or an owner-managed business as it will to a multinational group listed on an international stock exchange.
In a similar vein, the government introduced the “hybrid mismatch” legislation which is targeted anti-avoidance designed to, among other things, restrict deductions for interest where the credit is not taxable elsewhere due to a perceived “hybrid” structure. This, along with the CIR, and also the UK’S existing “transfer pricing” legislation, are now key considerations when looking at financing of UK debt.
Additionally, the Criminal Finances Act 2017, effective from September of that year, puts the responsibility onto businesses to tackle the proceeds of crime via facilitation of tax evasion. Businesses need to undertake a risk assessment and ensure that their policies and procedures are tailored to minimise the risk of the facilitation of tax evasion by employees, agents, subcontractors or other “associated persons”.
This is wide-reaching legislation, applicable to all businesses regardless of size, and can result in a criminal prosecution, unlimited fines and serious reputational damage.
Finally, Brexit undoubtedly brings uncertainty and challenges, but it should be viewed as an opportunity for UK corporates to review their business with European counterparts and ensure that any transactions are properly planned pre-brexit.
With an ever-changing business landscape, and the introduction of more and more complex legislation, it is critical that UK companies have a proactive and skilled tax advisor who can navigate the challenges and changing legislation and support in maximising the tax opportunities.