The year 2013 was an extremely diverse period for the tax environment in the UK. While the government commitment to increasing the competitiveness of the UK tax regime will eventually lead to another reduction in the corporation tax rate (to 20 per cent in 2015), the positive landscape continues to be affected by the ongoing negativity surrounding the purported “fairness” of taxation.
In 2014, the trend of marketing the UK as “open for business” is anticipated to continue. The return to economic growth, however, alongside the re-inflated housing market, is expected to enhance the search for closed loopholes and boosted tax revenues, particularly those capturing developed capital growth in residential property.
Time for Multinationals to Become a Little Bit British
2014 will be the year to be a multinational enterprise in the UK. Corporation tax rates are on the decline to the lowest within the G8, and general economic growth has returned. The UK is gradually building a reputation as a modern tax haven, particularly when considering generous recent measures brought in to attract key industries to the UK, including further tax savings for the film, gaming, fracking and tech industries, to name only a few. The UK is considered to be a low-risk planning hub in the context of reputational concerns.
The increase in competitiveness within the UK is, however, shaping a landscape equally dominated in recent months by the Base Erosion and Profit Shifting (BEPS) initiative from the OECD. The importance of BEPS will become clear throughout 2014 as multinationals adopt anticipated measures of global governments and legislative policy begins to become apparent at a national level. As many of the key policy writers for BEPS came from the UK’s HMRC, certain components which may prove tougher to reconcile with comparatively inward-looking tax regimes, such as the Chinese and American systems, are modeled on those already implemented in the UK. 2014 is thus likely to see a further uptake in corporations seeking the UK as a relatively “safe haven” from BEPS uncertainty, as the UK’s BEPS response is already visible. Indeed, this feature of the UK’s tax system, along with other recent changes (including wide-reaching CFC reform) has encouraged numerous high profile firms to relocate (in some cases back) to the UK and to seek advance rulings with the UK tax authorities on key tax issues.
The trend for increased corporate activity in the UK has been further demonstrated by the sustained high level of Advanced Pricing Agreements (APAs), and ever-increasing numbers of Advanced Thin Capitalisation Agreements (ACTAs) being taken out with HMRC in recent years – 2013 being no exception. A&M anticipates this trend to continue in 2014, with a further increase in firms seeking to “lock-in” the fiscal benefits of locating in the UK with HMRC, generating certainty of this extremely favourable tax regime.
Balancing the Books with Your House
Despite the corporation tax rate set to reduce to 20 per cent by 2015, overall UK tax rates are expected to increase as a percentage of national income between now and 2018. While lower headline corporation tax rates generate pro-commerce headlines, it is not surprising that the UK is expecting other tax revenues to more than make up for any such decrease. In 2014, we anticipate the government to move to make up the shortfall (and, indeed, potential increase) in taxation revenues through capturing more of the capital growth of UK residential property within the UK tax net.
UK property prices are rising at pre-recession levels for the first time since 2008. National house prices rose at an average of 7.7 per cent in 2013, with an average rise above 10 per cent in London, now considered among the most expensive locations for property in the world. This value increase can, in many cases, fall outside of the UK tax net, where Principal Private Residence relief exempts any gain on sale should the property be the taxpayer’s primary home.
Recent moves have demonstrated the UK government’s unwillingness to let this rise in value continue to go un-taxed, with reduced timeframes for principal private residence relief sales and moves to capture increased tax on sales of residential holdings by corporate bodies. Furthermore, in 2014 the government will be consulting on the charge to capital gains tax for foreign buyers of residential property in the UK – raising tax revenue, while appeasing public perception that foreign investors are pricing local buyers out of the market. These changes have followed a steady yet dramatic increase in the cost of stamp duty on sales of UK properties.
While 2014 will be the year when the UK government’s initiatives to attract more multinationals onto British shores will likely pay-off, HMRC is certainly not content with reduced corporation tax revenues eating into fiscal budgets. Despite considerable scope for the new tax initiatives to drive significant inward investment, and associated tax revenues, into the UK, A&M anticipates 2014 to balance the decreasing corporation tax revenues with significantly increased capital taxation relating to residential property.
 Economic and Fiscal Outlook, December 2013, Office for Fiscal Responsibility.
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