Britain's back in business

Yesterday HMRC released a significant amount of detail concerning proposed changes to the UK's tax system.  One of the key changes relates to the taxation of Non-UK Domiciled individuals.  The proposals potentially create new opportunities for fiduciary businesses in the islands to assist UK resident non-domiciled individuals  to invest in UK business.

Another important change concerned the reform of UK Corporation Tax, in particular, the replacement of the Controlled Foreign Company regime with a new system.  The new regime could create significant opportunities for the Channel Islands.

It was disappointing that the new statutory rules on residence status will be delayed for a year to 2013.

Income Tax

Taxation of non-domiciled individuals
Draft legislation has been published today on some of the proposed reforms to the taxation of non-domiciled individuals.  From the Islands' perspective, the encouraging aspect is the possibility for UK resident non-domiciled individuals to invest in UK businesses using foreign income and gains without triggering a remittance charge.  This could stimulate activity in the fiduciary sector.

These measures include:

  • Enabling non-domiciled individuals to remit overseas income and capital gains tax-free to the UK for the purpose of commercial investment in certain qualifying businesses.
  • Increasing the existing £30,000 annual charge to £50,000 for non-domiciled individuals who claim the beneficial tax regime ("the remittance basis") in a tax year and who have been UK resident for 12 or more of the 14 years prior to the year of claim.
  • Making technical simplifications to some aspects of the existing rules to remove undue administrative burdens.

Since the initial consultation, the definitions surrounding commercial investment and the mechanisms around realisation have been eased.  It will be possible to invest in residential property and leasing businesses, subject to restrictions for personal enjoyment.  Investee companies will be able to undertake limited non-qualifying activities.  It will also be possible to invest in AIM or PLUS quoted businesses and there will be no requirement for the investee business to be UK Resident or have a UK Permanent Establishment.

For certain other aspects on non-domiciled taxation the draft legislation will now be published early in 2012, or later, with the result that the policy measures announced at Budget 2011 will be implemented in a two-stage process that will be completed in Finance Bill 2013.

Statutory Residence Test ("SRT")
Draft legislation relating to the proposed new SRT was expected to be published today, following consultation on the new proposals over the summer. However the Government announced today that the draft legislation will now be published around Budget 2012, with a view to introducing the test from 6 April 2013. A statement issued today stated that the consultation has raised a number of detailed issues which require careful consideration to ensure the legislation provides certainty. This is disappointing as it means continuing uncertainty for many.

Any reforms to ordinary residence  will be introduced at the same time.

Corporation Tax

Controlled Foreign Companies ("CFC") changes
A new CFC regime has been proposed, with legislation to be introduced to enact this, in Finance Bill 2012.  Key elements of the new system include:

  • New Gateway test introduced to filter out companies from more burdensome compliance aspects.
  • Safe harbours will be provided covering general commercial business and incidental finance income.
  • A new suite of exemptions, including an excluded territory exemption, a low profit margin exemption and a low profits exemption.

Additionally, the new Finance Company Partial Exemption has been reconfirmed.  This will be an attractive option for UK headquartered business wanting to finance their overseas operations and could offer interesting opportunities for the Channel Islands.

Patent Box
The Patent Box regime will be introduced from 1 April 2013, with the aim of encouraging commercialisation of existing and development of new patents.  Under the regime, companies will be able to elect to apply a 10% rate of corporation tax from 1 April 2013, to profits attributable to qualifying IP.  The Patent Box will apply to existing as well as new IP and to acquired IP, in certain circumstances.

Other measures

Low Value Consignment Relief ("LVCR")
As has been widely broadcast, the draft legislation removes low value consignment relief (LVCR) from mail order goods imported into the UK from the Channel Islands. The measure will have effect for goods imported on or after 1 April 2012. It goes without saying that it is disappointing that there has been no movement by the UK Government on this.

Tax Transparent Funds
Draft legislation was published today governing the tax treatment of investors of UK Tax Transparent Funds ("TTF's"). A regulatory consultation document is expected to be published late 2011 or early 2012. The new regulated vehicle is expected to be in place by summer 2012 and is aimed at allowing the UK to compete as a transparent fund domicile.

If you have any questions, please do not hesitate to use the contact details on this page or your usual PwC contact.