Foreign Profits update
Worldwide Debt Cap - announcement 7 April 2009
HMRC released an update to the debt cap proposals, with a view to simplifying the original proposals. The key change is the adoption of a 'gross' test, in determining total third party debt - which sets the maximum amount of finance costs that can be offset against UK profits. The original test looked at net debt i.e. finance expense, net of finance income. However, a targeted anti-avoidance rule is planned. Our initial view is that, whilst it's clear that HMRC have worked hard to develop solutions to problems, there are still too many questions open - including of course how all this might turn into statute - for the debt cap to go forward acceptably in 2009.
Foreign Profits update - 10 March
The official date for submitting responses to the Consultation closed on 3 March. We think that there's a broad consensus that the Dividend exemption should be introduced in 2009. However, there is great concern on the debt cap proposals, where - despite the willingness of the HMRC team to listen to issues and seek to find answers - the structure of the rules may get in the way of effective solutions.
The big challenge is clearly making the rules fit into the straitjacket set by the EC treaties and the rules on freedom of establishment and free movement of capital. This means that the first, early, draft is actually disadvantageous for those with UK domestic activities and income. We know this is recognised by HMRC and work is being done to try to develop solutions.
There seems to be a variety of opinion on the introduction of the debt cap. Our view is that there is sufficient protection in the existing rules and the planned extension to the 'unallowable purpose' rules to protect the Exchequer. The Chartered Institute of Taxation has recommended that the provisions should not be introduced into Parliament when the Finance Bill is published, but delayed, to give more time to formulate new provisions and debate them with business and advisers.
The minutes of the Business-Government Forum - published on 10 March - confirm that the the provisions will not be introduced on 1 April but that they will only apply from a later date, as yet unknown. Our view is that the debt cap rules cannot be calculated effectively unless they apply only from the start of an accounting period.
