UK Summer Budget 2015: New Corporate Benefits and Risks
By Lee Curthoys, Corporate Tax Lead, Radius
Earlier this month, UK Chancellor George Osborne announced his Summer Budget to Parliament. The Budget made news in the UK and beyond primarily for its plan to raise the UK’s National Living Wage at the same time that it cuts welfare benefits. While the new minimum wage requirement is noteworthy for multinationals operating in the UK, there are other aspects of the Budget that will more seriously affect those businesses, for better and worse.
New Corporate Benefits
On the bright side, the Conservative Party’s Budget continues the UK trend of lowering the corporation tax (CT) rate, which between 2010 and 2015 was slashed from 28% to 20%. The main CT rate will be further cut from 20% to 19% in April 2017, and to 18% in April 2020. These reductions will make the UK’s headline corporate income tax rate more competitive with other countries, even when compared against perceived “low-tax” jurisdictions such as Singapore, Hong Kong and Switzerland. The UK CT reductions — coupled with favourable controlled foreign company rules and the opportunity to exempt overseas branches — are showcasing the UK as a very attractive destination for multinationals looking to establish a European or global holding company.
Multinationals should also note that the Summer Budget increases the threshold for quarterly instalment payments of CT to companies with annual taxable profits of £20 million or more (subject to the number of associated companies in the group). This threshold increase will relieve a significant number of UK companies from the administrative and cash-flow-related burdens of paying tax by mandatory quarterly instalments. (UK companies outside the quarterly instalment regime must make payment of their UK CT liability nine months after the year end.)
Finally, as of January 2016, the UK annual investment allowance will be set at £200,000. This allows businesses to deduct the cost of certain items (like equipment and machinery) up to a total value of £200,000 from their taxable profits immediately, rather than spreading it over many years. Further, this is the first time this limit has been increased on a permanent basis. (Up to now, the limit has been changed annually and has fluctuated between £25,000 and £500,000.) This increase will provide multinationals with incentives to invest in the infrastructure and equipment of their UK subsidiaries and allow them to better plan their longer-term investment.
New Corporate Risks
While the 2015 UK Summer Budget will result in some highly attractive corporate benefits, it will also lead to increased scrutiny from HMRC (the UK tax authority) — and companies operating in the UK had better take note. The gov.uk website’s useful key announcements document, which summarizes the Budget, issues this stern warning: “The government will continue to clamp down on tax avoidance, planning and evasion, as well as increasing resources for HM Revenue and Customs (HMRC) so they can make sure people pay the tax that’s due.”
The term “people” referenced above is broader than it sounds — it includes all companies operating in the UK. HMRC will now have access to more money and more data “to identify businesses that aren’t declaring or paying tax,” with the Budget announcing innovative approaches to identifying small businesses that may be under-declaring their income. The Budget also specifically mentions multinationals operating in the UK, noting that the enhanced emphasis on ferreting out tax avoiders will extend to international companies in order to ensure “they pay tax on profits diverted from the UK.” The Budget also notes that a new “general anti-abuse rule” penalty will be introduced, along with “tough new measures for serial avoiders, including publishing the names of people who repeatedly use failed tax avoidance schemes.”
All of which is to say that if you’re concerned that your company may be out of compliance with UK corporate tax laws, now is the time to review your practices and make any necessary changes to comply with the evolving regulations. Osborne and his government may be offering a lot to attract and support business through lower tax rates and other key benefits, but they have also fired a warning shot to tax avoiders that the HMRC will do all it can to ensure offenders suffer not only financial but also reputational damage.
For information on implementing an efficient, compliant tax structure, watch our webinar recording, “Building the Foundation for Successful International Expansion: Tax Structure & Strategy.”