CFC changes will drive jobs away, not into, the UK

HMRC’S CONTROLLED Foreign Companies legislation, although designed to make the UK more competitive, may actually drive jobs out of the country. It feels like it has been drafted with the paranoid assumption that all companies are looking to artificially divert income into overseas subsidiaries for tax reasons, even foreign owned companies that have come to the UK voluntarily or have a real business need for offices overseas.

The issues revolve around legitimate overseas subsidiaries being charged UK corporation tax on genuine foreign profits. The drafted rules are complex and unclear, and foreign groups considering a UK headquarters may struggle to understand or pass the new rules. This dangerously unpredictable tax bill may deter multinationals from setting up headquarters in the UK and does not fulfil the policy objective of “improving the UK as a jurisdiction for businesses to locate and invest…”

The main problem is the need for subsidiaries to employ a certain proportion of Significant People Functions (SPFs) such as day-to-day management to achieve exemptions. This works for huge companies, but smaller or foreign multinationals often have streamlined local offices supported by a centralised UK operation, and therefore have a greater proportion of UK SPFs. Even if the subsidiaries pay an Arm’s Length Charge for the HQ’s services, this will not support any exemptions. Employers may find the only way to pass the new rules is to move staff out of the UK into foreign subsidiaries. So the rules might drive jobs out of the UK, thereby reducing the tax take from PAYE, VAT etc. How can this be a good thing? Is this really in the best interests of the UK?

We need an additional exemption; overseas subsidiaries that conduct genuine commercial activities, and pay an Arm’s Length Charge to their UK HQ, should be eligible for exemption from the CFC regime, even if the HQ houses the majority of the SPFs. Fundamentally HMRC needs to stop punishing organisations looking to create jobs in the UK.

Tim Branston, director of global taxation at Gazprom Marketing & Trading

Image credit: Shutterstock

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