Tax Challenges (and Opportunities!) for UK Corporates

Over the years the UK has continued to drive towards a more competitive Corporate Tax (CT) regime. This has been achieved by various means, including lowering the headline rate to 17% from April 2020, which will be amongst the lowest rates of the G20 countries. Compare this to a rate of 28% from a decade ago, it is encouraging for foreign investors! In addition, the UK has generous tax incentives to encourage UK innovation in the form of Research & Development and Patent Box Relief. There have also been changes in the legislation designed to encourage utilising the UK as a “Holding Company” location, including some relaxations to the Substantial Shareholdings Exemption (SSE) legislation which in many cases now makes it easier for UK Holding companies to obtain CT relief when selling subsidiaries, and other investments.

Although generous incentives have been put in place there are inevitably challenges that UK based companies will face to comply with the ever-changing legislation. HMRC are not in the business of giving with one hand, without taking some with the other. Since 2017 in particular, there has been a raft of complex tax legislation introduced. For companies to be able to maximise any tax planning opportunities and to ensure compliance with the laws, it is important they are aware of the impact of these, together with any mitigation strategies.

From 1 April 2017 HMRC introduced the Corporate Interest Restriction (CIR) legislation. The CIR is based on the Organisation for Economic Cooperation and Development’s (OECD’s) best-practice recommendations for limiting a perceived tax base erosion by means of excessive tax deductions for financing costs. The legislation is designed to discourage groups from over burdening UK companies with excessive debt to obtain tax deductions on interest charges. The CIR rules can seriously limit UK interest deductions for CT and generally applies if your UK group (or standalone entity) expect to deduct more than £2 million net interest per annum (including certain finance costs).

The UK’s CIR rules arguably go beyond the scope of the OECD’s intentions, as the restriction will apply equally to a standalone UK only entity with Private Equity funding or an Owner Managed business, as it will to a multinational group listed on an international stock exchange.

In a similar vein, the government introduced the Hybrid Mismatch legislation which is targeted anti-avoidance designed to, amongst other things, restrict deductions for interest where the credit is not taxable elsewhere due to a perceived ‘hybrid’ structure. This, along with the CIR noted above and also the UK’s existing Transfer Pricing legislation, are key considerations now whenever looking at financing of UK debt.

In addition the Criminal Finances Act 2017, effective from September 2017, puts responsibility on businesses to tackle the proceeds of crime via facilitation of tax evasion. Businesses need to undertake a risk assessment and ensure their policies and procedures are tailored to minimise the risk of the facilitation of tax evasion by its employees, agents, subcontractors or other “associated persons”. This is wide reaching legislation applicable to all businesses, regardless of size and can result in a criminal prosecution, unlimited fines and serious reputational damage.

In addition, Brexit undoubtedly brings uncertainty and challenge, however, it should be viewed as an opportunity for UK corporates to review their business with European counterparties and ensure any transactions are properly planned pre Brexit. With an ever-changing business landscape, and the introduction of more and more complex legislation, it is critical that UK companies have a proactive and skilled tax advisor who can navigate the challenges and changing legislation and also support in maximising the tax opportunities.

By Helen Brown International Tax Director at Anderson Anderson & Brown LLP