| The UK Finance Bill contains some interesting ideas which we would do well to copy. |
There was a time in the not too distant past when each UK Finance Bill contained lists of tax breaks viewed with envy from this side of the Irish sea. With our push to lower corporate taxes, most of these business tax breaks in the UK are now irrelevant to us.
The range of ideas worth copying is now much more limited than it was in the past. Nonetheless there are a few:
• Capital Gains Tax
Both Ireland and the UK have what is known as ‘group relief’ from taxation of a company’s capital gains. This permits assets to be moved about inside a group without incurring CGT immediately. Another form of group relief permits trading losses and some other expenses to be surrendered by one group member for relief against the profits of another group member. Hitherto however capital losses could not be surrendered between companies. Nonetheless losses could be relieved on a group basis. This was done by moving within the group an asset (about to be disposed of by a third party) into a company which had capital losses available, and arranging for that company to dispose of the asset.The UK Chancellor has abolished the need for this ritual. In the future capital losses will be capable of surrender between members of a group, broadly in line with the way other losses may be surrendered. It will no longer be necessary to move the assets around in order to match up the gains and the losses within the same company. This costs the exchequer nothing.
It does save taxpayers from a rather silly exercise, with attendant costs. The UK are also permitting UK branches of foreign resident companies to participate in groups for the purpose of surrender of losses and tax free transfers of assets. This is probably required by EU law as stated in the case of ICI v Colmer. However it is a move which we have not adopted although we did make some effort to bring our law into line with ICI v Colmer, in the Finance Act 1999.
The annual exemption from capital gains tax for individuals is now Stg7200 in the UK. The equivalent Irish figure is IEP1000. There are probably few arguments in terms of either equity or economic theory for exempting any significant amount of capital gains from taxation. But neither is there much point in pushing large numbers of otherwise compliant taxpayers into petty tax evasion. If it is discovered that a large proportion of the population who have small amounts of gains do not report them, that would come as no surprise. The UK limit probably more sensibly discriminates between true tax evasion which must be stamped down, and minor dishonesty which can never be eliminated.
• Employee options:
A new focused form of employee share option has been introduced. SMEs (broadly those whose gross assets do not exceed Stg50m) will be able to reward up to 15 key employees with tax advantaged share options worth up to Stg100,000 p.a. each at the time of grant. No tax will arise on the grant of the option.
When the shares acquired on foot of the option are sold, the UK tapering relief for capital gains tax purposes will ensure an effective tax rate of as low as 10%, where the share is not sold until four years after the option is granted. This form of relief is particularly suited to indigenous high tech start-ups. It enables them to offer a valuable carrot to attract top talent. The UK approach to options is radically different from our own in that it permits them to be focused on key individuals rather than requiring universal participation within the firm. It is economically more sensible, if politically less correct.
• Internet and computers:
The UK has introduced 100% year one write-off for capital expenditure on computers and on Internet enabled mobile phones. This accelerated capital allowance is confined to SMEs and is not available to all companies.
With Ireland’s reducing corporate tax rates this relief may not be directly relevant in Ireland. What might be relevant in Ireland would be a BIK exemption where employers provide employees with computers for installation at home, and with Internet enabled mobiles.
• Withholding taxes:
The UK have reduced the rate of sub-contractors withholding tax (known in Ireland as relevant contract tax) to 18%. In Ireland the rate remains 35%. That rate in Ireland may be unconstitutional on grounds of proportionality, since it is applied to gross receipts at a rate in excess of corporate tax rates, and not much short of the top personal tax rate.
• Shipping:
The UK is proceeding with the adoption of a tonnage tax on shipping companies. To a large extent this extends a virtually tax exempt environment to the UK shipping industry. It goes without saying that shipping is mobile. Inevitably, it will base itself, and flourish, only in the lowest tax environments.
• Tax rates:
Ireland has opted for very low corporate tax rates, accompanied by reduced corporate tax breaks. The UK is still working away on corporate tax breaks but it should not be forgotten that its basic corporation tax rate is quite low.
For companies with profits not exceeding IEP300,000, the tax rate is only 20%. For the very smallest companies, with profits not exceeding IEP10,000, the rate is only 10%!
Ireland’s 12.5% (or the 10% manufacturing rate for the period to 2003) remains very competitive against UK rates in attracting in large enterprises which will have substantial profits. However the UK is not that far behind us in offering an attractive tax environment for smaller indigenous industry and enterprise.
Mistake!
The major error in the UK Finance Bill was the attack on mixer companies. These are used to mix foreign income from high tax and low tax sources to produce an average tax cost that can be credited against domestic tax without waste. Ireland included a similar mistaken measure in Finance Act 1998 without any publicity or controversy. |
Eric Wallace is a Tax Partner with KPMG.
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| Article appeared in the May 2000 issue.
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