The UK: Time for a Health Check?

Many companies dip their toe into an overseas market with meticulous planning (and a degree of trepidation), others barely think about the significant differences they are likely to encounter, such as language, culture, business practice, legal system and of course tax. Tax is the one area that is often overlooked and the one most susceptible to significant change. One only has to take a look at what a Labour Government would have led to had Corbyn been handed the keys to No 10.

Entering the UK market is very attractive in its own right and as a stepping stone into Europe (Brexit aside). However, the pace at which tax rules and regulations change and the associated red-tape and compliance burden are often overlooked or underestimated.

We offer a ‘Health Check’ service for non-UK headquartered groups with UK operations, that are potentially exposed to UK tax issues such as:

• Corporate Residence
• Permanent Establishment
• Diverted Profits Tax
• Hybrid Mismatch rules
• Corporate Interest Restriction
• Transfer Pricing

Our approach is as follows:

Scope:

1. Fact find meeting or call
2. Review group structure
3. Review last UK tax return/computation and financial statements
4. Review inter-company agreements and/or Transfer Pricing documentation (if the group is not utilising the UK SME TP exemption)

Output:

1. Short slide deck using a traffic light system to assess the risk level across various legislative changes, anti-avoidance rules and reporting requirements.
2. Recommendation as to next steps to manage or monitor risk.
3. If issues are spotted that need to be rectified, then a plan of action and a fee quote for advising are agreed.

If you are interested in discussing your requirements please contact Zoe Wyatt on +44 79 0978 6144 or zoe.wyatt@uk.Andersen.com

or Andrew Parkes on +44 20 7242 5000 or andrew.parkes@uk.Andersen.com

UK / Hungary: Film and TV

It is not uncommon for actors and actresses to use personal service companies (PSCs) (i.e. loan out companies, slave corporations etc) through which to provide their services to film/TV productions. A problem often encountered is where the PSC is disregarded by the state in which the services are being performed. UK actors regularly ply their trade in Hungary where there is a significant film and TV industry. UK cast members that are contracted via PSCs will be taxed as individuals in Hungary (pursuant to the UK / Hungary DTA), giving rise to a mismatch. The question we are often asked is whether UK tax legislation allows a credit for the Hungarian personal income tax paid against the UK corporate income tax.

The answer is yes, it does and is dealt with in HMRC guidance at International Tax Manual 168063.

There are two options to deal with this:

1. the foreign income tax is credited against the corporation tax of the entertainer’s PSC; or
2. the foreign income tax is credited against the income tax on the salary or dividends taken by the entertainer from his PSC. This latter option is only available if there is a “clear and direct” link between the fees for the performance in the foreign country and the salary/dividend such that it can be said the salary/dividend is derived from the performance fee.

Of course, the tax credit can still be restricted in accordance with normal double tax relief rules.

The UK : Film and Tax TV Credits

With the increase of must see shows and films that the team are watching, we thought now was a good time to have a closer look at the UK’s film and high-end reliefs that, like some TV shows, had a bad start (Men Behaving Badly) but recovered and went from strength to strength (Blackadder).

The original relief was launched in 1997 to encourage film making by allowing relief for the production or acquisition of the master copy of a film. From the start, the relief was abused. Some of the “films” made to obtain relief were of such low quality they made Attack of the Killer Tomatoes look like Citizen Kane.

The regime was tweaked again and again to stop the avoidance, but to no avail. It was finally put out of its misery in 2006, while the battles over the £1bn said to have been lost to tax avoidance continues.

The new regime, in contrast, has been a great success. Copying an adage from Hollywood that there are no new ideas, the UK’s film tax regime, has a nod towards the Canadian and Irish regimes.

It works by channelling the money (the tax credit), to the person who actually makes the film – the producer. It no longer goes to the person financing the film. This means that the person who is making the hiring and firing decisions, the person who is creating the jobs in this high value industry, is the one to benefit from the incentive.

The film scheme relief was such a success it was widened to high-end TV and animations in 2013 and then over the next few years to video games, theatre, children’s TV, orchestras plus museums and exhibitions, becoming the creative industries reliefs.  Latest figures from HMRC show that they paid out £1.1bn across all of these reliefs in 2018/19, with £595mn being paid out for films and £246mn for high-end TV.

The relief is available for one production company per UK film or TV series, with the Britishness of the project being certified by the BFI. It allows the production company to double 80% of their “core expenditure” relating to pre-production, production and post-production or all of their UK core expenditure, if it is less than 80% of the total. Then, and here is the cinematic magic, these losses can be “sold” to HMRC for 25p in the £1.

The production and post-production phases are the main target of the relief, as this is where the majority of jobs, especially the high value ones, are generated. The UK is now a world leader in special and visual effects that are added to films and TV series in post-production.

These skills are also used in animations and video games (as mentioned, areas that not uncoincidentally also have their own reliefs), whilst the production phases with principal photography taking place in various locations across the UK, enhances the tourist industry in those locations. Several members of the team have the DVDs to prove they rode a broomstick at “Harry Potter World” (aka Warner Brothers Studio, Leavesden) and can’t wait to do the Games of Thrones tour in Northern Ireland.

With the doubling of their expenses, many films can now be made that previously would not have received the “green light” as the producers can turn a profit, even on films that made a commercial loss, or make a larger profit upon one that was only marginally successful commercially.

For example:

*Credit is the lesser of the losses or the enhanced expenditure (here £8mn).

Is it any wonder that the regime has proved so popular?

There are quirks to each regime. For films, you must intend that at least 5% of the revenue comes from theatrical release (i.e. you can’t just run it in one cinema for one day). In other words, if you did this, your film would qualify for the Oscars but not for film relief. It must also be a film – you can’t just put a double episode of a TV series onto the screen and call it a film.

For high-end TV you must have a slot length of over 30 minutes, which will rule out most half hour comedy shows as they have a slot length of 30 minutes even though they are only 19 to 22 minutes long. The average cost of each episode must also be over £1mn. This is designed to show that the TV series is “high-end”, but given the amounts charged by some TV personalities, this total is not too difficult to reach. Finally, and again to show the “high-end” nature of the programme, the TV show must be a drama or a documentary. It can’t be a quiz or chat show, nor news or live events. Some of these restrictions are relaxed for animations and children’s TV.

Many films and TV shows are now made in several countries, often in countries where there are tax incentives (see Hungary above). The UK regime allows for that. It allows for a UK production company and a non-UK one, if the film or programme is being made under a co-production treaty. The UK has 11 of these, with possibly the most important being Canada and Australia. The UK is also a signatory to the European Convention on Cinematographic Co-Production, which is a Council of Europe document and shouldn’t be affected by Brexit.

Andersen has dedicated media teams in many of the countries where there are tax incentives and we can assist on single country or co-production projects.

If you have any queries regarding the UK creative industry reliefs please contact Zoe Wyatt on +44 79 0978 6144 or zoe.wyatt@uk.Andersen.com

or Andrew Parkes on +44 20 7242 5000 or andrew.parkes@uk.Andersen.com

Russia : Residency Rules to be Updated

Most countries determine the tax residence status of an individual by reference to the number of days that they spend in the country in question. For obvious reasons, 183 days is the brightline test. However, many countries also use the concept of “centre of vital interests” as a secondary test to extend the reach of domestic residence rules to cover individuals who might not spend the requisite number of days in country, but who nonetheless have sufficient connections or ties with that country.

Russia currently operates the 183 day rule, but the Russian Ministry of Finance has proposed reducing this to 90 days over a 12 month period. In addition, it also plans to extend the rule to include “centre of vital interests” irrespective of the number of days an individual spends in Russia. The clear aim of these changes is to capture wealthy Russian individuals who might, for example, be resident for tax purposes in the UK (and benefit from the non-dom regime) but whose family, assets and commercial interests remain in Russia. By extending the scope of the residence rules, Russia is making it much harder for individuals to become non-resident. In many cases individuals will become dual resident giving rise to potential double taxation and increased compliance cost and complexity. Furthermore, domestic Russian anti-avoidance (e.g. CFC provisions) and disclosure rules (CRS) will be brought into play.

The rules could come into force as soon as 2021, so watch this space.

If you wish to discuss a particular case or are unsure of what steps you should take in advance, please contact Miles Dean on +44 20 7242 5000 or miles.dean@uk.Andersen.com

The US: Check the Box Election – The Gift that Keeps Giving

Many readers will have read about and/or be knowledgeable about the Check The Box (CTB) election that allows a business entity to elect how it is treated for tax purposes. The three options are:

i) Taxed as a corporation
ii) Taxed as a partnership
iii) Disregarded (applicable only to a single-owner entity)

The CTB has been widely used by US businesses to mitigate their exposure to US taxation, but it also makes the US an attractive destination for individuals looking to realise a capital gain on an exit transaction. The US does not offer an automatic rebasing to market value of an individual’s assets on arrival in the US (unlike Australia, Canada, the Netherlands and various others), but the CTB can in certain circumstances allow an individual to trigger an uplift for US tax purposes prior to arrival in the US.  How does this work?  When a non-US company makes a valid CTB election to be treated as a partnership or disregarded entity it is deemed to have distributed its assets to the shareholders which results in a step up (or down) as at the date of the election. Assuming the individual is a non-resident alien, and the non-US company has no US assets there should be no taxable gain for US tax purposes and no disposal in the individual’s country of residence. However, any gain realised by the individual on the disposal of the company once they are resident in the US should be limited to the difference between the sale price and the CTB step up value.

If you are interested in this planning opportunity or US tax matters in general, please contact Julian Nelberg on +44 20 7242 5000 or julian.nelberg@uk.Andersen.com

or Paul Lloyds on +44 20 7242 5000 or paul.lloyds@uk.Andersen.com