Corporate Tax 2010 - BMR Advisors

Slaughter and May
United Kingdom
3.5 If so, is there a “safe harbour” by reference to which tax
relief is assured
There are no statutory safe harbour rules. In Tax Bulletin 17 of
1995, however, the Inland Revenue, as they were then called,
explained their practice of accepting that where a loan otherwise
meets the arm’s length test, a company will not be thinly capitalised
where:
the level of debt to equity does not exceed a ratio of 1:1; and
its income to interest cover is at least 3:1.
The Tax Bulletin emphasised, however, that there are no hard and
fast rules in this area and that each case has to be considered on its
own facts. This is reaffirmed in the International Manual at
INTM579040.
3.6 Would any such “thin capitalisation” rules extend to debt
advanced by a third party but guaranteed by a parent
company
received by a UK company will now, subject to some exceptions,
be exempt from corporation tax.) For more details about the
taxation of dividends see Chapter 1 by Graham Airs.
3.8 Does the United Kingdom have transfer pricing rules
Yes. Since 1 April 2004, the transfer pricing rules have applied to
both cross-border and domestic transactions between associated
companies.
If HMRC do not accept that pricing is arm’s length they will raise
an assessment adjusting the profits or losses accordingly. It is
possible to make an application to HMRC for an advance pricing
agreement which has the effect that pricing in accordance with its
terms is treated as arm’s length.
In cross-border transactions the double taxation caused by a transfer
pricing adjustment can be mitigated by the provisions of a tax
treaty.
United Kingdom
Yes. A company may be thinly capitalised because of a special
relationship between the borrower and the lender or because of a
guarantee given by a person connected with the borrower. The UK
legislation contains a wide definition of the word “guarantee” and
includes any case in which the lender has a real expectation that he
will be paid by, or out of the assets of, another connected company.
There is no requirement for a guarantee to be in writing.
The legislation gives a compensating adjustment to a guarantor in
circumstances where interest has been disallowed because of the
guarantee. The effect of the rule is to treat the guarantor as if the
guarantor had taken the loan and paid the interest instead of the
actual borrower. The guarantor will obtain a tax deduction for the
interest provided it meets the usual conditions for an interest
deduction. The effect where the borrower and the guarantor are
both subject to UK tax is, therefore, neutral.
3.7 Are there any restrictions on tax relief for interest
payments by a local company to a non-resident in addition
to any thin capitalisation rules mentioned in questions
3.4-3.6 above
The Finance Act 2009 has introduced, with effect for accounting
periods beginning on or after 1 January 2010, a further restriction
on tax relief for finance expenses of groups of companies in certain
circumstances. The new “worldwide debt cap”, as it is known,
limits the aggregate UK tax deduction for the UK members of a
group that have net finance expenses to the worldwide consolidated
gross finance expense of that group. The intention behind the new
legislation is to prevent groups “dumping” debt in the UK in order
to achieve a UK tax deduction.
The complex legislation contains a “gateway test” which is
intended to be more simple to apply than the full regime. The
gateway test simply compares the aggregate of the average net debt
of each UK company for an accounting period with the average
worldwide gross debt income. If the aggregate UK net debt does
not exceed 75% of the worldwide gross debt then the debt cap
provisions need not be considered further.
Financial services groups fall outside the new rules if certain
conditions are met.
The worldwide debt cap is intended to pay, in part, for the tax
exemption for foreign dividend income which has been introduced
by the Finance Act 2009. (Prior to the Finance Act 2009, dividends
received by a UK company from another UK company were
exempt from tax but foreign dividends were taxable. All dividends
ICLG TO: CORPORATE TAX 2010
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4 Tax on Business Operations: General
4.1 What is the headline rate of tax on corporate profits
The headline rate of tax is currently 28%.
4.2 When is that tax generally payable
For companies other than “large” companies, corporation tax is due
and payable nine months after the end of the accounting period for
tax purposes.
Large companies are generally companies with profits in the
accounting period in question in excess of £1.5m, but this £1.5m
threshold is proportionately reduced if there are associated
companies or the accounting period is less than 12 months. Large
companies have to pay corporation tax in quarterly instalments
based on an estimate of the tax they are likely to pay. The first
instalment payment is due 6 months and 13 days from the start of
the accounting period and the last instalment (which will be the
balance of the corporation tax liability) is due 3 months and 14 days
from the end of the accounting period.
4.3 What is the tax base for that tax (profits pursuant to
commercial accounts subject to adjustments; other tax
base)
In general terms, the tax follows the commercial accounts subject to
adjustments.
4.4 If it otherwise differs from the profit shown in commercial
accounts, what are the main other differences
Certain items of expenditure which are shown as reducing the
profits in the commercial accounts are added back for tax purposes
and deductions for tax purposes may then be allowable. For
example, in the case of depreciable plant or machinery, capital
allowances on a reducing balance basis at various rates depending
on the type of asset and the level of expenditure incurred) are
substituted for accounting depreciation.
The UK tax legislation has been amended to deal with various
issues arising from companies adopting International Accounting
Standards to draw up commercial accounts for accounting periods
beginning on or after 1 January 2005 and in certain circumstances,
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