Horwath Clark Whitehill - Corporate Taxes Update - 7 July 2008

Apr 5, 2009 | Publisher: CroweClarkWhitehill | Category: Business & Jobs |  

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A summary of the latest UK tax news www.horwathcw.com Corporate Taxes Update 7 July 2008 In this issue: • UK Controlled Foreign Company regime in doubt • Mixer cap and the effect of changes to the corporation tax rate • VAT and opting to tax – some changes UK Controlled Foreign Company regime in doubt A ruling in the High Court has put in question the validity of the UK’s Controlled Foreign Company (CFC) regime. The case of Vodafone 2 v HM Revenue & Customs Commissioners related to the acquisition by Vodafone of the German company Mannesmann. Vodafone used a company based in Luxembourg to undertake the acquisition. HM Revenue & Customs (HMRC) had sought to tax the profits of the Luxembourg intermediate holding company in the computation of the UK company under the provisions of the UK’s CFC legislation. Vodafone appealed on the grounds that the legislation was incompatible with EU law on freedom of establishment. The High Court agreed that on the construction of the UK law it is incompatible with EU law; Mr Justice Evans-Lombe also called for the UK Parliament to clarify the position for taxpayers. He is quoted as saying that: “In my judgment the CFC legislation must be disapplied so that pending amending legislation or executive action, no charge can be imposed on a company such as Vodafone under the CFC legislation…it seems to me that all UK taxpayers, including Vodafone, were and are entitled to be told by legislation, of which the meaning is plain, what the tax consequences for them will be if they decide to incorporate a controlled foreign company in a member state.” This is great news for UK corporation taxpayers that have been caught by the CFC rules and have had to pay UK corporation tax on the profits of subsidiaries based in the EU. It is expected that many groups will now review their positions and that claims for the repayment of UK corporation tax will follow. This ruling follows recent announcements regarding the UK government’s review of the taxation of foreign profits. This case will therefore add more pressure on the government to make a decision on how it intends to tax such profits, but the government knows that its decisions are under close scrutiny following the recent high profile exits of a number of groups from the UK. Companies that have reported CFC profits should review whether to make a claim to recover UK corporation tax which it now appears should not have been paid. A note of caution, however, HMRC are unlikely to accept this ruling and are expected to lodge an appeal. This is unlikely to be the end of the story. Mixer cap and the effect of changes to the corporation tax rate The Financial Secretary has announced that changes will be made in Finance Bill 2009 to correct an unintended oversight regarding the mixer cap. The mixer cap restricts the amount of relief that a company can claim for foreign tax paid on foreign income. As a result in the reduction in the corporation tax rate applying for large companies from 30% to 28%, this has some potentially disadvantageous implications for such companies. This correction will have immediate effect and will ensure that companies are not unintentionally taxed twice on the same income. Corporate Taxes Update A summary of the latest UK tax news www.horwathcw.com 7 July 2008 For more information please contact: Angela Lazda Tax Partner angela.lazda@horwath.co.uk Stuart Weekes Senior Tax Manager stuart.weekes@horwath.co.uk Horwath Clark Whitehill LLP Aquis House 49-51 Blagrave Street Reading, RG1 1PL Telephone: 0118 959 7222 Fax: 0118 958 4640 This information is published without responsibility on our part for loss occasioned to any person acting or refraining from acting as a result of any information published herein. © Horwath Clark Whitehill LLP July 2008. www.horwathcw.com VAT and opting to tax – some changes The Value Added Tax (Buildings & Land) Order came into force on 1 June 2008. This order introduces and updates the existing provisions regarding the option to tax. Income and expenditure relating to land and buildings is usually exempt for VAT purposes, but businesses letting property can elect to disregard this exemption i.e. they opt to tax. The effect is that the business is able to recover input tax on purchases incurred in respect of the building; however it is then obliged to charge VAT on rental and other income. The order introduces a number of changes. • The date that permission is sought is now the effective date; taxpayers are also permitted to appeal should HMRC refuse an application. • If members leave a group they are not tainted by the option providing they do not have an interest in the property, have no right to any proceeds and are connected to such a person. • The option remains with land after demolition and flows into any building built on it. • If a commercial building is to be converted into dwellings, the purchaser or tenant must issue a certificate to disapply the option. • Once an application has been made to opt to tax a building there is a six month cooling off period – previously this was three months. One of the key implications of the option to tax is that this cannot be revoked for 20 years. The result is that when the building is bought and sold during that 20 year period VAT must be charged on the transaction (unless certain other exemptions apply). The rules were introduced nearly 20 years ago, which means that from 1 August 2009 some taxpayers will have the ability to revoke the option to tax. This will be good news for taxpayers who have tenants that cannot recover the VAT on the rent. This also puts such landlords in an advantageous position over similar landlords who are still required to charge VAT. Businesses that own property on which VAT is charged should check when the option can be revoked and whether such a move would be advantageous. Other matters • Finance Bill 2008: The House of Lords debate is scheduled to take place on Friday 18 July 2008, with Royal Assent expected early the following week.

Horwath Clarke Whitehill - Corporate Taxes Update - 7 July 2008.pdf

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