The UK company tax panorama in 2021

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The big corporate tax headline that emerged from this year’s UK budget presented on March 3rd was the leap in the corporate tax rate from its current 19% to 25% as of April 2023 for companies with profits in excess of £ 250,000 ($ 345,000).

It was clear that the hole in public finances created by the aftermath of the Covid-19 pandemic needed to be filled somehow. It turns out that the UK government has resisted calls for an explicitly targeted form of super taxation on companies whose profits have increased over the period. It has also rejected other potential sources of income, such as an increase in the tax rate on investment income (which is widely believed to be an option) or the creation of a new “wealth tax”. These may be for future budgets; The focus for now is on increasing the corporate tax rate.

To take a step back and put this proposed increase in context, this is the first increase in the corporate tax rate since 1974. And just recently, the government told us that it intended to lower the tax rate further from 19%: a decrease in the rate 17% was planned for 2020, although this was ultimately discarded (prepandemic) because it was probably a little too generous.

The amount of additional tax revenue the government expects from the proposed 6% increase is significant: an additional £ 12 billion in 20232024, up to £ 16 billion the following year and £ 17 billion the following year, compared to £ 17 billion Pounds increase current corporate tax receipts.

A resurgence in tax planning?

When the standard corporate tax rate is low, as it is now, the incentive to avoid that tax rate is inevitably less pronounced than with a much higher tax rate.

The higher the overall tax rate, the greater the urge to avoid it.

One wonders, therefore, to what extent, after April 2023, taxpayers will be inclined to engage in behavior that they would have been less inclined to engage in without such a substantial increase in the standard rate. There is, as is sometimes argued, a level of taxation that companies are willing to pay.

This measure turns the dial up significantly.

Interestingly, in its impact assessment of the new measure, the government makes a slant reference to this:

“A behavior adjustment has been made [to the amount of tax expected to be collected] Take into account changes in incentives for multinationals to move profits to and from the UK. “

However, the desire to lower the effective tax rate is not limited to multinational companies.

It is expected that the directors of each of the affected companies, whose profits are subject to UK corporation tax, will consider whether, and if so, how they could mitigate the effects of the proposed rate hike.

The new landscape

However, the landscape is very different from the landscape last seen when the corporate tax rate was around 10 years ago at 20%: the UK government has put in place a number of additional measures to bridge the gap between the assumptions Taxpayers and the UK Tax Authority HM Revenue & Customs (HMRC).

For example, the disclosure rules for tax avoidance systems, although they were introduced more than 15 years ago, are still being expanded and strengthened. One of the most significant developments in the recent history of anti-avoidance strategy was the introduction of a general anti-abuse rule in the UK in 2013.

In addition, and of particular relevance in this regard, there is now, under the armament of the HMRC, the Diverted Profits Tax, the tax rate of which will be increased from April 2023 to ensure that it remains several percentage points higher than the corporate tax rate, to do so continues to have a deterrent effect against what is perceived, which is its goal.

As a result, the types of techniques that multinational corporations may have used 10 years ago to lower the UK effective tax rate are a little less available.

Then there is also what could be termed “softer”, less direct methods used by the HMRC to stop taxpayers’ behavior they dislike and further reduce the perceived “tax gap”.

One such approach is the proposed code, which targets “uncertain tax positions”. This will now be considered briefly, as it is one of the measures that was expanded upon by a consultation document that the government issued shortly after the budget at the end of March.

UK as a competitive corporate tax jurisdiction

We have recently seen an extended period in which the UK has built a reputation as a viable holding location – standout features of UK taxation including a universal exemption from participation in dividends and profits; Absence of withholding tax on dividends paid out of the UK; and a very broad network of tax treaties. In addition, a low corporate tax rate was the icing on the cake (and much more competitive in that regard than most other large EU economies).

After Brexit (but before Covid) there were even government proposals to make the UK tax system extremely competitive to further bolster the UK’s reputation in this regard.

The pandemic has completely turned such plans on their head (like many others, of course).

Unsafe tax positions – a consultation

As noted above, the government has begun using various “indirect” methods to stop taxpayers’ behavior deviating from what it would ideally like to see.

This is one such suggestion.

Although some details have changed based on feedback from the initial consultation, the aim of the proposal remains unchanged: to identify and reduce tax losses caused by delays in identifying and resolving disagreements in the interpretation of the law.

What the government calls the “legal interpretation tax loophole” is estimated at £ 4.9 billion.

That being said, one is used to hearing the concept of the “tax gap” in the context of discussions about tax evasion and tax avoidance. It is an interesting position to describe the situation in which a taxpayer sees the legislation differently than what the tax authorities believe to be a “tax loophole”. However, it seems to be only a logical step in the belief that those who disagree with HMRC on any point are members of a group that does not pay their fair share of taxes.

However, this is not what the consultation document says!

The stated aim is to highlight and clarify legal differences between taxpayers and HMRC earlier, either through notification or by encouraging more companies to discuss areas of uncertainty with HMRC before filing their tax returns.

To quote the consultation:

“This action is not intended to encourage the assumption that the HMRC’s interpretation is correct, nor that the HMRC is a final arbitrator of tax law. The purpose of this action is to ensure that HMRC is informed of any cases where a large corporation is treating the opposite way has applied to the well-known position of HMRC and to expedite the point where discussions of unsafe treatment are taking place. “

When tax treatment is uncertain, there are several ways to interpret or apply tax legislation in relation to a transaction.

It only applies to “large” companies, namely companies with sales in excess of £ 200 million or total assets in excess of £ 2 billion, and it is proposed that the reporting threshold be £ 5 million, which is the “tax.” Effects “represents. the transaction, e.g. B. the amount of tax involved.

It will be interesting to see how this development, if incorporated into the law, will affect taxpayers’ behavior.

Public perception of tax avoidance

The climate is now very different when it comes to public perception of tax avoidance.

While in the past companies would have considered it their duty to keep their tax liabilities as low as legally possible and to advocate the legal avoidance of taxes as the norm, this imperative now contrasts with the desire to be seen as responsible taxpayers.

The public and the media are now more focused than ever on the amount of corporate tax paid by large corporations and the oft-heard phrase used by corporations that “we comply with our legal obligations in all jurisdictions.” in which we operate “is far less likely than before – even with the shareholders themselves.

Businesses now regularly produce annual reports detailing the amount of taxes paid (whether corporate, employment, or other taxes).

Matters in this regard were arguably at the height of fever in 2012 when Starbucks voluntarily “offered” £ 20 million in taxes in a high-profile move. This was unprecedented – as was the boycott of stores by those who allegedly protested the group’s UK tax-paying habits. Arguably the most noticeable feature of the gesture, however, was the fact that the company felt motivated to make it in the first place.

This was kind of a turning point (which wasn’t even welcomed by HMRC, who wanted to point out that taxes are not something people can pay at their own discretion). But it was important because it showed that the pendulum was swung into a position where an established multinational would not feel able to simply dismiss the situation as “noise” that would go away over time.

Given the need to maximize shareholder resources, corporate boards can no longer focus entirely on lowering their corporate taxes as much as legally possible. Not only the public, but also the shareholders themselves now expect public statements on the responsible behavior of taxpayers.

The reputational risk of pursuing aggressive tax avoidance systems can be viewed as the predominant (usually shorter term) cash flow benefit of tax savings. And where exactly “aggressive” begins and ends on the scale of taxpayer behavior, things are likely to drift further.

The power of negative tax publicity means businesses now have to ask themselves, “Would we be happy if every aspect of our tax planning got the press?”

All in all, businesses will have much more room to maneuver than they were on the last occasion when corporate tax rates were on the order of 25%. A decade can be a long tax period, probably no more (in terms of developments in the perception of tax avoidance) than the one that has just ended.

In the past year it has been said more than once that we are living in interesting times. It looks like it will stay that way for the foreseeable future.