Contents

1. The UK: Taxation of Asset Holding Companies – Miles Dean
2. The UK Capital Gains – A little less satisfaction – Julian Nelberg and Andrew Parkes
3. The UK: Musings: The law of unintended consequences – Miles Dean and Andrew Parkes

The UK

Taxation of Asset Holding Companies 

We wrote about the Government’s consultation on fund asset holding companies in our January edition and the proposals look set to be introduced as of 6 April 2022. The new elective tax regime will apply to companies that hold assets as part of fund/collective investment scheme structures. So-called qualifying asset holding companies (QAHCs) must be at least 70% owned by diversely owned funds managed by regulated managers, or certain institutional investors. The aim of the new regime is to facilitate the flow of capital, income and gains between investors and underlying investments as if the investors held the assets directly.

The regime is intended to only be available to investment arrangements that involve the pooling of investor funds with professional investment managers and is not intended to affect the taxation of profits from trading activities, UK property or intangibles.

The main features of QAHC regime include:

• exemption for gains on disposals of certain shares and overseas property by QAHCs;
• exemption for profits of an overseas property business of a QAHC (where such profits are subject to foreign tax);
• deductions for certain interest payments that would usually be disallowed as distributions (e.g. in respect of a profit participating loan); and
• exemption from withholding tax on payments of interest to investors in the QAHC.

QAHCs will be liable to UK corporation tax (CT) on profits not covered by the new regime. For instance, UK source property income and gains will be subject to CT. Foreign property gains will be exempt irrespective of whether they are liable to tax at source, whereas foreign property income is exempt only if it is subject to foreign tax.

The new regime is clearly designed to challenge the likes of Luxembourg and Dublin as current European leaders in the fund space. The issue for the Treasury is to ensure the regime is used by genuine widely held structures whilst avoiding the need for overtly complex and burdensome provisions to prevent abuse. One only has to look at the UK’s Patent Box regime to see how difficult a balancing act this is.

However, challenges apart, this is a significant step in the right direction adding a further string to the UK’s bow.

For more information, please contact:

Miles Dean, Head of International Tax
M: +44 (0)7785 770 431 or
E: miles.dean@uk.Andersen.com

The UK

Capital Gains – A little less satisfaction

There is a lot going for the UK’s taxing regime (as noted above re QAHCs), but we were reminded recently of an area where the UK leaves quite a lot to be desired and that is in the area of capital gains for newly arrived residents.

Unlike some countries, notably Canada and in certain circumstances the Netherlands, when a person arrives in the UK (whether it is a company or an individual) their assets all retain their original acquisition costs. There is no “step up” to the current market value. The UK considers that it is entitled to tax all of the gain, even where it arose with no economic linkage to the UK (i.e., before the person was resident in the UK).

This might be considered acceptable if there was no exit charge upon assets when a person leaves the UK (i.e., you are taxed here upon gains crystallised whilst in the UK, but we have no interest in gains crystallised outside the UK). However, there is an exit charge for companies and trusts, plus a potential exit charge for temporary non-residents if they dispose of assets whilst non-resident but return within 5 years of leaving.  As an aside, we consider (well, some of us do!) that the temporary non-resident rules have a legitimate policy aim, as do exit charges, if they seek to secure UK taxation of gains made using the UK’s economy. What we are against, however, is the attempt by the UK to obtain a windfall by taxing gains that have nothing to do with the UK.

Like many aspects of the UK’s capital gains rules, we suspect that the reason for the lack of a step up is simply the perceived difficulty in valuing assets at the date of arrival in the UK. However, with advances in technology such valuations are now easier to come by (or make), but with the state of the UK’s finances and the call for capital gains to be taxed at ever higher rates, there is little to no chance of a Chancellor righting this wrong.

Why are we making this point? A client who was non-UK resident held an asset with a large uncrystallised gain, the asset was to be sold prior to arriving in the UK, with foreign tax paid and the remainder being capital, free to be used here. However, there was a delay in the transaction and the sale happened after he arrived in the UK.  Our client was resident in the UK for only a matter of days prior to disposal, but now the entire gain is liable to UK tax.  Fortunately (if that is the right word) the remittance basis applies as the client is non-domiciled and no UK tax is due, provided that the proceeds remain outside the UK.  Whilst his domicile status came to save him, he cannot enjoy the gains in the UK without triggering a tax charge and will have to use other sources of capital to fund his UK lifestyle.

On one level, you may say the moral of the story is not to cut it so fine, but the sale was supposed to happen months prior to his arrival and for other reasons UK residence could no longer be “put off”, but with an extension of the UK’s territorial tax system to gains, this would not be an issue.

If you have any queries concerning the application of the UK’s chargeable gains regime, please contact Julian Nelberg for individuals, or Andrew Parkes for companies:

Julian Nelberg
Partner
M: +44 (0)7803 502 555 or
E: julian.nelberg@uk.Andersen.com

Andrew Parkes
National Technical Director
M: +44 (0)7522 229 589 or
E: andrew.parkes@uk.Andersen.com

The UK 

Musings: The law of unintended consequences 

This is something (the law of unintended consequences that is) that often occurs in taxation. For instance, many of us will remember the 0% CT rate in 2002 to encourage the development of small business. The incorporation of 100,000’s of companies following the announcement came, bizarrely, as a huge shock to the Treasury, which then doubled down and introduced the non-corporate distribution rate before scrapping the rate entirely in 2006. Whilst the Treasury quietly cussed their bad luck, everyone else just asked “what did you expect?”

There is possibly another example arising from Brexit, although collateral damage may be a better term, and that relates to the taxation of cross border interest and royalty payments. The Interest and Royalties Directive (IRD) was designed to smooth the flow of such payments through the EU, although in quite limited circumstances as the payments could only be between companies where one held at least 25% of the other, or a third company held at least 25% in both.

This limited the benefits to corporate parent/child or sibling relationships. Anything wider, such as grandparent or cousins were right out the window.

As a directive, each member state had to design and enact its own legislation to give the IRD effect. This was done by referring to payments made to companies resident in, wait for it, member states. Therefore, for the UK, the national provisions applied where a UK company or the UK PE of an EU company made a payment to an EU company. Likewise, for, say, Italy, the rules applied where an Italian company made a payment to a company in another member state (which, pre-Brexit included the UK).

However, following Brexit, the UK is no longer a member state, but Italy is. This means that payments from an English company to an Italian company were still covered by the terms of the IRD due to our domestic legislation, whereas a reciprocal payment from Italy to the UK was not by virtue of their legislation. In the absence of the IRD the Italy/UK double taxation agreement applies. This meant that interest payments from Italy now suffered WHT of 10% and royalties 8%, whereas payments to Italy were tax free.

The Government noticed this “problem” and the UK’s enabling legislation was repealed from 1 June 2021.

This may cause problems where a group has been relying upon the IRD as it could now be facing WHT on payments that it didn’t have to worry about before. For royalties the issue is more manageable, as a UK payer can apply a treaty rate if it reasonably believes that the recipient is entitled to the benefit of the treaty. Therefore, if the treaty rate is 0%, no tax will be due, although the payer should at least have some evidence as to how it satisfied itself that it was reasonable to believe that the treaty rate was available. This is in case HMRC comes knocking and decides the treaty benefit is not due.

For interest, the problem is wider as there is no such “reasonable belief” test. If the benefits of the IRD were to be claimed for interest payments, an application still had to be made to HMRC to pay the interest gross. Any agreements issued by HMRC came to a crashing stop on 1 June 2021 and all interest payments made on or after that date need a new direction from HMRC under the relevant treaty.

Admittedly, HMRC have introduced a simplified process for applying for such permission where an agreement had been reached under the IRD, but the need for new authority is very much needed.

For payments that used to be covered by the IRD, we would expect HMRC to take a lenient view on penalties if permission has not been granted before an interest payment was made (or if the wrong rate of WHT was withheld on royalty payments), provided it is an unprompted disclosure within the next 12 months. However, the longer the delay, the more likely it is that HMRC may seek penalties, even if no tax is eventually due, that is, HMRC may seek penalties on the tax that should have been withheld even though they grant treaty relief and “repay” that tax. Plus, of course, interest.

Due to the repeal of the IRD for UK companies we recommend that groups review their payments to EU affiliates that may have been under the IRD, especially any long-standing arrangements, given that the IRD was enacted back in 2004 and the reason why the payment is being made without WHT may be lost in the mists of time (or since Gerald retired).

If you have any queries regarding withholding tax or reports to HMRC, please contact Miles Dean or Andrew Parkes:

Miles Dean
Head of International Tax
M: +44 (0)7785 770 431 or
E: miles.dean@uk.Andersen.com

Andrew Parkes
National Technical Director
M: +44 (0)7522 229 589 or
E: andrew.parkes@uk.Andersen.com