The post pandemic tax environment
Inflation seems set to become a feature of the post pandemic global economy. In response, monetary policy is tightening with the Bank of England having already raised interest rates twice in recent months, and rates are expected to rise further.
While the last decade has been one of low interest rates, it has also been one that has seen a number of changes to UK and global taxation. The effect of these changes is likely to impact an increasing number of groups as finance costs rise. In particular, in line with OECD recommendations, the UK implemented the Corporate Interest Restriction Regime (“CIRR”) with effect from 1 April 2017.
The CIRR restricts the ability of large businesses to reduce their taxable profits through excessive UK interest expense. The rules operate on a worldwide group basis and, in broad terms, where a disproportional amount of finance cost is incurred by UK entities there is a disallowance of the excess finance cost. The computations of the restrictions are complex. Groups with less than £2 million of net interest expense within the scope of corporation tax per annum will not need to apply the rules, however they may still be subject to other anti-avoidance provisions such as transfer pricing and thin capitalisation.
As finance costs increase, groups would be advised to monitor their interest costs to ensure they do not have inadvertent restrictions in the UK or other jurisdictions.
With economies opening up, international property groups looking to grow or establish international portfolios will also need to consider withholding taxes on interest. Following the end of the Brexit transition period on 1 January 2021, EU directives like the interest and royalties directive and the parent-subsidiary directive have ceased to apply.
These directives meant reduced withholding taxes on interest, royalties and dividends paid from or to EU based group companies to nil. This benefited a number of groups, for example for those with a UK holding company, any withholding tax on dividends paid by subsidiaries will represent a global tax cost due to the UK exempting dividend income from corporation tax. In some instances reduced or nil withholding taxes may still be available under the relevant double tax treaty, but the position will need to be reviewed in detail.
Outside the EU, the UK continues to benefit from being part of a large number of double taxation treaties. The UK’s tax treaties replicate the benefit of the directives with EU countries but groups looking to expand into the EU would be well advised to carefully consider the structuring of financing and the flow of returns on investment.
The post pandemic tax environment
Inflation seems set to become a feature of the post pandemic global economy. In response, monetary policy is tightening with the Bank of England having already raised interest rates twice in recent months, and rates are expected to rise further.
While the last decade has been one of low interest rates, it has also been one that has seen a number of changes to UK and global taxation. The effect of these changes is likely to impact an increasing number of groups as finance costs rise. In particular, in line with OECD recommendations, the UK implemented the Corporate Interest Restriction Regime (“CIRR”) with effect from 1 April 2017.
The CIRR restricts the ability of large businesses to reduce their taxable profits through excessive UK interest expense. The rules operate on a worldwide group basis and, in broad terms, where a disproportional amount of finance cost is incurred by UK entities there is a disallowance of the excess finance cost. The computations of the restrictions are complex. Groups with less than £2 million of net interest expense within the scope of corporation tax per annum will not need to apply the rules, however they may still be subject to other anti-avoidance provisions such as transfer pricing and thin capitalisation.
As finance costs increase, groups would be advised to monitor their interest costs to ensure they do not have inadvertent restrictions in the UK or other jurisdictions.
With economies opening up, international property groups looking to grow or establish international portfolios will also need to consider withholding taxes on interest. Following the end of the Brexit transition period on 1 January 2021, EU directives like the interest and royalties directive and the parent-subsidiary directive have ceased to apply.
These directives meant reduced withholding taxes on interest, royalties and dividends paid from or to EU based group companies to nil. This benefited a number of groups, for example for those with a UK holding company, any withholding tax on dividends paid by subsidiaries will represent a global tax cost due to the UK exempting dividend income from corporation tax. In some instances reduced or nil withholding taxes may still be available under the relevant double tax treaty, but the position will need to be reviewed in detail.
Outside the EU, the UK continues to benefit from being part of a large number of double taxation treaties. The UK’s tax treaties replicate the benefit of the directives with EU countries but groups looking to expand into the EU would be well advised to carefully consider the structuring of financing and the flow of returns on investment.
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Phil Westerman
2 March 2022
