1. Extension of UK withholding tax regime
Currently withholding tax is applicable at the rate of 20% on royalty payments and some IP related annual payments. This rate can be reduced appropriately if there are Double Taxation Agreements (DTA) in place between the countries.
Changes have been brought in by the Finance Act 2016 to withhold tax on all royalty payments that follow the OECD definition. Before the changes were brought in via Finance Act 2016 some royalty payments were under the royalty withholding tax (WHT) regimes and some were not (e.g. payments for know-how and some trade marks).
In addition, the new rules ensure that royalties connected with activities of a UK Permanent Establishment (PE) of a non-resident entity will be deemed to be covered by the UK royalty rules regardless of where the payments are being made from.
The rules also restrict the use of DTAs to reduce the royalty WHT rate for payments between connected persons where it is reasonable to conclude that the main purpose or one of the main purposes of the arrangements was to obtain a tax advantage.
This means existing agreements need to be looked at and new ones may need to be drafted, if a company or UK PE falls under this regime.
2. Corporate interest relief restriction
This replaces the former World-Wide Debt Cap regime and was introduced by Finance Act 2017. It is intended to restrict “unfair” UK interest deductions for a group’s net interest expense above a £2m de minimis level. The regime is effective for periods after April 2017, but due to the complexity of the rules around its application, companies are still coming to terms with how to apply it.
The rules bite where the UK interest deduction is limited to the lower of:
A “group ratio” election can also be made which may produce a better result if the worldwide group is more leveraged than the UK sub-group. If restrictions apply, the group will need to file an Interest Restriction Return, hence increasing the compliance costs.
Adding to this complexity is the fact that where a group needs to gather information about worldwide finance expense to carry out the calculations then different group companies could be reporting under different GAAP meaning that gathering the required information quickly becomes quite complex.
As the rules apply at the level of the worldwide group, depending on how private equity groups have structured their investments, the rules may apply to all of their UK investments taken together as a whole.
3. Diverted Profits Tax (DPT)
Although this tax regime was introduced in Finance Act 2015 and is applicable for profits arising after 1 April 2015, it is now widely thought that Her Majesty’s Revenue & Customs is starting to apply the new regime a little more aggressively on large corporates and UK PEs of multi-national companies.
The rules are intended apply to large multinational groups, however for this purpose “large” means the company or group has either; 250 or more employees or meets either a turnover test (greater than €50 million) or gross assets test (greater than €43 million).
The tax applies in the following circumstances:
The rate of DPT is 25% and reporting is separate from the corporation tax system.
It has been reported that in 2017 nearly 200 notifications of potentially being within the charge to DPT were made by UK companies, and HMRC is focusing its attention on companies that have not made such a notification but where it thinks one should potentially have been made.
Typically, DPT notices are issued where HMRC disagrees with the transfer pricing stance adopted or is concerned that the group’s structure has been contrived to minimise the level of UK activity or to divert UK-generated profit to a lower-tax regime.
However, even if a DPT notice does not result in extra tax being payable, it allows HMRC to look at issues such as company residence, permanent establishment and controlled foreign company matters, and to issue challenges relating to valuations or the deductibility of payments (including under unallowable purposes rules) and to raise queries on withholding taxes.
4. Corporate brought forward loss relief changes
Changes have been enacted on the rules regarding corporation tax losses carried forward post April 2017.
The changes mean that losses carried forward can be used against total profits from any source and can also be group relieved. This applies to trading losses, management expenses, non-trading loan relationship deficits, non-trade losses on intangible fixed assets and UK property business losses, thus ensuring a degree of reduction in complexity.
However, losses that were brought forward prior to April 2017 will not fall under this regime.
For large companies with taxable profits above £5m there is a restriction where after an allowance of £5m (which applies to the whole group) only 50% of the remaining trading profit can be offset by the brought forward losses.
5. Extension of UK Tax to Non-Residents Involved in UK Property
Currently non-UK companies owning properties in the UK and which generate rental income are subject to income tax at the flat rate of 20%, and this is reported via a non-resident company income tax return. HMRC intends to bring such situations within the rules for corporation tax and thus remove them from the rules relating to income tax. This is, however, expected to take effect from April 2020.
This will add a compliance burden and any potential complications need to be taken into consideration.
Other changes were introduced recently which affect non-resident companies which own properties in the UK. These include: