INTERNATIONAL TAX COMPLIANCE REGULATIONS IN (PART 18): UK
By Alan Rajah, Lawrence Grant, Chartered Accountants
The International Tax Compliance (Amendment) Regulations 2019 came into force in the UK on 16 May 2019. This instrument amends the International Tax Compliance Regulations 2015 (SI 2015/878) (“principal regulations”), which came into force on 15 April 2015 and require financial institutions in the United Kingdom to report information on certain non-resident account holders to Her Majesty Revenue & Customs (HMRC) for exchange under international arrangements.
This instrument brings into scope international exchange arrangements equivalent to those included in the principal regulations which the United Kingdom has entered into since May 2018. The principal regulations impose obligations on UK financial institutions to carry out due diligence procedures to identify account holders that are resident overseas, to maintain a record of relevant information, and to report accounts identified as reportable to HMRC.
This instrument does not relate to withdrawal from the European Union and does not trigger the statement requirements under the European Union (Withdrawal) Act. The legislation applies to activities that are undertaken by small businesses. The approach to monitoring of this legislation is that HMRC and HM Treasury will continue to liaise with stakeholders from time to time to discuss the implementation of the regulations as part of continuing engagement with industry.
Foreign Tax and Financial Reporting Requirements for the UK
1. Main types of businesses and taxes in the UK
The main type of businesses in the UK and taxes for each entity are as follows:
a. Sole traders run their own businesses as an individual and are self-employed. Personal Income Tax rates for 2019/20 range from 20% to 45%. In addition, a separate tax known as National Insurance is payable by individuals who work for themselves, which is dependent on profit.
b. A partnership is the simplest way for two or more people to run a business together. A partner does not have to be an actual person. For example, a limited company counts as a “legal person” and can also be a partner.
c. There are different rules for Limited Liability Partnerships. An LLP can be set up (“incorporated”) in order to run a business with two or more members. A member can be a person or a company, known as a “corporate member”. Each member pays tax on their share of the profits, as in an “ordinary” business partnership, but isn’t personally liable for any debts the business can’t pay. Partnerships are taxed in the same way as sole traders. There are exceptions to the rules where the partnership or LLP has a corporate member (a limited company) in which the tax rules are extremely complex.
d. A limited company is a company “limited by shares” or “limited by guarantee”.
The current corporation tax rate is 19%. There are special tax treatments to plant and machinery which allows 100% tax allowance known as the annual investment allowance. Any dividends received by a company are usually non-taxable and are known as franked investment income.
Disposals of assets are subject to corporation tax at 19%. Another exemption is known as Substantial Shareholding Exemption (SSE). The SSE allows a gain on a disposal of shares by a company to be exempt from corporation tax on the capital gain. There are certain criteria to be met in order to qualify for this exemption.
Research and development refers to the activities companies undertake to innovate and introduce new products and services. Certain expenditure and capital items may qualify for enhanced deduction, therefore SMEs would get an extra 130% on their qualifying costs from their yearly profit, as well as the normal 100% deduction, to make a total 230% deduction.
The patent box enables companies to apply a lower rate of corporation tax to profits earned and will allow the lower rate of corporation tax, at 10%, to be applied.
Most companies that are limited by guarantee are not usually liable to corporation tax and no corporation tax return is usually due.
Public limited companies pay the same corporation tax rates as private limited companies. However certain sectors such as banks are taxed differently.
2. Types of trusts, foundations and tax rates for each structure
There are a number of trusts in the UK, including bare trusts, interest in possession trusts, discretionary trusts, accumulation and maintenance trusts, mixed trusts, settlor-interested trusts, and non-resident trusts.
Trustees of non-resident trusts do not pay UK tax on foreign income they receive. There are different tax rules for each type of trust and tax rates range from 7.5% to 45%. Non-resident trustees do not usually pay UK capital gains tax.
Instead, the settlor or the beneficiaries may have to pay tax on gains made by the non-resident trustees. Trusts, including non-resident trusts, may have to pay inheritance tax on assets in the trust. Non-resident trusts will only have to pay it on assets situated outside the UK if the settlor was domiciled (or deemed domiciled) in the UK when the assets were put into the trust.
3. Tax compliance requirements for owners of foreign assets such as bank accounts, insurance policies, shares, etc.
There are new changes for overseas owners of UK real estate, including holding entities and funds. The first change is a tax charge on capital gains on disposals, and the others are antimoney- laundering proposals. These include the registration of overseas legal entities and some trusts holding UK real estate with details of their owners.
There is now legislation to bring non-residents within the scope of UK tax on gains on investment in UK real estate. The change came into force on 06 April 2019 and any gain is based on increased value as calculated from that date.
The change impacts non-resident owners, although those with a general exemption from UK tax, such as certain overseas pension funds and sovereign wealth funds, are outside direct scope.
All other disposals of residential property are chargeable to capital gains tax from 05 April 2015. Annual Tax on Enveloped Dwellings (ATED) is an annual tax payable mainly by companies that own UK residential property valued at more than GBP 500,000 and the charges depend on the value of the property. Non-resident property collective investment vehicle (CIV) may be subject to UK property taxes with effect from 06 April 2019, which may have an adverse impact on pension funds.
4. Tax compliance requirements for estate and wealth planning matters
All UK-domiciled individuals and UK residents who have been in the UK for 17 of the last 20 years are subject to inheritance tax (IHT) on worldwide assets that exceed GBP 325,000 and are taxed at a rate of 40% . Non-UKdomiciled individuals are subject to IHT only on UK-situated assets.
5. Tax compliance requirements on sale of real estate
The EU’s Fifth Anti-Money Laundering Directive (MLD5) extends the existing trust registration requirement to all non-UK trusts that own UK real estate.
HM Treasury brought in the Fifth Anti- Money Laundering Directive on 09 July 2018 and the text of the directive was transposed by EU member states on 10 January 2020. On this date, the Fourth Anti-Money Laundering Directive (MLD4) was amended.
Capital gains tax (CGT) may need to be paid if a person makes a profit (“gain”) when they sell or gift a property that’s not their home. The CGT rate for individuals ranges from 18% to 28%.
Collaboration with Other GGI Members
The firm has developed a number of onshore and offshore structures by working closely together with other GGI members in multiple jurisdictions. The UK tax legislation has presented a huge tax planning opportunity for foreign companies to set up holding company structures in the UK with the shares owned by offshore trusts. The main benefits of such structures include the following:
- No capital gains tax on the sale of subsidiary;
- No tax on dividends received by subsidiary companies; and
- No withholding taxes on dividends distributed by a holding company.
- The extension of the period from 12 months to 36 months for the holding company to be liquidated to take advantage of the tax benefits of having a holding company.
- Protection of family assets and creation of a long-term legacy for the family heirs.
Future Developments, Outlook, and Summary
It is widely accepted by most tax planners around the world that the days of complex and aggressive offshore tax planning may be numbered due to the pressure exerted by various governments around the world. The introduction of the exchange of information legislation has resulted in a number of offshore structures being closed or under review.
However, there are still a few taxplanning opportunities that are available in order to avoid unnecessary tax leakage, but taxpayers must seek appropriate professional advice before embarking on any offshore tax planning.
Alan RajahGGI member firm
Lawrence Grant, Chartered Accountants
Advisory, Auditing and Accounting, Fiduciary and Estate Planning, Tax
T: +44 20 8861 7575
Lawrence Grant, Chartered Accountants celebrates its 50th anniversary this year. Based in North London, they have over 30 staff, three partners and two tax consultants providing well-respected accountancy, business support, and cross-border tax advice. They also offer a selection of cloud and digital software solutions using AI technology.
Alan Rajah joined Lawrence Grant in 1994 and became partner in 2001. He is involved in all areas of general practice, specialising in valuations of business, due diligence, and mergers and acquisitions. His client portfolio includes UK and overseas companies and individuals as well as medical professionals. Alan is global vice chairperson of the GGI International Tax Practice Group.
Published: Working Together to Optimise International Tax Compliance, No. 2, Spring 2020 l Photo: s4svisuals - stock.adobe.com