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Calculating taxable diverted profits ― avoided PE cases
Calculating taxable diverted profits ― avoided PE casesCalculating taxable diverted profits ― step oneOnce it has been established that a charge to diverted profits tax (DPT) has arisen in accordance with the conditions of FA 2015, s 86, as set out in the DPT ― avoidance of UK permanent establishment guidance note, it is then necessary to calculate the quantum of the non-UK company’s profits (if any) that will be subject to the charge. The aforementioned guidance note should be read prior to reading this one. There are three statutory ways in which the amount of taxable diverted profits may be determined, under FA 2015, ss 89, 90 and 91 (although there are technically four if sections 91(4) and 91(5) are considered separately), which are set out in Step two below. In order to determine which of these methods apply, it is necessary to determine whether or not the ‘mismatch condition’ (defined in the DPT ― avoidance of UK permanent establishment guidance note) applies and, if so, whether or not the ‘actual provision condition’ (defined below) then applies at the same time.This latter concept plays an important part in the calculation of taxable diverted profits involving ‘mismatch condition’ arrangements under FA 2015, ss 90 and 91. FA 2015, s 89 deals with avoided PE situations not involving ‘tax mismatch condition’ arrangements, ie where the ‘tax avoidance condition’ solely applies.The comments above reflect the flowchart shown in HMRC’s guidance notes to calculate diverted profits under FA 2015, ss 89–91. In
Introduction to CFCs
Introduction to CFCsIntroductionThe controlled foreign company (CFC) rules as outlined in this note apply to accounting periods beginning on or after 1 January 2013, the date upon which significant changes made by Finance Act 2012 became effective.From this date, the CFC rules also apply to foreign branches in respect of which an exemption election has been made. See the Foreign ‘branch’ exemption ― overview guidance note for more details.The rules are complex and this guidance note outlines the main provisions only. More detailed commentary can be found in Simon’s Taxes D4.401.HMRC guidance on the CFC regime is available at INTM190000 onwards.CFCs ― basic principlesA CFC is any company which is resident outside the UK, but ‘controlled’ by a UK resident person or persons. This can include companies and individuals. UK resident persons control a company if they have the power to secure that the affairs of the company are conducted in accordance with their wishes, or if they are entitled to more than 50% of the proceeds on a disposal or a winding up. The definition of control is extended to include certain structures where UK resident persons hold 40% of the rights in the overseas company. From 1 January 2019, the definition of control is further extended to the situation where a UK company together with its associated enterprises holds more than a 50% investment in the non-resident company. There is a targeted anti-avoidance rule which applies where artificial steps have been taken to avoid a subsidiary being
Investors’ relief
Investors’ reliefInvestors’ relief is a capital gains tax (CGT) relief on the disposal of qualifying shares in an unlisted company. A taxpayer making a disposal that qualifies for investors’ relief will pay tax at a rate of 10%.Although it is a separate relief, the rules for investors’ relief were intended as an extension to business asset disposal relief (previously known as entrepreneurs’ relief) and therefore complement and mirror those rules, to a degree. See the Conditions for business asset disposal relief guidance note.IntroductionInvestors’ relief is aimed at incentivising external investment. It is not intended to be accessible by individuals whose natural means of capital gains relief on a disposal would be business asset disposal relief. Accordingly, most employees and directors will not be entitled to investors’ relief.Also, unlike business asset disposal relief, there is no requirement to hold a minimum number of shares in the company. There is a lifetime limit on the relief of £10m, which is in addition to that applying for business asset disposal relief.The rules for investors’ relief are contained in TCGA 1992, ss 169VA–169VY. HMRC guidance on investors’ relief can be found at CG63500P. Conditions for reliefRelief is available where a qualifying person makes a disposal of, or of an interest in, a holding of shares that includes qualifying shares in an unlisted company provided a claim for the relief is made. A qualifying person is an individual or a trustee. Investors’ relief is not available to companies.Qualifying sharesQualifying shares are ordinary shares (within
Corporate debt ― overview
Corporate debt ― overviewThis guidance note provides an introduction to the provisions governing the taxation of debt for UK companies and also provides links to more detailed guidance notes dealing with those provisions.The taxation of corporate debt in the UK is complex. There are several different sets of rules governing the amount and timing of tax deductions available for interest and other amounts relating to corporate debt. These include:•the loan relationships regime•the corporate interest restriction (CIR) rules•transfer pricing and thin capitalisation requirements•a range of associated anti-avoidance measures ― it should be noted that there are regime anti-avoidance rules (RAARs) in CTA 2009, ss 455B–455D and related sections for loan relationships and in TIOPA 2010, s 461 applicable to the CIRIt should also be remembered that payments of interest by a UK company on all liabilities capable of remaining outstanding for more than one year are subject to withholding tax, unless they are expressly exempt or qualify for relief.Loan relationshipsIn most instances, a company’s financing costs and income are taxed or relieved under the loan relationships regime. Relief is only available where the cost attaches to the company’s own loan relationships or a balance which is deemed to be a loan relationship for tax purposes. See the What is a loan relationship? guidance note.A loan relationship exists where a company stands in the position of debtor or creditor in respect of a money debt that arises from a transaction for the lending of money. Although, it
Calculating taxable diverted profits ― entities or transactions lacking economic substance
Calculating taxable diverted profits ― entities or transactions lacking economic substanceCalculating taxable diverted profits ― step 1Once it has been established that a charge to DPT has arisen in accordance with the conditions of FA 2015, ss 80 or 81, as set out in the DPT ― entities or transactions lacking economic substance guidance note, it is then necessary to calculate the quantum of profits (if any) that will be subject to the charge. The aforementioned guidance note should be read prior to reading this one. There are three ways in which the amount of taxable diverted profits may be determined, which are set out in Step 2 below. However, in order to ascertain which of these three methods is to be applied, the ‘material provision’ (effectively what has actually happened) must first be compared with a ‘relevant alternative provision’ to establish whether or not the ‘actual provision condition’ is met.The ‘material provision’ takes its meaning from FA 2015, s 80, ie the actual transaction or series of transactions. The ‘relevant alternative provision’ means the alternative provision which, it is just and reasonable to assume, would have been made or imposed as between the relevant company and one or more companies connected with that company, instead of the material provision, had tax (UK or non-UK) on income not been a relevant consideration for any person at any time. In some cases, no transactions would have taken place, had tax not been a consideration. This situation can still be regarded
Share incentive plans
Share incentive plansWhat is a share incentive plan (SIP)?The share incentive plan (SIP) is a tax-advantaged employee incentive plan, which provides employees with the opportunity to obtain a continuing stake in the employing company through the acquisition of shares (not share options). Provided qualifying conditions are met, the SIP attracts income tax and national insurance contribution (NIC) advantages for participants.The plan must be open to all UK resident employees, although a qualifying period of up to 18 months can be imposed. The terms must be the same for every employee who wishes to participate, and no preferential treatment can be given for directors or senior employees.The SIP must be operated via a UK resident trust. The SIP trust holds shares on behalf of employees.A number of changes were made to the SIP rules by FA 2013 and FA 2014 to simplify the administration of the scheme and harmonise some of the rules with that of other tax-advantaged schemes. One of these changes means that from 6 April 2014 a qualifying SIP is known as a ‘Schedule 2 SIP’.The Government launched a call for evidence in June 2023 to determine whether the plan still meets its original policy objectives and whether the rules can be improved or simplified. This was published on the same day as a report commissioned by HMRC into the use of tax-advantaged share schemes.Key considerations for a Schedule 2 SIPEligible employeesAll UK resident eligible employees must be able to participate in the plan, and must be invited to do so. Generally speaking,
Research and development SME tax reliefs
Research and development SME tax reliefsThis guidance note provides information on the R&D reliefs available specifically to companies which are small and medium sized enterprises (SMEs). The definition of an SME is detailed in the Research and development (R&D) relief ― overview guidance note. The Qualifying expenditure for R&D tax relief guidance note provides information on what expenditure qualifies for SME relief.See also Simon’s Taxes D1.419, D1.420.For accounting periods beginning on or after 1 April 2024, SMEs can claim relief for qualifying R&D expenditure under the merged RDEC scheme. See the Research and development expenditure credit (RDEC) guidance note. Only loss making SMEs which meet an R&D intensity condition can claim the more generous SME reliefs described in this guidance note. This is sometimes referred to as the ‘SME intensive scheme’ or ‘ERIS’ (enhanced R&D intensive support).For accounting periods beginning before 1 April 2024, SMEs can claim RDEC only for contracted out, subsidised or capped expenditure by SMEs that does not qualify for the SME scheme. Otherwise, SMEs can only claim for relief under the SME scheme, whether or not the company is loss making or R&D intensive.R&D intensive SMEsA company meets the R&D intensity condition for an accounting period if its R&D expenditure is at least 30% of its total expenditure for the period. If the company is connected with any other companies, the test is applied to the expenditure of all of the connected companies. Where the claimant company’s accounting period does not fully coincide with that
Living accommodation
Living accommodationEmployers may provide living accommodation to their employees ‘by reason of their employment’. There is specific tax legislation that covers the provision of accommodation and the expenses associated with it. In certain circumstances, a statutory exemption from tax is available for particular employments.This guidance note outlines the benefits in kind potentially taxable when living accommodation is provided to an employee, alongside potential exemptions which may apply. Other benefits, which are unlikely to be exempted, are outlined in the Utilities, council tax and other bills in accommodation and the Furniture in accommodation provided by employer guidance notes. An overview of the different benefits possibly taxable is also given in the Client factsheet ― employer provided accommodation ― how various payment elements are taxed as benefits in kind .Living accommodation benefitA tax liability on the provision of accommodation to an employee is imposed by ITEPA 2003, s 102. The section states that if accommodation is provided for all or part of a tax year, then the cash equivalent of the benefit should be treated as earnings. The calculation of the cash equivalent is discussed below. A liability can also arise under ITEPA 2003, s 62 as earnings where employers settle employee’s rents or provide special entitlements in relation to rent.The term ‘provided’ should be given its everyday meaning; there are no specific legal definitions of it in relation to living accommodation. The accommodation does not necessarily have to be provided by the employer. As long as the accommodation is provided
Conditions to be met by the EIS investor
Conditions to be met by the EIS investorTax reliefs under the enterprise investment scheme (EIS) can be summarised as follows:•income tax relief for the investor of up to 30% of the amount invested•disposals of EIS shares after three years may be free from CGT•capital gains deferral relief allows investors disposing of any asset to defer gains against subscriptions in EIS shares•losses on EIS shares may be offset against taxable income•EIS investments should qualify for IHT business property relief after two years’ ownershipEIS reliefs are available to individuals only, except for EIS deferral relief which is also available to trustees. EIS reliefs are available to UK residents. UK non-residents only qualify for some EIS reliefs; they are not eligible for deferral relief or relief for on losses on disposals of EIS shares. With the exception of EIS deferral relief, EIS reliefs are available only to outside investors.For more detail on the tax reliefs, see the Enterprise investment scheme tax relief and Enterprise investment scheme deferral relief guidance notes.Note that a sunset clause for EIS income tax relief has been introduced. This ensures that income tax relief will no longer be given to subscriptions made on or after 6 April 2025, unless the legislation is renewed by Treasury Order. The sunset date is extended to 6 April 2035 by FA 2024, but the Treasury Order cannot be brought before Parliament until domestic and international subsidy approval has been received. Ongoing qualifying conditionsTo obtain (and retain) EIS tax
DPT administrative process
DPT administrative processThere are several administrative matters and deadlines to be aware of in connection with diverted profits tax (DPT). The key provisions are listed below.Duty to notify HMRCA company is not required to self-assess its liability to DPT. Rather, if it is potentially within the charge to DPT, it is under a duty to notify HMRC within three months following the end of the relevant accounting period. For accounting periods ending on or before 31 March 2016 (ie the first year of application of DPT), the notification deadline was extended to six months from the end of the relevant period. The notification must be made by the affected UK resident or foreign company in writing and must state:•whether the duty to notify arises as a result of FA 2015, ss 80 or 81 (entities or transactions lacking economic substance), or FA 2015, s 86 (avoidance of a UK permanent establishment (PE))•the name of the avoided PE in FA 2015, s 86 cases•in FA 2015, ss 80 or 81 cases, a description of the material provision (ie the transaction(s)) involved, together with the names of the parties concerned•in FA 2015, s 86 cases, whether or not the mismatch condition is met, and if it is, a description of the material provision involved, together with names of the parties concernedFA 2015, s 92(9); INTM489886The penalties for not notifying when a notification is subsequently found to have been required are based on ‘potential lost revenue (PLR)’ (see
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