Last week saw the release of various corporate tax consultations that were announced in the Chancellor’s Budget back in March. One covers proposals to reform the Substantial Shareholdings Exemption. At the risk of over simplification, broadly this is a measure that gives exemption from tax when trading groups sell shares in their subsidiaries. It also prevents tax losses arising in the same circumstances, so essentially trading groups can make commercially driven disposals tax free.
The consultation looks at a range of changes, and probably represents a widening of the exemption rather than a restriction; however an obvious opportunity for genuine simplification is being missed.
The UK tax legislation for corporates includes two other sets of measures – one being an exemption for dividends received by companies, provided the conditions are met, and another being targeted Controlled Foreign Companies rules. Taken together, these two plus the Substantial Shareholding Exemption are aimed at the same thing; that is to exempt in most circumstances or to tax in some circumstances the profits made by a company owned by a UK corporate tax payer. As things stand, the three sets of rules are entirely separate and contain different tests that can be complicated to apply. At their heart, though, do they not have the same policy objective? To encourage groups to choose the UK as a location from which to make and manage outbound investment.
The government says it wants to simplify the UK tax system as well as making it most competitive in the G20. They even state in the consultation’s introduction that some have concerns that the Substantial Shareholding Exemption itself is too complicated. Whether this is the case or not, the government should be bold enough to do the obvious - take the three sets of legislative provisions and rewrite them into one brand new set of rules (incidentally did suggest this in a meeting with HMRC back in 2009, but no-one seemed to have considered it).
If you would like to discuss any of these points further, get in touch with Rebecca Reading or your usual RSM contact.