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UK To Forge Ahead With Corporate Tax Reform

September 2010 - Tax & Private Client. Legal Developments by Hassans.

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Mark Hoban, the Financial Secretary to the UK Treasury, confirmed in a speech on September 20 the government's desire to move the country towards a more territorial system of corporate taxation.

Hoban said that the coalition government was determined to reform business tax in the UK through changes to the Controlled Foreign Companies (CFC) regime and the taxation of foreign branch profits, so that it "properly reflects the modern, global, business environment."

"The UK needs a more territorial approach to taxation," Hoban said in a speech kicking off City Week, a major international event to promote the City of London and the UK financial services industry. "We want to make CFC rules easier to operate, to enhance the attractiveness of the UK economy."

"Equally important is addressing the costs of complying with the UK?s tax legislation," Hoban added. "So we are making every effort to simplify taxation in Britain - to eradicate the unnecessary complexities that came with the system we inherited."

In last June's emergency budget, the government announced that it was aiming to complete an overhaul of the CFC regime by the spring 2012, allowing time for proposals to make the system more competitive to be thoroughly considered whilst providing "adequate protection" for the UK tax base. Consultation has taken place over the summer, and interim improvements to the CFC rules are due to be introduced in spring 2011.

According to a Treasury Note outlining the aim and scope of the interim improvements, it is intended that the operation of the current CFC rules will be "eased" ahead of full reform in spring 2012, rather than provide all the benefits of full reform. "The aim is to improve the targeting of the current regime in ways that are consistent with the direction of travel for full CFC reform," the Note states.

The Treasury says that the interim changes should not require extensive amendment or revision of existing CFC legislation. Further details and draft legislation on the CFC interim improvements will be published by November, and the changes will be legislated next summer as part of the 2011 Finance Bill.

The government's decision to tackle the CFC rules has been welcomed by tax experts and business groups, but some doubt whether such a complex reform can be agreed and implemented by spring 2011 without a certain amount of compromise.