Inland Revenue 5
8 November 2000
A MORE COMPETITIVE ENVIRONMENT FOR BUSINESS
Enhancements to the competitiveness of the UK's tax system were announced by the Chancellor today, providing a modern environment in which businesses can thrive. The package, which is subject to consultation:
- Removes out-dated requirements for companies to withhold tax on most intra-UK interest and royalty payments, simplifying the administration for payers and avoiding cash flow issues for the recipients. This should help .to enhance competition in the financial services sector;
- Builds on the work undertaken since Budget by the Inland Revenue, together with business, to launch the next stage in the reform of the taxation of intellectual property, goodwill and other intangible assets;
- Expands the scope of the consultation on the taxation of disposals of substantial shareholdings, to consider the issues surrounding a deferral relief regime in more detail and, as part of a wider discussion on competitiveness, whether alternative approaches, including the possibility of a form of exemption regime, might be appropriate; and
- Extends the on-shore pooling rules for Double Taxation Relief to allow relief for rates of foreign tax paid up to 45 per cent even if these arise at several levels in a chain of companies overseas.
In addition to these measures, the Government is also looking to:
- Simplify and modernise the legislation concerning corporate debt, financial instruments and foreign exchange gains and losses;
- Clarify the tax treatment for the new Limited Liability Partnerships (LLPs);
- Adjust and simplify the calculation of foreign tax for Double Taxation Relief purposes, so that it applies in all cases as originally intended; and.
- Clarify the changes to the treatment of capital gains of companies introduced in this year's Finance Act.
- Draft clauses for a number of the measures are being published today. Appropriate legislation for these measures will be introduced in the next Finance Bill.
DETAILS
Withholding tax on interest and royalty payments
The Government intends to abolish the requirement to deduct tax at source from most payments of interest or royalties between companies where the recipient company is within the charge to corporation tax on that income. This simplification builds on the Budget 2000 announcement to abolish withholding on international bond interest and the consultation on the taxation of intellectual property. This change would mean that from 1 April 2001 the paying company would no longer need to deduct tax from most interest or royalties paid to such a company.
Mechanics
For interest or royalties to be paid gross, the paying company will need to be satisfied that the recipient is within the charge to UK corporation tax. The Government is anxious to minimise the compliance burden on companies making such payments, whilst ensuring that gross payments are only made in appropriate circumstances. Views would be welcome on the detail of procedures that the paying company would need to follow when making gross payments.
One possible approach would be to allow a paying company not to deduct tax where it had reasonable grounds for believing that the recipient company was within the charge to corporation tax (e.g. if the recipient company had an address in the UK). But in certain circumstances (e.g. when payment is made to a nominee, whether or not in the UK) the paying company might decide to require further information before paying without deduction at source.
If it later turned out that the recipient company was not within the charge to corporation tax, the paying company would be liable to pay the tax that should have been withheld, with interest. However, penalties would not be charged unless it should at the time have been clear to the paying company that the recipient company was unlikely to be within the charge to corporation tax.
Comments are invited on whether this approach would be acceptable or whether a different system might be preferable. For example, there would be less scope for uncertainty if precise rules set out the evidence which companies should require to decide when tax should or should not be withheld, but this approach might seem inflexible.
Comments on the proposed changes are welcome. Please send them by 20 December 2000 to:
Guy Hooper
Inland Revenue
Business Tax
Room S 23, West Wing
Somerset House
Strand
London WC2R 1LB
Intellectual property, goodwill and other intangible assets
The Inland Revenue published a Technical Note on 23 June 2000 setting out the options for reform in this area, and over 80 responses were received.
The consultations showed that there was considerable support for the aims of the Review, but also identified some issues which needed to be addressed. The Inland Revenue is today publishing a further Technical Note which sets out in more detail how a new regime might operate.
The new Note, 'Reform of the taxation of intellectual property, goodwill and other intangible assets: the next stage' may be downloaded from the Inland Revenue website or obtained by post from:
Inland Revenue
Business Tax
Room 312
22 Kingsway
London
WC2B 6NR
The note considers firmer options for taking the reform forward, in the light of the responses received. It discusses the scope of the reform, considers how an accounts based reform would work in practice and looks at options for transition to the new regime.
Comments are invited on the note. They should be sent to Jon Sherman at the address above by 20 December. Earlier comments will be very welcome.
Taxation of gains on disposal of substantial shareholdings
A Technical Note issued on 23 June 2000 set out a possible form for a deferral relief on gains on substantial shareholdings held by companies. There were 51 substantive responses.
The Government has assessed the benefits of such a relief in the light of those responses and wishes to initiate a wider debate about the best way to boost UK business by a capital gains relief. The Technical Note, entitled "Corporation Tax: Chargeable Gains: Relief for Gains on Substantial Shareholdings", includes draft clauses relating to the main framework of the original proposals and details of the further refinements which would be made; and invites consultation, as part of a wider discussion on competitiveness, on whether alternative approaches, including the possibility of a form of exemption regime, might be appropriate.
It can be downloaded from the Inland Revenue website or obtained by post from:
Inland Revenue
Capital and Savings
Room 121, New Wing
Somerset House
Strand
London WC2R 1LB
Comments should reach the Inland Revenue by 20 December 2000 or earlier if possible.
Double Taxation Relief
Schedule 30 to Finance Act 2000 introduced far-reaching changes to the rules for allowing foreign tax paid against UK corporation tax payable on dividends. Following discussions with business, the way in which eligible unrelieved foreign tax (EUFT) is calculated and the mixer cap itself will be changed.
The changes would mean that:
- EUFT, up to 45 per cent, will be calculated taking into account tax above 30 per cent at each level as profits are paid up through a chain of companies as dividends - not just at the highest level where the mixer cap applies. Companies would be able to set this against UK tax payable on dividends of the permitted type in respect of which credit relief is claimed, as provided in Finance Act 2000.
- The maximum amount of underlying tax to be allowed under the "mixer cap" is currently calculated by working from the actual dividend received and grossing up at 30 per cent, the rate of corporation tax. EUFT is calculated on the same basis, using a grossing up rate of 45 per cent. Since Finance Act 2000 was published, detailed consideration has identified some unexpected consequences which mean that the provisions do not always give the measure of either Case V income or EUFT that would be expected.
- The Government proposes instead that the calculation be based on adding together the actual foreign underlying tax paid and the actual dividend received, and taking a straight percentage of this total.
This revised calculation would ensure that the measure of dividend income coming into the UK is on a like-for-like basis with the current regime. It would also make the calculations simpler to understand and administer, reducing compliance costs for UK businesses.
The Inland Revenue will consult with business and other interested parties on the detail of the proposals before legislation is finalised for the next Finance Bill.
Limited Liability Partnerships (LLPs)
LLPs have been developed to combine organisational flexibility with the benefits of limited liability, thus providing a modern alternative business structure. This is expected to be particularly attractive to professional partnerships. In order to ensure that the commercial choice between using a LLP or a partnership is not distorted, the LLP will be treated for tax purposes as a business carried on by partners in a partnership, rather than a body corporate.
The Government is concerned to ensure that this new structure is not used to create an unfair advantage, through tax avoidance. In order to mitigate this risk, it will bring forward rules to ensure that:
- exempt bodies are taxed on any income from property they receive in their capacity as members of an LLP;
- the same consequences follow for shareholders in a company that disincorporates to form a LLP, as currently follow when a company disincorporates to form a partnership;
- and loans used to provide money to purchase an interest (or a "share") in an investment LLP will not qualify for tax relief.
The Government would welcome views on whether LLPs are likely to be used for businesses other than professional partnerships and, if so, whether further tax legislation is required to provide certainty of tax treatment, given the intention that the creation of LLPs should not give rise to a significant tax loss.
LLPs will become available from 6 April 2001 to tie in with the start of the tax year. The Inland Revenue will be publishing an article in the December edition of Tax Bulletin setting out their views on the tax treatment of members of LLPs carrying out a trade or profession. Further details about LLPs, including the LLP Act 2000, regulations made under the Act and responses to the various consultations are available at:
External links
Comments on this approach to the taxation of LLPs are welcome. Please send them to:
Guy Hooper
Inland Revenue
Business Tax
Room S23, West Wing
Somerset House
Strand
London WC2R 1LB
by 20 December 2000.
Corporate debt, financial instruments and foreign exchange gains and losses
The Technical Note is about tax legislation for exchange gains and losses (called "Forex" for short), derivative financial instruments (called "FI" for short) and corporate and government debt or "loan relationships". The legislation removed the distinction between capital and revenue, tying the tax result much more closely to the profit figure revealed in a company's accounts.
An internal review has been carried out and the findings set out in the Note, which goes on to consider areas where the legislation might be improved and modernised. The Note can be downloaded from the Inland Revenue web site or obtained by post from:
Inland Revenue
Business Tax
Room S11, West Wing
Somerset House
London WC2R 1LB
Comments are invited on the note. They should reach the Inland Revenue by 12 January 2001 or earlier if possible
Groups of companies: group leaving charges and value shifting for inheritance tax (IHT)
Sections 101 and 102 of and Schedule 29 to Finance Act 2000 introduced wide- ranging changes to the rules for groups of companies. Transitional provisions for the charge on a company leaving a group where an asset has been transferred within the group prior to 1 April 2000 were included in Schedule 29. It has been argued they do not cover all the situations they had been designed to do. This has led to uncertainty for taxpayers.
New rules will ensure there is no charge where there is:
- a transfer of an asset within a group prior to 1 April 2000 and subsequently the transferee company leaves the UK part of the group but remains within the worldwide group, or
- a transfer of an asset prior to 1 April 2000 within a UK group, and the principal UK company subsequently leaves the worldwide group along with its subsidiaries, but without the subsidiary that made the transfer.
Finally as consequence of the elective regime for intra group transfers introduced in section 101 a small change is required to the Inheritance Tax Act 1984 to ensure that a disposal following such an election does not trigger IHT value shifting rules.
NOTES FOR EDITORS
Abolition of withholding tax
Tax deduction at source is required when interest or certain royalty payments are made from one company to another, unless either both companies are in the same group and covered by a group income election or interest is paid to a bank. This obligation ensures that the Exchequer receives the tax, but it also imposes an administrative burden on the payer who has to deduct the tax and pay it to the Inland Revenue under the quarterly payment arrangements. Similarly, the receiving company may face the administrative burden of having to reclaim the tax if it cannot set it against a corporation tax liability. The Budget 2000 Budget Note REVBN2J announced the abolition of the tax rules for financial institutions which act as Paying and Collecting Agents of international bonds and foreign dividends from April 2001.
The proposals announced today for interest and royalties payments apply only to payments made to companies within the charge to UK corporation tax in respect of the interest and royalties. Payments to individuals will continue to be paid net of tax. This will avoid the necessity of a large number of non-higher rate taxpayers having to complete a self-assessment return.
Corporate Debt, Financial Instruments And Foreign Exchange Gains And Losses
The Technical Note on corporate debt, financial instruments and foreign exchange gains and losses invites public comment on proposed simplifications to the tax system which would make it easier to understand and apply. The note was foreshadowed in Budget 2000 Press Release REV/C&E2.
Double taxation relief
The Taxes Acts give relief for tax paid overseas if the profits would be taxed again when paid back to the UK as a dividend so as to prevent double taxation. Pre FA 2000, if foreign tax already paid exceeded the UK tax payable on a dividend coming into the UK, the UK recipient could not get relief for all the foreign tax. Offshore intermediate companies were therefore set up to mix high-and low-taxed dividends so that they came into the UK at an averaged rate. FA 2000 introduced provisions to prevent this. At the same time provisions were introduced allowing the excess tax paid up to a maximum of 45 per cent to be relieved against certain other dividends, or to be carried forward or backwards, or surrendered to other companies in the same group.
The formula used to calculate the maximum amount of underlying tax allowable will be changed. At present it takes the dividend coming into the UK (D) and grosses it up by the maximum relievable rate (M):
D x M / (100 - M)
The formula will now add the actual underlying tax paid (U) to the dividend and multiply it by the maximum relievable rate:
(D + U) x M.
These new proposals will mean that the FA 2000 provisions operate in the way in which they were intended. In particular the changes in how eligible unrelieved foreign tax is calculated will significantly benefit UK groups who acquire existing business structures where tax in excess of 30 per cent is paid at several levels in that structure.
Taxation of gains on disposal of substantial shareholdings and taxation of intangible assets
The consultation on a new relief for gains on the disposal of substantial shareholdings held by companies and the taxation of intangible assets was announced in Budget 2000 Press Release REV/C&E2 and Budget Note REVBN2C. The Technical Notes were announced in a Press Release issued on 23 June 2000.
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Media enquiries to: 020 7438 6692 / 6706 / 7327
(out of hours: 07860 359544)
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