The Government has introduced measures to crack down on “designer” tax systems which it claims help companies evade a reported £1bn a year in UK taxes.
Under the new rules, businesses have to pay an amount of controlled foreign company (CFC) tax equal to the amount which would have been avoided by using tax havens such as Jersey, Guernsey the Isle of Man and Gibraltar.
In the past, CFC rules only regarded a company as using a tax haven if it was paying a rate of tax below 75 per cent of what it would have been paying if it was a UK resident.
The Government claims that as a result, a number of countries will negotiate the level of tax paid by a company to just over that threshold.
Any saving on tax made by a company will have to be paid in CFC tax.
But will the measures lead to so-called tax havens attempting to adapt tax rates to help companies avoid UK tax? How will the changes affect companies that choose to operate under the present system?
Steve Edge, tax partner at Slaughter and May, believes that the move was inevitable. He says: “It is interesting to see that the Revenue is up to date on CFC and people are planning with CFC but I think this is just the first step and there will be further measures taken.
“With the abolition of Advance Corporation Tax (ACT), it was inevitable that this was going to happen. Under the old system, ACT used to make sure that multinationals would pay some tax, but with its abolition, the incentive to do that went and the Revenue believed that businesses would stay paying tax here because our tax was lower than in other parts of the world. But the revenue has since found that the tax level was not low enough.”
Edge believes that multinationals based outside the UK will not be greatly upset by the changes, adding: “multinationals will only have the financial base for their UK operations based here.” Their overseas operations will not be affected.
Julia Chapman, tax partner at Jersey-based firm Mourant du Feu et Jeune, believes that the impact of the new rules on Jersey will be minimal. “We have not been instructed to set up as many International Business Companies (IBC) recently as [we were] four or five years ago. I do not know why this is but I suspect that perhaps the systems are more favourable now in the home countries,” she says.
“I would be surprised if a lot of companies took advantage of the system.”
Chapman believes that the perceived problem comes from outside the British Isles. She says: “It may be that the British Government has looked at designer tax systems outside of Jersey because in Jersey the tax rate cannot be negotiated.”
However, Chapman says that the IBC has been suggested as a suitable form of company for e-commerce ventures, and that this potential source of work for Jersey firms could be curtailed with the new rules.
Susan Ball, tax partner at Clyde & Co, believes that the move by the Government is a little mean spirited.
Ball asks: “If a company is paying a certain amount of tax on your chosen mix of income that the Government in the past has deemed acceptable, then why can the Government now move in and say that level of tax is not acceptable?”
Ball concedes that the changes might be an to attempt to bring all taxation back to the UK. “It is also part of the general European Union movement to bring the European offshore tax havens into the mainstream system.”
However, she is dubious as to how many companies are actually taking advantage of the schemes. “In my experience, most offshore activities that I deal with are tax exempt anyway.
“There will be groups that will be affected by the changes but I have no idea what level of tax the Government is losing out on.”