Save content
Have you found this content useful? Use the button above to save it to your profile.
AIA

The Bourne Agenda - Taking control. By Claire North

by
6th Feb 2009
Save content
Have you found this content useful? Use the button above to save it to your profile.

The Bourne Agenda is a fortnightly blog brought to you by Bourne Business Consulting LLP, an independent tax and business consultancy with offices in London and Farnham.

The government has been looking at the way that foreign profits are taxed for a number of years resulting in the draft foreign profits legislation released in December 2008 and should culminate in a new regime being introduced in the Finance Act 2009. In the meantime there were a number of changes, targeting anti-avoidance, announced in last year’s Budget which were enacted into the Finance Act 2008. These changes have affected company structures that use partnerships, discretionary trusts, decontrolled structures and planning that enabled certain income to be excluded from the ‘chargeable profits’ calculation.

One of these anti-avoidance measures was to expand the control test to include situations where a UK company was in control of 50% or more of the rights to profits & assets on winding-up of an offshore entity but held minimal voting rights. This structure would have fallen outside the controlled foreign company (CFC) rules as the UK company did not have sufficient voting rights to control the offshore entity. No UK tax would be payable on any profits made in this entity, until distributed. The control test has now been expanded to include persons who would be entitled to

  • the greater part of the distribution if the whole of the income was distributed,
  • the greater part of the proceeds if the whole of the company’s share capital were disposed or
  • the greater part of the assets of the company which would be available for distribution on winding up.

For CFC purposes, this would mean the control of the company is now considered to lie in the UK where it had previously been sitting in an offshore company or trust.

This change in the legislation, alongside others, occurred on 12 March 2008 with immediate effect from that date. There was no grandfathering or future enactment date which is often used with a change in legislation. This change would have affected a number of companies without any warning. The companies that it affected would be subject to the CFC legislation from that date and could potentially owe corporation tax that had yet to be calculated. Large companies pay their corporation tax through quarterly instalments so the corporation tax payable by companies in respect of profits chargeable under the amended CFC rules would have already been due for those companies with a year ended before 31 July 2008. Interest would be payable on the late paid tax that as yet would be unknown.

The CFC legislation as it stands is a struggle to get your head around. There are a number of rules to be followed and a flow-chart may be a useful tool in working out the path that a company should follow to identify whether or not it falls under the CFC rules. If there are a number of companies in a group, perhaps all in different countries then the change in the CFC rules can result in an administrative nightmare. By the time a group structure has been obtained, the relevant figures have been collated and a list of companies drawn up that may potentially fall under the CFC rules, further interest will have accrued.

In order to identify whether a company falls under the CFC legislation, detailed information will need to be obtained regarding the amount and source of the company’s income, the nature of the company’s activities and whether it has any subsidiaries. The practicality of communicating with the relevant people in a number of different countries even with modern-day technology should not be over-looked and not to mention the language barriers. To understand our CFC legislation as a native-English speaker is a challenge but to comprehend and identify which rules are met, accurately and quickly, in a second or third language is almost impossible.

With the new territorial approach to focus on controlled companies rather than controlled foreign companies, it looks certain that the acceptable distribution policy and exemption for certain holding companies within the exempt activities test will be abolished. It is therefore unfortunate that these intermediate provisions which caused such a burden were put in place for such a short time.

Claire North
Bourne Business Consulting LLP

Tags:

Replies (0)

Please login or register to join the discussion.

There are currently no replies, be the first to post a reply.