The Government’s aim is that the UK should be an attractive environment in which businesses can compete effectively in the global marketplace. The DTR changes form part of a broader Budget package, including substantial proposals to continue to enhance the UK’s attractiveness as a place to do business as well as to ensure a fair tax system, which include consultation on:

– rollover relief for gains on the disposal of substantial shareholdings held by companies; and

– introducing tax relief for the costs of purchasing goodwill and other intangibles.

The Government wishes to make progress in these areas and, subject to consultation, plans to publish draft clauses on possible changes at the time of the Pre-Budget Report.

At the same time the Government is keen to continue its dialogue with business on ways in which the UK business environment can continually be enhanced and made more competitive.

The detailed changes will be as follows:

The Government recognised in the Budget that the DTR changes should not come into effect immediately. A start date of 1 July 2000 was proposed to allow groups a period in which to pay dividends to the UK under the old rules. However, some groups with complex, multi-tiered structures face complications arising, for example, from the position of minority shareholders in foreign subsidiaries, and from foreign law constraints on when dividends can be paid, placing them at an artificial timing disadvantage, vis-a-vis others. The Government has therefore decided that the start date for the restriction on the use of mixer companies should instead be 31 March 2001;

– a provision introduced by paragraph 5 of Schedule 30 of the Finance Bill, dealing with the interaction of double taxation agreements and relief for foreign tax under UK domestic law, will apply only in relation to agreements that are made on or after 21 March 2000;

– a provision introduced by paragraph 10 of Schedule 30, limiting the amount of relief for underlying tax that is allowed to a UK company, by reference to dividends paid between companies in the ownership chain below the UK company, will not apply where the company paying the dividend and the company receiving it are resident in the same country except in cases of abuse;

– a provision introduced by paragraph 12 of Schedule 30, clarifying how relief for underlying tax is to be allowed where a group of companies is taxed as a single entity in another country, will apply wherever the group of companies is situated in the ownership chain below the UK company.

These changes will be contained in amendments which will be tabled to the provisions in Schedule 30 of the Finance Bill.

The other proposals in the Budget package to modernise the tax system included:

– consultation on the possibility of introducing a rollover relief for gains on substantial shareholdings held by companies. This would be a major relaxation to the capital gains rules for companies. By removing the immediate tax charge when companies rationalise their substantial shareholdings, it would promote business efficiency;

– broadening the scope of the intellectual property review to reflect the increasing importance of intellectual property to business, to take in the possibility of introducing tax relief for the costs of purchasing goodwill and other intangibles.

Changes in these areas, if introduced, would take effect at the same time as the mixer company changes. Taken together, they would protect and enhance the attractiveness of the UK as a location for holding companies.


Draft legislation on double taxation relief was published by the Inland Revenue on Budget day, 21 March 2000, in the paper “Double Taxation Relief for Companies: Outcome of the Review”.


Double taxation occurs when income is taxed both by the taxpayer’s country of residence and by the country in which the income arises. The most common UK approach to relieving double taxation is the credit method, under which the foreign tax paid on an item of income is deducted from the UK tax payable on the same item of income. Other countries may use the exemption method to relieve double taxation, under which the foreign income is generally disregarded for tax purposes in the country where the taxpayer is resident.

The purpose of double taxation relief is to remove or reduce the disincentive that double taxation represents to outward investment. It is estimated that in the tax year 1999-2000 £5.5 billion of relief will be given against income tax and corporation tax. A key part in that is played by double taxation agreements that the UK has entered into with other countries. More than 100 of these are now in force.

Around #4 billion of the foreign tax for which relief is allowed in the UK is underlying tax. This is tax paid by a company on its profits out of which it pays a dividend.

A mixer company is an offshore subsidiary of a UK company which itself has one or more subsidiary companies. Dividends from different subsidiaries are routed into the UK through the mixer company. This allows mixing of the different dividend streams and of the underlying taxes attributable to each.

Under the current rules it is possible to mix, and thereby to average out, foreign taxes, paid in different countries, of, say, 60 per cent and 5 per cent, to set against the UK tax charged at 30 per cent on the single dividend that emerges from the mixer. Under the Finance Bill, the foreign tax charged at 60 per cent will be limited to 30 per cent for the purpose of calculating the relief that is available in the UK.

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