The message from the Chancellor of the Exchequer in his 23 March Budget statement is that the UK is open for business, says Nick Farmer, international tax partner at Menzies. The Government has stated its ambition to make the UK the most competitive business regime in the G20. It has signalled this intent with a range of measures designed to attract businesses and individuals to the UK and to enable UK businesses to be competitive on the international stage.
Summarised below are the main aspects of Budget 2011 that will be of interest to internationally focused businesses as well as individuals coming to the UK.
INTERNATIONAL BUSINESSES
Corporation tax rate reduced
The mainstream rate of corporation tax will reduce from the current 28% to 26% from 1 April 2011. It is then scheduled to fall by a further 1% each year until 1 April 2014 when the rate will be 23%. This will result in the UK having the lowest corporate tax rate in the G7.
UK Research and Development regime to be enhanced
R&D in the UK will become more attractive for small and medium-sized companies. Subject to State Aid approval from the EU, the rate of the deduction for qualifying R&D expenditure will increase from 175% to 200% from 1 April 2011 and to 225% from 1 April 2012.
Help for companies commercialising intellectual property in UK
Companies with income from patents first commercialised after 29 November 2010 will be eligible for a 10% rate of corporate tax on the patent income. The Patent Box regime, scheduled to be introduced from 1 April 2013, is designed to attract and benefit innovation in the UK. Consultation regarding the exact detail of the regime will be undertaken later this year.
More certainty for Controlled Foreign Companies
After much consultation, new CFC anti-avoidance legislation will be introduced from 1 April 2011, with further legislation scheduled to be introduced from 1 April 2012. The UK CFC legislation has caused considerable uncertainty for multinationals, and has been cited as a reason for numerous high-profile corporate relocations outside the UK. The changes to the CFC legislation are intended to address this issue, and create more certainty for multinationals headquartered in the UK.
Branch Exemption for overseas income
In a move towards a more territorial tax regime, an exemption system will be introduced from 1 April 2011 for income from overseas branch activities. Companies will be entitled to opt irrevocably into the exemption, although in such instances branch losses will thereafter no longer be available for set off against UK corporate profits.
New legislation to prevent abuse of tax treaties
It is intended that anti-avoidance legislation will be introduced into domestic law to prevent the UK tax treaty network being used for tax avoidance purposes. Legislation will be introduced (from a date to be specified) to counter tax-avoidance schemes such as "conduit" and "treaty shopping" arrangements. This is consistent with OECD commentary and the approach adopted by other countries to deny treaty reliefs in abusive situations.
Help for UK resident investment companies
From 1 April 2011, measures will be introduced to assist UK resident investment companies to manage their currency exposure. In certain circumstances this will enable such companies to elect a designated currency for tax purposes other than the functional currency used in its GAAP accounts. Multinational companies will therefore be better able to manage their foreign currency exposure arising in UK resident investment companies.
Consultation on worldwide debt cap
The UK worldwide debt cap legislation was introduced from 1 January 2010. Such legislation applies to large groups of companies and can result in restrictions for interest payments in certain circumstances. Practical problems have been identified with this legislation, and the Government intends to consult in these areas later in 2011.
INDIVIDUALS
Statutory residence test to be introduced
To date the UK has not had a statutory definition of tax residence for individuals, and this has resulted in a considerable amount of recent case law and uncertainty. The Government has announced that it intends to consult on the definition of residence for tax purposes, and to introduce a statutory residence test effective from 6 April 2012.
Changes for Non-domiciled individuals
The UK offers considerable tax breaks for non-domiciled individuals. Overseas income and gains may only be taxed if remitted to the UK. To enjoy this advantaged status, currently a £30,000 annual fee is payable by a non-domiciled individual if they have been resident in the UK for more than seven out of the last nine tax years. This fee will increase, with effect from the 2012 tax year, to £50,000 for individuals who have been in the UK for 12 or more years.
The Government is keen to incentivise non-domiciled individuals to undertake business activities in the UK. To facilitate this process, legislation will be introduced from 6 April 2012 whereby remittances to the UK will no longer be within the charge to UK tax provided the funds are used for the purpose of making commercial investments into UK businesses.
Extension to capital gains tax relief for entrepreneurs
Entrepreneurs' relief is designed to benefit individuals who set up businesses to undertake trading activities. From 6 April, the first £10 million of gains qualifying for this relief will be subject to a 10% rate of tax. This is the third successive increase in the lifetime limit (currently £5 million), and highlights that this is seen as a fundamental relief for encouraging entrepreneurs to invest and then reinvest in the UK.
50% rate of income tax is only a temporary measure
The UK introduced a 50% rate of income tax from 6 April 2010 for individuals with total taxable income in excess of £150,000. This rate of tax is higher than most other countries and it is felt that it may not actually raise as much tax as expected. It has therefore been confirmed that the 50% rate of tax is only a temporary measure and HMRC has been asked to quantify the amount of tax it raises.
For further information, contact Nick Farmer at nfarmer@menzies.co.uk