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The Autumn Statement of the UK Chancellor of the Exchequer, presented to Parliament on 5 December 2012, was delivered with attention to three main themes: protecting the UK economy, growth and fairness. Within the overall strategy of combining deficit reduction with stimulating economic recovery, the UK taxation features of the Autumn Statement make interesting reading. The taxation provisions outlined in the Autumn Statement can be divided into those focused on “growth” and those which are more concerned with “fairness”. At a time when short-term economic forecasts have been downgraded by the Office for Budget Responsibility and the Government’s austerity programme has been extended until 2018, it is perhaps unsurprising that the taxation provisions relating to “fairness” (or, in other words, ensuring that tax evasion and tax avoidance is firmly counteracted) feature more than tax-stimulus measures to propel growth.
The Government announced in the Autumn Statement a surprise reduction in the main rate of UK corporation tax by an additional 1 per cent. from April 2014. This will result in the main corporation tax rate falling to 23 per cent. in April 2013 and to 21 per cent. in April 2014. In consequence, HM Treasury have stated that the UK will have the lowest main corporation tax rate in the G7, and the fourth lowest in the G20. While the reduction is undoubtedly headline-grabbing and will be welcomed by UK companies, the reductions in the main rate of corporation tax are part of a co-ordinated strategy to improve UK tax competitiveness, particularly when placed alongside other tax-attractive jurisdictions in the EU such as Ireland and the Netherlands. The main corporation tax rate reduction also complements other key components of the UK Government’s strategy of increasing tax competitiveness, such as the extensive reform of the UK controlled foreign companies legislation in Finance Act 2012 and the introduction of a UK “patent box”.
Such visible encouragement to UK companies (and non-UK companies looking to establish, or augment, existing operations in the UK) was balanced with some very carefully chosen words regarding the current media-fuelled debate in the UK regarding the low amounts of corporation tax paid by a number of non-UK headquartered multinational companies. Media reports concerning the amount of corporation tax paid by companies such as Starbucks and Amazon on UK generated revenues stimulated a robust discussion in the Parliamentary Public Accounts Committee in late November 2012.1 HM Revenue & Customs (“HHMRC”) were criticised by the Chairwoman of the Committee and urged to be “more aggressive and assertive in confronting corporate tax avoidance” when faced by a number of tax planning arrangements regarding which certain multinationals were accused of “using the letter of tax laws both nationally and internationally to immorally minimise their tax obligations”.2
In such an environment, the Chancellor’s statement that the Government will invest further funding in HMRC to enhance its “risk assessment capability for large multinational companies” and increase the recourses available to HMRC’s transfer pricing specialists to increasing the identification, challenge and resolution for transfer pricing disputes may appear to be rather downbeat. However, it seems unlikely that the Government will be complacent in this area. The parallel announcement in the Autumn Statement that the UK, along with France and Germany, would provide resources to the OECD to accelerate action aimed at eliminating “profit shifting and erosion of the corporate tax bases at the global level” is strongly suggestive that firmer cross-EU action against sophisticated tax planning by multinationals, perhaps those offering digitally-based services in particular, is likely to be forthcoming if not necessarily imminent. These statements also follow the earlier joint announcement by the Chancellor and the German Foreign Minister on 5 November 2012 regarding action to prevent tax base erosion by multinationals within the EU, G7 and G20.
It will be interesting to watch during the course of 2013 how the media-driven debate regarding multi-national companies’ tax burden is balanced with the Government’s aspiration for UK tax competitiveness.
While in the Chancellor’s words the main rate of corporation tax cut is “an advert for our country that says: come here, invest here, create jobs here; Britain is open for business”,3 the good news was not extended to the British banking sector. In the Government’s determination to ensure that the UK bank levy raises at least £2.5 billion per year, the rate of the bank levy is to be increased to 0.130 per cent. with effect from 1 January 2013. This might be considered to represent a fine line being followed in tax policy terms. Politically, there are obvious difficulties for the Chancellor in permitting banks to also benefit from a reduction in the main rate of corporation tax, and to some extent the two measures (corporate tax rate cut and bank levy increase) may therefore broadly be expected to cancel one another out.
There remains, however, no direct correlation between the rate of the bank levy and the actions undertaken by individual banks to stimulate lending to, and credit liquidity for, UK businesses (such as the Bank of England Funding for Lending Scheme launched in August 20124). The bank levy is imposed regardless of any steps taken by banks in recent years to meet Government lending targets. To this extent the bank levy remains a fairly blunt tool in tax policy terms, albeit currently a politically expedient one. With an EU financial transactions tax introduced through the enhanced cooperation procedure (but not extending to the UK) looking increasingly like a realistic possibility, the Chancellor may find that any consequent increase in banking business in the City of London could lead to an uncomfortable position of tacitly encouraging intra-EU migration of banking activities to the UK while continuing the markedly unfavourable corporation tax treatment for the banks when compared to other UK companies.
Regardless of how these tensions may be resolved, the Autumn Statement includes measures to ensure that foreign bank levies will not qualify as a deduction for UK corporation tax purposes. Legislation will be enacted in Finance Bill 2013 to make it clear that a deduction for corporation tax purposes will not be available where a bank’s expenditure relates to an equivalent foreign levy and a claim has been made for bank levy double taxation relief in respect of the levy for the period in question.
Although the Autumn Statement is not generally intended to serve as a mini-Budget, a number of announcements invoked the tone of typical Budget press releases in addressing a variety of sophisticated tax avoidance arrangements. Four tax-driven arrangements are targeted in the Autumn Statement:
Although the number of legislative anti-avoidance changes announced in the Autumn Statement are not greatly excessive when compared to some recent Budgets, it is difficult to avoid the suspicion when reading the closely-articulated legislation governing the counteraction of the schemes referred to above that such legislative changes will continue to proliferate despite the introduction of a general anti-abuse rule into the UK tax statutes in Finance Bill 2013.
A very visible theme of the Autumn Statement, and one intrinsically linked to the concept of “fairness”, is the Government’s approach to combating tax evasion. On 3 December 2012, HM Treasury issued a press notice entitled “New Government clampdown on tax dodgers”. Clear resonances with that initiative, if not the language used by HM Treasury, are present in the Autumn Statement.
Further Government investment of £77 million in HMRC aims to secure additional revenues of £2 billion a year by the end of the current Parliament. The investment is intended to fund specific activities, including:
These measures should be considered alongside the forthcoming introduction of the UK’s general anti-abuse rule in Finance Bill 2013 and the response to the consultation on expanding the scope of the Disclosure of Tax Avoidance Schemes legislation in Finance Act 2004 which is expected on 11 December 2012. A “comprehensive offshore evasion strategy” is also promised by the Government in spring 2013, presumably to draw together the now numerous, and sometimes potentially disparate, initiatives against tax evasion currently being undertaken by HMRC.
With fiscal austerity showing no sign of immediately easing, it seems more than likely that 2013 will see the heightening of the Government’s attempts to eliminate tax evasion and prevent what it perceives as aggressive tax avoidance.
1 House of Commons Public Accounts Committee minutes of proceedings – Nineteenth Report into the Annual Report and Accounts of HM Revenue & Customs, December 2012, section 1: “Tax Avoidance by Multinational Companies” (“House of Commons Public Accounts Committee Minutes”).
4 The Bank of England Funding for Lending Scheme works by reducing funding costs for banks and building societies, which allows them to reduce the price of new loans and increase their net lending. Data for the period to September 2012 is available at: http://www.bankofengland.co.uk/publications/Pages/news/2012/153.aspx