| The Chancellor’s pre budget statement did not contain many unexpected tax measures. Some tax measures will be of interest from an Irish perspective. |
TThe UK Chancellor makes his budget speech on as many separate occasions as he can get away with. There is therefore a practice in the UK of a “pre budget statement”. This is a statement indicating his intentions for his budget statement. Chancellor Brown made his pre budget statement on 10 December. A number of measures touch on topics relevant also in Ireland.
Transfer pricing
Ireland has for some time been considering the introduction of transfer pricing rules. The Chancellor announced that the UK, who have long had such rules on cross border transactions, will now proceed to apply them to domestic transactions, between UK resident companies also. There is a belief that the application of rules to cross border transactions only may conflict with EU law.
The application of transfer pricing rules to UK - UK transactions is widely seen as a bureaucratic nightmare, and an expensive means of achieving nothing, other than compliance with EU law. In recognition of the problems it will create, the Chancellor has announced that the extension to UK - UK transactions will be confined to larger companies and will take effect from 1 April 2004.
In a complex move, the Inland Revenue will be given the power to impose domestic transfer pricing rules on UK - UK transactions involving medium-sized businesses, but such businesses will not be obliged to self-assess as if such rules applied to them. Smaller businesses will neither have to self-assess on the basis of the application of such rules, nor will such rules be applied to them by the Inland Revenue.
For these purposes a small group is one which has fewer than 50 employees and whose turnover is less than Stg?5.6m and whose assets is less than Stg?2.8m. A medium size group is one with fewer than 250 employees and whose turnover is less than Stg?22.8m or whose assets is less than Stg?11.4m. These limits are applied on a worldwide group basis.
For that reason some Irish groups will find that although their UK subsidiaries may seem to fall within these limits, they will nonetheless have the transfer pricing rules applied to them on UK - UK transactions because of the limits being exceeded by the group on a worldwide basis.
The exemption from the new UK - UK transfer pricing rules is not all embracing. In particular it does not apply to arrangements with low tax jurisdictions. Hopefully the Republic of Ireland won’t be included in this category!
The Chancellor hopes that the exclusions described above will mean that the UK - UK transfer pricing rules will apply to only 5p.c. of businesses. Since the exemptions granted are not absolute, the 5p.c. figure may be optimistic.
If Ireland did proceed to introduce transfer-pricing rules, it would be faced with having to adopt a somewhat similar regime. Ireland may count itself lucky to have had a warning in time.
The Chancellor’s proposal suggests that the existing transfer pricing rules may be invalid in EU law.
Any group already encountering problems with the cross border rules might consider this point.
Interest
The Chancellor has also abolished thin capitalisation rules. These are rules that restrict the deductibility of interest by a business controlled by non-residents, where the ratio of borrowing to equity in the UK operation exceeds specified limits. Despite the abolition of the rule (which conflicted with EU law) much the same result is hoped to be achieved by applying transfer pricing rules to interest expense. When the final details of the application of the new transfer pricing rules to interest expense are produced, Irish firms with UK operations will need to review their financing.
Management expenses
The Chancellor has announced that he is going to extend the deductibility of management expenses to companies which do not qualify as investment companies. Broadly speaking, a taxpayer is permitted to deduct expenses in computing tax only if they are carrying on a trade, or have a rental property, or are an “investment company”. An investment company must have primarily investment income, and exist for the purpose of making and holding investments. The rule relating to the type of income is one which is easy to breach accidentally. The Chancellor’s decision to remove these pointless rules is one that the Minister for Finance in Ireland should consider following.
Creches and subscriptions
In the area of employments, the Chancellor is going to carry out a review of deductions for professional subscriptions. The review will focus on their relevance in terms of the provision of training to the member of the professional association. As economies become high tech, more and more employees will belong to technical or professional associations, and have to pay annual subscriptions to maintain their membership. The issue is therefore relevant in Ireland as well as the UK. At present there is no statutory deduction in Ireland for such subscriptions by employees, although they may have been allowed by the Revenue Commissioners on a concessional basis in some cases.
The Chancellor is also liberalising the rules relating to the tax-free provision of childcare facilities. In particular he is removing the rule that requires the employer to play a role in the management of the childcare facility. The UK relief in this area was largely copied in Ireland. Although the rules in Ireland do not require the employer to be involved in the management of the child care service in every case, they remain unnecessarily restrictive and do not extend the relief to the simple situation where the employer allows the employee to nominate the creche they wish to use, and where the employer pays the cost. Perhaps the Minister will be more radical than the Chancellor and remove the pointless rules that stand in the way of this relief.
Research and Development
The UK have had an R&D credit for four years. The Chancellor announced a new definition of research, the third so far. This may suggest that Ireland will have difficulties getting its definition right in the upcoming Finance Bill. |
Eamonn Donaghy is a Tax Partner in KPMG, Belfast.
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| Article appeared in the January 2004 issue.
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