A Competitive UKCT System, but with Traps for Unwary

For a number of years, the UK Government has had a drive to make the UK corporation tax (UKCT) system one of the most competitive in the world. With Brexit looming, this takes an ever increasing importance: once the UK is outside the EU, having a competitive UKCT system is a vital strand that both attracts multinationals into the UK economy, and seeks to prevent corporate behaviours which aim to shift profits outwith the UK tax net.

The past ten years have seen substantial reductions in the headline UKCT rate, from 30% in 2008 to its current 19%, with a further reduction to 17% planned in 2020. Whilst undoubtedly good news for UK companies, as is often the case with tax, legislative changes are made elsewhere in order to temper headline-grabbing rate decreases.

There are two relatively recent changes in the UK, being the corporate interest restriction (CIR) and the carried-forward losses restriction (CFLR) – both effective from 1 April 2017, and both now beginning to bite a number of companies.

The CIR replaced, and arguably widened the reach of, the old ‘debt cap’ rules. CIR seeks to limit UK interest expenses for UKCT purposes and can apply where a UK group’s net financing expense exceeds £2 million. When this £2-million limit is exceeded, complex calculations are required to determine any level of disallowance, thus increasing taxable profits in that year.

The CFLR can apply to earlier years’ brought-forward losses that a company seeks to utilise against current-year UK profits. Previously, trading CFLs could be fully utilised against profits earned by the same trade without restriction, and this will remain unchanged for many companies. However, some larger entities or groups with profits and CFLs in excess of £5 million may see restrictions in the losses that they can utilise.

Thus, whilst it is clear the UK is becoming more competitive, it is still vital that companies take early advice to manage their UKCT affairs in the most efficient manner.

Contact Andrew Shaw, Tax Senior Manager (andrew.shaw@aab.uk) or your usual AAB Advisor.