How the Government have sold their soul to the devil

8 February 2011

We like rants. Furious rants, resigned rants, over-excited rants we aren’t bothered, but this particular rant caught our eye in a big way.

DAVID_CAMERON.ashxIt’s not that we trusted politicians beforehand, but this latest idea really does seem to be Dave making sure he sorts out his mates at the expense of the rest of us. Good job we’re all in it together eh Dave?

The specific measures causing consternation are the new rules in respect of international corporation tax issues mooted for inclusion in the 2011 Budget, due on 23 March. There are two new proposals, those amending the rules for the Controlled Foreign Companies (CFCs) and those covering the taxation of foreign branches.

In simple terms, the new rules will mean that 150 companies, mainly banks and insurance companies, will now be able to avoid UK corporation tax, and potentially any tax at all, on profits from foreign branches, at a cost to the Treasury of £100 million a year.

CFCs

At the moment, profits of an overseas subsidiary company are taxed in the country of origin, rather than in the UK, so the idea of setting up a foreign company in an overseas jurisdiction with, say 0% corporation tax might therefore have been an attractive measure for some UK companies who could then ‘divert’ profits from the UK charge into the cheaper overseas one. As a result, the CFC regime was introduced .

The principle behind the CFC rules was simple but in practice there were multiple problems, the biggest pain in the bum being those pesky Europeans. You see, the CFC regime meant that companies were not free to establish a subsidiary in other European countries without suffering penalty taxation, which is clearly contrary to the EC prime directive. The UK has been taken to the European Court and had its knuckles rapped on more than one occasion.

So the rules have needed amending for some time- they were so tightly drafted that legitimate companies were being caught in the CFC net. What is scheduled for inclusion in the 2011 Budget, however, looks less like a careful consideration of the issues and more like a broad relaxation of the rules.

Still, if it wasn’t for the changes to Foreign branches, they might just have slipped it under the radar.

Foreign branches

Now, foreign branches were the other side of the coin. Here, much as a UK resident individual is normally taxed on his worldwide income, a UK company earning profits from foreign branches was charged UK corporation tax, with double tax relief on any foreign tax suffered. Sounds simple.

However, the 2011 Budget proposes to offer an opt-in exemption to any company who so chooses to take it. This exemption means that these companies will no longer pay UK tax on foreign branch profits. Sounds dodgy.

a banker. or should that be w...

The rationale for this measure is that assessing profits and then allowing double tax relief is a waste of time, and where the tax rate in the overseas jurisdiction is equal to or more than the UK rate, thereby wiping out the UK liability, there is some sense in this argument. But what about where the overseas country levies no tax or very low rates? Like say the Cayman Islands or any other banking haven? Under the new rules, these foreign branch profits will escape tax altogether.

You might think you are missing something. You aren’t. Our “big society” leader is making big noise about a miniscule bank levy, while admitting that “The primary benefit of this proposal will arise in two sectors: banking, which currently makes greatest use of foreign branches and general insurance.”

The new measure, by the Government’s own predictions, is expected to cost £100million a year in lost tax revenue. And the benefit? Well the 150 companies the Government expects to be affected will benefit to the tune of £667,000 each. Every year. And I’m sure Dave will get a few pats on the back too.

Not so sure about the rest of us.

TOPICS:   Government

17 comments

  • Phil
    The conservatives favouring big business? What next? It was pretty obvious they'd bend over - its all just preparation for a non-exec director job in 4 years!
  • Yue
    I've never known a worse government than this one. And I grew up under Thatcher. Today they made a big deal about adding 800 million to the bank levy. This basically was putting the bank levy back up to Labours figure as the coalition had previously taken 800 million off of it. Every day gets worse for us and nobody seems to care about doing anything about it.
  • Denny
    £100m? The Government pisses that away before breakfast. Ed Balls won't get out of bed unless he's allowed to "invest" double that. Gordon Brown can't count that low. £100m? Really? Pfft ...
  • Mark H.
    'consumer hacks, tips & news from the trenches of the uk deal community' Top right of every page. Doesn't mention politics. In fact I come to sights like this to get away from such nonsense.
  • Mark H.
    I meant 'sites'. Sorry.
  • Mark H.
    I meant 'sites', sorry.
  • Mark H.
    and now I've double posted. I really am very sorry.
  • MrRobin
    @Mark H... Hear, hear! If I want my fill of lefty political ranting, I'll read the Grauniad.
  • Anthony
    Seriously, this sort of weak leftist crap is part of the problem that is spoiling the political discourse within the UK. How many people do these companies employ within the UK? If this is part of a deal which keeps them happy - and a very small deal it is too - then so be it. We need more big business (and small business and medium sized business...) here, and less taxes. Even if it isn't, and it is a self aggrandising thing (though I seriously can't see how this could be the case) then Labour did and do MUCH MUCH worse. Case in point. See how the Union movement has mutated into creating its own elites of Bob Crow etc. on incredible wages (no bonuses though, oh no!!) all so that can bring down the UK's economy for the sake of socialist revolution. All of which is supported and accepted by Labour.
  • nibbles
    Love it. The "Labour did worse therefore this Tory policy isn't so bad" rationale. Don't mind a little more serious stuff about economics on BW, all adds to the mix :D
  • Anthony.
    whoops, what I meant was I'm a right wing fag.
  • Anthony
    Can the admin please remove the abusive comment above please?
  • Anthony
    And to be clear Nibbles. I didn't make a comment on policy. It was about the corruption of British politics. Being 'right wing' ie. small state etc. Isn't a crime nor is it morally empty as the standard leftist view would have everyone believe.
  • Nob
    At least they sold it. Labour gave theirs away for nothing.
  • Sam T.
    Calm down guys. This was not meant to be a political piece as such- it would have been written the same way whomever was in charge. I have worked in tax for far too long not to realise that, certainly where tax policy is concerned, they are all as bad as each other! We thought this piece fitted with BW, not as a political rant, but a rant at the wool being pulled over consumers, in this case the UK taxpaying electorate's eyes. And continue...
  • Steve
    I wouldn't piss on a politician if he was on fire. Unless I could piss petrol, but who can afford that these days.
  • kingkerouac
    Mind you the Tories are and have always been vermin. No offence.

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