The residence of a company whose central management and control of the business operations was in the UK company but incorporated outside the UK can be quite complex (Wood and another v Holden (Inspector of Taxes) [2005]. One of the most widespread corporate tax avoidance schemes is –the so-called Delaware Link- which involves the creation of companies in the US but also resident in the UK, enabling tax deductions to be obtained for the same interest payment in both countries. In normal cases control is identified with a company's board of directors, and hence a company is usually resident where its board of directors meets. However, as in the case of Unit Construction Co Ltd v Bullock, where African incorporated companies with African boards of directors were held to be resident in the UK. This was on the basis that the UK Company had effectively 'usurped the functions of the local boards' and controlled the subsidiary companies.
The basic test is the ‘central management and control’ (De Beers Consolidated Mines Ltd v Howe 1906). Ultimately, this emphasises the important difference between, on the one hand, exercising management and control, and on the other hand, being able to influence those who exercise management and control. The fact that someone may have a great deal of influence on the transactions carried out by a company does not automatically mean that central management and control has been usurped even if the directors of that company can ordinarily be expected to go along with their wishes.
The second weakness is that the relationship between a company and its wholly-owned subsidiary is completely under the control of the company itself and any attempt to distinguish the two entities for tax purposes is doomed to frustration.
The Group loss relief, which allows companies to surrender their trading losses, which the claimant company can relieve against their own profits chargeable to corporation is currently been exploited by Marks & Spencer
The relationship between parent companies and their subsidiaries under UK tax law means UK groups can for tax purposes transfer losses within their groups, so that loss-making UK subsidiaries reduce the tax payable by profitable UK companies. This cannot be done with loss-making UK subsidiaries for the simple reason that they are not subject to UK tax (Marks & Spencer plc v HM Inspector of Taxes). Marks and Spencer sought to use the losses of the overseas companies to reduce their UK tax bill. The European Union has opened a door for cross-border taxes where businesses could offset foreign losses against domestic profit.
The UK has put in place Double Tax Treaties, which attempt to sort out some of the disruptions to International trade and capital movements which would otherwise arise from multiple claims to jurisdiction. Double Taxation Treaties are conventions between two countries that aim to eliminate the double taxation of income or gains arising in one territory and paid to residents of another territory. They work by dividing the tax rights each country claims by its domestic laws over the same income and gains. The UK has one of the largest networks with more than 100
Evaluation Of The Principles & Basis Of Assessment Of Corporation Tax
If a company is a UK resident, it will have to pay corporation tax on its worldwide profits, adjusted for tax purposes. This includes capital gains tax (CGT) on profits from the sale of assets. A company will qualify as a UK resident if it is incorporated in the UK or its central management and
controls are in the UK. Any foreign income on which a company pays tax abroad is still liable to tax in the UK. However, the overseas tax paid can generally be credited against the companies, tax bill (If the same profits are taxable in the UK and in an overseas jurisdiction, double tax relief is generally available to prevent the same profits from being taxed twice). (ICTA 1988, s 8)
Non-resident companies with a permanent establishment in the UK from which it carries on a trade are charged on income from that permanent establishment, and on capital gains from the disposal of assets in the UK used for purposes of the trade or permanent establishment.
Non-resident companies are chargeable to income tax unless the non-resident is a company trading here through a branch or agency, in which case the charge is to corporation tax. The taxable profits in both cases are those that arise from that part of the trade exercised in the UK. In the case of companies trading through a branch or agency, profits that arise outside the UK on assets used by the branch or agency are also included within the charge.
Basis of Assessment
For the purposes of corporation tax for any accounting period, income is computed under Cases I to VI of Schedule D on the full amount of the profits or gains or income arising in the period (whether or not received in or transmitted to the United Kingdom), without any other deduction than is authorised by the Corporation Tax Acts. Where a company is chargeable to corporation tax in respect of a trade under Case V of Schedule D, the income from the trade is computed in accordance with the rules applicable to Case I of Schedule D.
Cases IV and V of Schedule D extend to companies not resident in the UK for corporation tax purposes, as long as the companies are chargeable to tax on income of descriptions which, in the case of companies resident in the United Kingdom, fall within these Cases
Companies prepare financial accounts periodically; these periods are known as Periods of Account. Periods of account are usually 12 months however they can be shorter or longer than this at a time when a company modifies its year-end date.
Corporation Tax is calculated on the basis of Accounting Periods. An Accounting Period starts when a company starts to trade, or immediately after the previous accounting period ends. An Accounting Period ends usually 12 months after the start, although it can end at the end of a period of account if it is earlier. So if a company has a period of account of say 15 months then it is split into two accounting periods the first of 12 months and the second of three months.
The diagram below outlines the assessment basis :
In this example it will be necessary to allocate profits (or losses) between the relevant accounting periods. There are rules for doing this. Trading income, before deducting capital allowances, is apportioned on a time basis. Capital allowances are calculated specifically for each accounting period. Interest paid or received in relation to non-trading loans (bank deposit interest is always non-trading) is accrued to each accounting period (using the appropriate rates of interest so is not necessarily time based).
BIBLIOGRAPHY
1. Bramwell, R. (1973) Taxation of Companies. London, Sweet & Maxwell
2. Kay, J & King, M. (1991) The British Tax System. 5th Edition. Oxford, Oxford University Press.
3. Melville, A. (2004) Taxation: Finance Act 2004. 10th Edition. Harlow, Pearson Education Limited.
4. (Accessed 2nd November, 2005).
5. (Accessed 2nd November, 2005).
