UK Tax Bulletin
December 201444 Offices in 21 Countries 2 www.squirepattonboggs.com
Current Rates:..............................................................................Latest rates of inflation and interest
Remittance Basis Charge:......................................................................... Some unexpected effects
ATED:............................................................................................................ The rates of tax increase
Diverted Profits Tax:................................................................................Some anomalies arise here
Goodwill on Incorporation: .........................................................................HMRC clarify their views
Inheritance Tax : Multiple Trusts:.......................................................HMRC have some new ideas44 Offices in 21 Countries 3 www.squirepattonboggs.com
Latest Rates of Inflation and Interest
The following are the current rates at December 2014
Current Rates December 2014
Retail Price Index: November 2014 257.1
Inflation Rate: November 2014 2.0%
Indexation factor from March 1982:
to October 2014
to November 2014
Interest on overdue tax
Interest on all unpaid tax is charged at the same rate.
The formula is Bank base rate plus 2.5% which gives a present rate of 3%.
There is one exception: Quarterly instalments of corporation tax bear interest at only 1.5%.
Interest on all overpaid tax is payable at the same rate.
The formula is Bank base rate minus 1% but with an overriding minimum of 0.5% which applies at
the present time.
Official rate of interest
To 6 April 2014: 4%
From 6 April 2014: 3.25%44 Offices in 21 Countries 4 www.squirepattonboggs.com
Remittance Basis Charge
The announcement in the Autumn Statement that the non dom charge is going up to £90,000 for
those who want to continue to access the remittance basis after they have been resident in the UK
for 17 out of the last 20 years was a bit of a surprise. It sounds like a sensible linking up with the
inheritance tax deemed domicile rules but unfortunately it isn’t, when you think about it. It is also
bound to cause confusion because the inheritance tax rules deem the individual to be UK domiciled
whereas the non dom charge effectively confirms the non dom status of the individual.
What is worse, this proposal creates a huge anomaly.
Let us assume that a non dom individual who has been resident in the UK for a long time, leaves
the UK and becomes non resident for 3 consecutive years and then resumes UK residence. On
his return, he will not be liable to the £30,000 non dom charge because he will not have been UK
resident for 7 out of the last 9 years; similarly he will not be liable for the £50,000 (soon to be
£60,000) charge because he will not have been resident here for 12 out of the last 14 years.
However, he will be liable to the £90,000 charge on the 17 out of 20 year rule. It is seriously
upside down to suggest that somebody who has not been resident long enough to pay the entry
level £30,000 charge will be stung for the £90,000 charge.
To be consistent with the non dom charge the test would be residence for 17 out of the last 19
years. That would make complete sense of the regime and although it would be out of kilter with
the inheritance tax rule, that does not really matter. Inheritance tax is an entirely different tax with
entirely different consequences and that differential gives rise to no anomaly or trap for the
Indeed it is no worse than the two entirely different methods of charging Stamp Duty Land Tax for
residential and commercial property which are charged at different rates and on entirely different
It remains to be seen how this ends up.
When I saw that the rates of ATED were going up by 50% above inflation I thought this meant an
increase of about 4% as inflation was running at about 2.5%.
Silly me. What it means is that the rates are going up by 52.5%. Accordingly, for 2015 we now
have the following tax charges:
£2 million - £5 million : £23,350
£5 million - £10 million : £54,450
£10 million - £20 million - £109,050
Over £20 million - £218,200
There is no indication of any change to the £7,000 charge to properties worth more than £1 million
which comes into force next April so maybe that stays the same.44 Offices in 21 Countries 5 www.squirepattonboggs.com
Diverted Profits Tax
Hey - a new tax. As a tax adviser, that sounds like pretty good news. (Shame it is so bad for the
country - but that's politics for you).
The idea is that next year, large companies will be subject to a new tax of 25% on profits which are
artificially diverted from the UK. A similar charge will apply to foreign companies who have a UK
turnover of more than £10 million but have artificially avoided having a permanent establishment in
I cannot even begin to explain. The rules are so imprecise that it would take all day. More
importantly, the imprecision makes it virtually impossible for any taxpayer company to be able to
determine whether or not they are liable to the tax, and how much the tax might be.
There is a responsibility on the taxpayer to determine whether or not they are potentially liable for
this new tax - with a tax geared penalty for failing to do so. HMRC will then issue a notice for the
tax which must be paid within 30 days. You would like to appeal? Dream on. There is no right of
appeal nor any right to postpone the tax.
This is obviously extremely serious so it is inevitable that your friendly tax adviser is going to be
heavily involved in all these issues.
A very important feature is that this tax may not be covered by double taxation agreements
because most treaties apply to "identical or substantially similar taxes" to income tax, corporation
tax and capital gains tax.
It is by no means clear that the Diverted Profits Tax will be an identical or substantially similar tax -
but whether it is or not, some interesting possibilities arise. Let us assume that a UK company
within the scope of the new tax has diverted profits to (say) Belgerland where the rate of
corporation tax is 15%. If the diverted profits tax is not substantially similar to the main UK taxes
then no credit will be allowed against the Belgerland corporation tax and the company will end up
paying 15% in Belgerland and 25% in the UK on the same profit. This would obviously be
intolerable and probably lead to a withdrawal of business activity in Belgerland.
However, if the diverted profits tax is found to be substantially similar to UK corporation tax then the
result will be that the UK tax may eliminate the Belgerland tax liability and the whole of the
company tax liability will be payable to the UK. The Belgerland Government would no doubt rejoice
that the UK are taking such a firm stand against tax avoidance. Or maybe not. Perhaps they
would enquire why the UK is pinching their tax revenue.
Some people might wonder whether this new tax achieves anything more than the present rules on
transfer pricing and the attribution of profits to a UK Permanent Establishment. (And what about
the GAAR - would not that deal with any such artificial arrangements.)
Of course, the new tax will apply where there is no PE. That's a bit curious too. We have lots of
double taxation agreements which say that foreign companies can only be taxed here on the profits
attributable to a PE. So now we will tax them whether there is a PE or not. I guess our treaty (and
EU) partners will have a view on this.
I expect that these proposals will provoke a degree of discussion and possibly some modification
before the proposed tax comes into force on 1 April 2015.44 Offices in 21 Countries 6 www.squirepattonboggs.com
Goodwill on Incorporation
For some time, HMRC have been considering the position where a professional person
incorporates his business. Their view was that a company cannot carry on a profession and
therefore it was impossible to transfer a professional activity to a company. Furthermore, they say
that the goodwill resides in the professional person and that cannot be transferred to his company
This resulted in one interesting letter from HMRC in which they expressed the firm view that
corporation tax cannot apply to profits from a profession with the (rather unlikely) result that the
company’s profits would presumably be tax free – a view which I’m sure was a surprise to the Law
Society, the Institute of Chartered Accountants, the RIBA, the RICS and others.
However, HMRC seem to have concluded their review and now accept that a professional activity
can be transferred to a company – and so can the goodwill.
It is perhaps a coincidence that this change of view arises just at the time when HMRC have
decided to remove entitlement to CGT entrepreneurs relief for such transfers, and to eliminate any
corporation tax deduction for the goodwill value for the company.
Anyway, whatever the motivation, things now seem to be clearer and the issues will be whether
there has been a valid transfer of the business to the company and whether the goodwill has been
Even without entrepreneurs relief, the capital gains tax treatment still gives rise to a considerable
advantage and HMRC remain vigilant about the possibility of the goodwill being transferred at an
over value. As long ago as April 2005 they published a detailed statement explaining that where
the amount paid for goodwill is excessive, it will be treated either as a distribution or as earnings –
although with the possibility of remedial action (such as a repayment to the company of any over
value) as an alternative.
The provisions of Section 774 Income Tax Act 2007 should not be overlooked in this context
because they apply to capital sums received from the exploitation of the earning capacity of an
individual from a profession or vocation – which HMRC suggest covers entertainers, pop stars and
sportsmen. In such cases, any capital sum would be chargeable to income tax under Section 776
so the changes to entrepreneurs relief would not have any effect anyway.
Inheritance Tax : Multiple Trusts
HMRC have announced that they have abandoned the idea of a single nil rate band for trusts, but
have decided to make changes to limit the advantages of multiple trusts – mainly by ensuring that
where property is added to two or more settlements on the same day they will be aggregated for
the purpose of calculating the trusts charges to inheritance tax.
The idea is that the initial value of the property together with the property added later will be
brought into the calculations for the 10 year charges and the exit charges. It will apply to trusts
created on or after 10 December 2014 and will also apply to earlier trusts where property is added
In another change, HMRC propose to amend the definition of a qualifying interest in possession
where a spouse succeeds to a life interest to which their spouse was previously entitled. Where
the interest is not a transitional serial interest Section 80 IHTA 1984 will apply to treat a new
settlement as having been made on that occasion so that the property can thereafter be subject to
the relevant property charges.44 Offices in 21 Countries 7 www.squirepattonboggs.com
A further, and very welcome, change is to be made to the calculation of the 10 year and exit
charges arising after 6 April 2015. The calculation is to be made without regard to the existence of
excluded property and this will simplify matters (and avoid a significant trap) for trustees.
I am conscious that the above paragraphs probably mean absolutely nothing to anybody who is not
up to his eyeballs in related property and excluded property settlements. For others it will be
REALLY interesting. I think I should get out more.
P S Vaines
Squire Patton Boggs (UK) LLP
24 December 2014
T +44 20 7655 1780
© Squire Patton Boggs (UK) LLP All Rights Reserved December 2014
The contents of this update are not intended to serve as legal advice related to individual situations or as legal opinions
concerning such situations nor should they be considered a substitute for taking legal advice.