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HMRC Listening to the Concerns of the Taxpayer
Earlier this year, HMRC began a consultation process on possible changes to the UK withholding tax rules on interest. The avoidance of withholding tax is clearly an area of concern for HMRC and the government, as this consultation follows a similar process to last year regarding Tax Treaty relief for withholding tax on interest. In October 2012, HMRC published their summary of responses to the consultation process. Reponses were received from 72 different individuals, businesses, professional bodies and firms. What was particularly interesting, and welcome, about HMRC's document was the fact that they were willing to listen to the representations and allowed it to influence their thinking. Taxand UK discusses the proposed changes put forward by HMRC and the impact they would have on the international business community.
The consultation addressed several areas within the UK tax rules and focussed on the avoidance of withholding tax on interest. The most contentious areas were:
- Yearly interest arising in the UK
- Quoted Eurobonds
- Interest in kind and funding bonds.
Currently, withholding tax only applies to yearly interest; short term interest payments are therefore not subject to withholding tax in the UK. The original consultation proposed to amend the legislation so that it applied to all interest, and not just yearly interest.
Respondents to the consultation argued that such proposals would have a significant impact on a number of commercial practices, such as cash-pooling arrangements for multinationals or short-term bridging finance.
The need to exempt such arrangements (and others such as payments under certain derivative or securitisation arrangements) and modify existing exemptions would add complexity to the law.
In addition, there would be an added compliance burden and increased cost of short term borrowing, therefore potentially making the UK a less attractive base for treasury operations.
HMRC has decided not to proceed with these proposed changes.
At present under UK law there is an exemption from withholding tax where a debt is structured as a bond quoted on a recognised stock exchange. The original consultation proposed to remove this exemption where the bond was issued to another group company and listed on a stock exchange where there was no regular trading in the Eurobond.
As with the yearly interest proposals above, responses to the consultation were largely against these proposals. It was felt that these changes would make the UK less competitive due to the increased difficulty in raising funds.
There was also the view that the changes would undermine a number of commercial structures, such as the on lending of external funding raised by a parent or SPV outside the UK.
In addition, the changes required to the current clearing and payment systems to allow for withholding at source would lead to an increased compliance burden.
As above, HMRC has decided not to proceed with these changes.
Funding bonds/interest in kind
Where a payment of interest is made as a payment of interest in kind, under the new proposals, tax would be paid in cash on the "grossed up amount" of the non-cash interest. The proposals would introduce new rules to calculate the cash equivalent of the non-cash interest.
According to HMRC, the majority of respondents supported the proposals but felt the process was too complex and would create additional compliance on taxpayers.
What's more e, under the proposals, where funding bonds are issued in lieu of interest, any withholding tax would be payable to HMRC in cash.
The response to this second proposal was less positive than the interest in kind. Respondents saw a difference between interest in kind and funding bonds, with the latter often used where businesses were in financial difficulty. This should outweigh any compliance burden for HMRC of dealing with the bonds.
HMRC have confirmed that they will introduce legislation regarding interest in kind, but at the same time distinguishing funding bonds, such that their treatment remains the same.
Many are of the opinion that the outcome of the consultation process is very positive. HMRC appear to be listening to the opinions and needs of businesses and practitioners.
The areas which have been highlighted above are those, which had the proposals gone through, could have had a major adverse impact on international groups and private equity structures, and therefore discouraged investment to the UK. HMRC commented in the original consultation paper that these proposals would be a straightforward revenue raiser of approximately ?200m per annum. Respondents made clear that this would drive investment instead to other jurisdictions or other zero withholding tax structures.
The proposals would also have meant additional cost and administration burden to existing commercial arrangements.
Withholding tax on interest payments is clearly an area of major focus for HMRC, with this consultation following on from their speculative challenge to tax treaty reliefs last year. They will no doubt continue to look at closing down those arrangements where they believe withholding tax is being avoided, so vigilance is required.
Overall, the positive message is that HMRC are listening!
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