BUDGET IN DEPTH: Foreign banks face £350m tax bill

This change in the treatment of UK branches of foreign companies will affect the way the taxable profits for branches are measured. Though it will affect all foreign companies with branches, it is likely to bite most significantly in the banking sector.

The Inland Revenue said the move would bring the UK into line with other countries and said the existing method of calculating branch profits had led to significant differences between the tax payable by companies operating in the UK through a branch and others which operate through a subsidiary.

The move will also affect UK companies that operate abroad through branches, as the new rules may alter the amount of double taxation relief that they will be able to claim.

In his Budget speech chancellor Gordon Brown said: ‘The UK’s current treatment of branch capital means that some profitable foreign companies operating in the UK pay little or no tax on their profits here.

‘From 1 January, at a revenue gain of £350m in its first full financial year, I will bring the treatment of capital for UK branches of foreign companies into line with international practice by applying similar corporation tax rules as America, Germany, France and most other major countries.’

Tax experts played down suggestions that the move could make the City a less competitive place to do business.

There are more than 200 foreign banks in the City making high-value loans so the impact of the new tax would be minimal, said PricewaterhouseCoopers tax partner Derek Jenkins.

‘We’ve been expecting this for 20 years but had kind of forgotten about it,’ he said.

Foreign banks would continue to use branch arrangements as this gave them regulatory advantages by allowing them to lend based on their parent’s balance sheet, Jenkins added.

There are fears that the move could cost accountants and other professional advisers dear as they currently act on behalf of foreign companies in discussions with the Inland Revenue.

But Frank Haskew of the ICAEW’s tax faculty, said: ‘There will be more tax that is taken and that always means there is more for accountants to advise on,’ he said.

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