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									           FINDING WAYS TO 

              STAY AHEAD

           By Christopher Morgan and 

                 David Kilshaw

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                    IN FOCUS: TAXATION

                    FINDING WAYS TO                                                                This article is sponsored by:

                    STAY AHEAD
                    The competitiveness of the UK tax system has made headlines recently as household names
                    move their headquarters overseas citing tax as a major cause. Below Christopher Morgan and
                    David Kilshaw discuss how the UK tax regime could be made more attractive to both
                    companies and individuals.

                    It is now two years since the credit   profitable businesses. To be able to   Paradoxically, these rules may well
                    crunch first started, leading to       attract new investment and             hinder inward investment.
                    unprecedented government bail­         business set-ups a tax system
                    outs and a global recession. One       needs to be competitive.               HM Treasury published a policy
                    consequence of this is that                                                   document in July 2009 on reform
                    governments across the world           Ways in which the UK corporate         of the UK Controlled Foreign
                    have seen significantly reduced tax    tax regime could be made more          Company (CFC) Rules. This also
                    revenues. They need to plan to         attractive                             suggests a move towards a
                    increase such revenues to recover      The competitiveness of the UK tax      territorial regime, but rejects calls
                    the costs of the fiscal easings,       system has hit the headlines a         to repeal the CFC rules completely
                    undertaken to diminish the effects     number of times in recent years as     and replace them with a targeted
                    of the global downturn.                household names move their             anti-avoidance rule to prevent
                                                           headquarters overseas citing tax as    artificial diversion of UK profits
                    One way to increase tax revenues       a major motivation. However, the       overseas. Many commentators
                    overall is to offer incentives to      issue is as much about investment      believe that the repeal of the CFC
                    businesses to set up in a              we are failing to attract, as          laws and their replacement by a
                    jurisdiction. The argument for this    investment which is leaving the        targeted anti-avoidance rule,
                    is that the initial costs of the       country. Much has been written         combined with strongly enforced
                    incentive are recouped by              about the prolonged and ongoing        transfer pricing rules and exit
                    increased revenues from                debate on the taxation of foreign      charges when UK assets are
                    employment taxes and social            profits so we will not repeat this     transferred overseas, would
                    security payments, sales taxes on      here. Instead, we look at a few        provide adequate protection for
                    revenues and higher corporate tax      ways to change the UK                  the UK tax base, while at the same
                    receipts from newly established        corporation tax regime to              time allowing groups more
                                                           encourage businesses and               commercial freedom.
                                                           individuals to base themselves
                                                           here.                                  2. Increased UK competitiveness in
                                                                                                     areas such as IP and finance
                                                           1. A ‘territorial’ base of taxation    The UK government could go
 Distribution exemption – from 1 July 2009, most UK        In a globalised economy, where         further and actively seek to
 and overseas dividends received by UK companies           capital may well be provided by        compete with other countries in
 are exempt from UK tax. Previously it was just            non-UK investors and invested in       certain areas that are key to the
 dividends received from UK companies that were            activity outside the UK, there is a    UK economy such as intellectual
 exempt.                                                   very strong case for the UK not        property (IP) and finance. The
                                                           taxing cross-border profit flows.      Netherlands is a good example
 Worldwide debt cap – is a new restriction on the tax                                             with its ‘patent box’ regime
 deductibility of interest expense for groups of           In other words, the UK should          whereby net income from IP is
 companies which will take effect for accounting           move to a ‘territorial’ base of        taxed at 10% and its planned
 periods beginning on or after 1 January 2010. The         taxation, only taxing those profits    ‘interest box’ regime whereby net
 basic aim is to limit the tax deduction for interest in   earned in the UK. The distribution     group interest income will be
 UK group companies to the total external interest         exemption introduced in the            taxed at 5%. Instead of expending
 cost of the worldwide group.                              Finance Act 2009 is a step in this     a great deal of effort trying to
                                                           direction, albeit accompanied by a     prevent UK groups taking
 Controlled Foreign Company Rules – are anti-              significant compliance burden          advantage of such overseas
 avoidance rules which in certain cases tax the profits    with the introduction of new           regimes the government could
 of a foreign subsidiary in the hands of the UK parent     worldwide debt cap rules               positively use the tax regime to
 even if they are not distributed.                         restricting the UK tax deduction       compete to bring this business
                                                           available for interest expense.        here (we would like to see any UK

22                                                           October 2009 FINANCE & MANAGEMENT

                                       It may no longer make commercial
                                       sense for higher earners and their
                                       employers to make contributions to
                                       a pension scheme

regime apply to all IP income and        over £180,000 will be eligible          creators that the economy needs
not just patent income). With all        for tax relief on pension               to live in the UK, the government
the other non-tax attractions the        contributions at just 20%, the          should offer a stable and simple
UK has to offer, this approach           basic rate of tax, while the tax        tax system so that individuals and
would almost certainly appeal to         paid on the subsequent receipt          their employers can readily
international groups and may             of a pension is up to 50%.              understand their tax liability and
actually result in an increased tax                                              reduce the cost of administration.
take for the Treasury as a             The exact impact of these
consequence.                           significant changes will depend on        Conclusion
                                       a number of factors, including the        There is much about the current
3. A competitive tax regime for        timing of retirement, total               UK tax system that is attractive to
   individuals                         pension, and options such as cash         foreign investors – relatively low
For individuals, the                   lump sums. Overall, however, the          corporate tax rates, incentives for
competitiveness of a tax system is     effect may well be that it no             certain types of expenditure, no
affected by both the headline rate     longer makes commercial sense for         withholding taxes on dividends
of tax and how complicated and         higher earners and their employers        from UK corporates to name just a
changeable the tax code is. In         to make contributions to a                few. But there is also much that
recent years, the UK has fallen        pension scheme. In a global               could be done to encourage more
behind on both. Tax legislation        marketplace, these changes will           businesses and individuals to
increases in volume and                make it harder for UK employers           locate in the UK and pay UK
complexity, such as in the recent      to attract top executives to the UK.      taxes. The Pre-Budget Report
fundamental changes to the way                                                   (PBR) coming up this autumn is
that non-UK domiciled individuals      Individuals in the UK face too            an opportunity for the chancellor
are taxed. Following this year’s       many changes and an overly                to make these changes. We await
Budget, higher earners are now         complicated tax system. To attract        the speech and the underlying
due to see yet more significant        high performers and the job               detail with great anticipation. ■
changes – but this time to the way
that their income is taxed. Hence:

● from April 2010, a 50p top rate
  of tax will be introduced for
  income over £150,000 (42.5%
  on dividends). Personal
  allowances will also be restricted
  for those earning over £100,000
  to reduce the benefit of the first
  few thousand pounds of income
  being tax free. This will
  significantly increase marginal
  tax rates for such earners in an
  unnecessarily complex way; and
● from April 2011, for all (and
  from April 2009, for many),
  higher rate tax relief on pension
  contributions will be restricted
  for those earning over £150,000.     Christopher Morgan is head of          David Kilshaw is head of the private
  This tax relief will be tapered      international tax, KPMG LLP (UK).      client business, KPMG LLP (UK).
  away so that anyone earning

FINANCE & MANAGEMENT October 2009                                                                         23

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