UK companies could inadvertently find themselves under a brighter spotlight
from tax authorities both home and abroad after the Lib-Con coalition’s surprise
move to cut corporation tax to 24%.
The move seemingly makes the UK a more attractive place for inward
investment, but advisers have warned of potentially unintended consequences.
Such a low rate
will put UK companies under the gaze of other tax jurisdictions desperate to
preserve their tax take, because the UK could become a destination for companies
to funnel assets to lower their tax bill.
Ironically, the UK government has tried to protect its tax base by ensuring
there is no artificial diversion of profits out of the UK by stockpiling assets
such as intellectual property in a low tax country where there is no genuine
“It might very well make overseas jurisdictions more interested in transfer
pricing operations,” said Andy Greenwood, tax partner at Alvarez & Marsal
The government is progressively cutting the headline rate of corporation tax
from 28% to 24% over the duration of this Parliament, a move which went further
than previously expected.
The payoff for the corporation tax cut is that companies are less likely to
shift their tax base to another jurisdiction, Greenwood added.
Advisers said clients were more interested in the benefits to business from
controlled foreign companies (CFC) reform and certainty rulings “rather than
headline grabbing rate changes”.
Business giants Vodafone and Cadbury have both battled the taxman in
multi-billion pound CFC cases.
While there is concern over the effect of the corporation tax cut could have
in increasing the artificial shifting of assets between borders, experts were
hopeful that current plans to overhaul the controlled foreign companies regime
would prevent drawn out and complicated challenges by tax authorities.
Gary Richards, tax partner at Berwin Leighton Paisner, said proposals to set
the regime on the basis of “artificial diversion” and “actual” rather than
“headline” tax rates would achieve these aims.
“One of the consequences of the corporation tax rate reduction could mean
that more companies are subject to a lower level of tax under the CFC regime
but, given that
two sets of changes are expected, this might not turn out to be a major issue.”
In the Budget, chancellor George Osborne launched a consultation into the
reform of CFC rules this summer. However, the new rules will not come into force
before spring 2012.
The Treasury has said the cool-off period would give it “time to consider
carefully how to make the rules more competitive, to enhance long-term stability
and to provide adequate protection of the UK tax base.”
Interim improvements to the current rules will be made in the Finance Bill
The Association of British Insurers has welcomed some of the proposals
because it could allow industry giants to use the UK as a hub for European
operations. “We will review the interim measures announced to controlled foreign
companies rules, which deal with the taxation of foreign profits made by
subsidiary companies,” the ABI said.
The body also urged the government to fast-track changes to CFCs as they will
enable the UK to compete effectively.
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