Tax Consequences and Administration in the United Kingdom - Case Study Example

Smith Chartered Accountants, 456345, London, 25.02.2017 Mr. Pulaski, Finance Director of Circuit Board VX, 4389, Russia Dear Mr. Pulaski, Ref: Tax Consequences and Administration in the United Kingdom Your company recently sought to expand its operations into the United Kingdom market. As a result of this activity, we would like to provide you with the following facts in regards to the UK Corporation tax. Mother Board VX In regards to Mother Board VX, the current facts that are known is that t is a tax resident in the Kazan- Russia, but has gone further to recruit a marketing manager in the United Kingdom for a period of three months for the purpose of undertaking market reconnaissance. The firm is also set to employ a UK sales manager for purposes of building pertinent relationships with potential clients. Currently, there are no form of establishments of leasing in the UK for this business, however; the assets will be acquired as soon as the first retailer potential is negotiated and secured. The tax consequence of this scenario is best expounded by the resident framework of the UK Corporations Act 2010. The act notes that a company is deemed to be UK tax resident in the event that it has been confirmed for its overall incorporation or in the event that it is still not incorporated in regards to its overall place of central management and control within the United Kingdom. In practice, incorporations and its lack thereof is determined by establishing whether directors exercise central management and control and in case that happens then it should later be established that the activity indeed happens in the United Kingdom. Following this line of arguments, it is important to note that Mother Board VX falls under the latter category, whereby the subsidiary is not incorporated but the central activities of management and control is being executed in the United Kingdom. The fact that the firm has gone ahead to employ a marketing manager in the UK confirms that its place of central management and control is present hence falls under a tax resident category. For this case, the company would be subjected to a main tax rate on its corporate profits of 20% (UK Corporation Tax Act 2010). Circuit Pro Ltd In the case of Circuit Pro Ltd, the company will be incorporated in the United Kingdom as a manufacturing plant. It is expected that the firm will register trading losses for the first few years of operations while the operations will be overseen from Kazan-Russia. In this case, the firm is a non-UK-resident company and it is subject to corporation tax in regards to the profits of its underlying permanent establishments in the country as well as possible chargeable gains made on assets that are either used or held by this establishment. The income tax for this case is set at 20% (UK Corporation Tax Act 2010). Given the fact that the firm operates as a UK PE(permanent establishment) of a non-resident entity, it is allowed to surrender or even claim a group relief in the event that certain conditions are met that include; amounts of losses should be confined to those set out in subsection(2) and should not be excluded by subsection (3). It is important to note that the amount of trading loss is allowed to be carried forward to the next accounting period and is subjected to the Chapter 2 of Part 16 of CTA 2009 as an underlying expense of management deductible for that period at hand or that which will succeed in relation to the chapter (UK Corporation Tax Act 2010). Of particular interest to note, a qualifying non-resident subsidiary that is present within the EEA and conducts its trading operations through a permanent establishment (PE) can however; surrender the aspect of group relief in the event that the existing and future period loss relief options are executed and exhausted in Russia-Kazan. This is likely attributed to the fact that the group enjoys The Double Tax Agreement between Kazan and the UK based on the OECD model treaty. The EEA group condition is met in the event that subsection (2) that allows the application of the relief if the surrendering entity company is 75% or more a subsidiary of the underlying claimant company and the claimant entity is deemed to be a UK resident; and subsection (3) which applies whenever it is established that both the surrendering company and the claimant company are 75% subsidiary of a third entity that resides in the United Kingdom (UK Corporation Tax Act 2010). Subsequently, the OECD arrangement is a feature that gives room for tax treaty relief from double taxation on all forms of income that will be posted. The treaty limits the taxation by one nation of companies resident in another nation while still protecting resident companies from discriminatory taxation. Legal & Ethical Issues for Strategic Tax Planning It is very important that the company does not fall into unethical practices related to tax avoidance. Currently, there has been increase in the number of entities that engage in the immoral activity in a number of ways that include; exploiting foreign tax havens as well as using a number of readily available financial tools. In the event that the outcome of this process fails to conform to UK government stipulations then it will be perceived as being a tax evasion. In doing so, the company risks being perceived as one that is trying to evade its social responsibility which forms one of the fundamental pillars of taxation. In fact, there have been numerous reports made by the Majesty’s Revenue and Customs (HMRC) that companies exploit tax havens for purposes of avoiding to pay taxes related to local corporation tax frameworks. As a result of this, many of these companies have received lots of negative media coverage as well as a change in public attitudes thereby affecting daily operations and public image. Consequently, it is important that firm adopt fairness of taxation practice. It is important for the Circuit Pro Ltd to note that the degree of tax should commensurate the amounts of profits posted within a particular operational period. Although this is not a legal requirement, its only just and ethical to ensure that the wealth accumulated within the period is divided amongst the societies that played a key part in the creation process. Failure to do that might result from the society feeling exploited and desist from participating in this creation process. The firm should further adopt effective transfer pricing mechanism that should reflect arm’s length prices that are guided under the OECD standards for purpose of completing and correcting tax returns. Failure to adhere to this stipulation would definitely result to imposition of a penalty. In essence, the firm should adhere to the diverted profit tax framework in the UK; a factor that is emphasised for the purpose of adjusting a corporate tax position to reflect possible expected outcomes from OECD base erosion as well as possible profit shifting projects. United Kingdom authorities considers the diverted profit taxes as being unique and different from corporation tax hence falls outside the scope of the underlying double tax treaties. In addition to this legal requirement, the business environment in the United Kingdom calls for the general anti-abuse rule (GAAR) for all arrangements that existed after 2013. This framework applies across a number of aspects including; corporation tax; income tax as well as stamp duty land taxes (UK Corporation Tax Act 2010). The existing legislation allows the UK tax entities the power to apply these ethic-based guidelines to possibly suppress tax benefits that might emanate from abusive arrangements. It is however; important to comprehend that the GAAR does not, in any way, replace the extensive framework set out to address the anti-avoidance rules that exists to target potential or even perceived manipulation of tax legislation. Tax Administration Features The tax year in the United Kingdom starts on 1st of April and financial accounting period runs for 12 months. In relation to filing and payment, the UK tax authorities require companies to self-assessment duties on their immediate corporation tax liability. Electronic filing is considered a mandatory affair as companies are subjected to a fixed penalty of GBP 100 in the event that they fail to file a tax return by the due date and an additional GBP 100 when the submission is not done in a period within 3 months (UK Corporation Tax Act 2010). A penalty of GBP 1000 is affected in the event that the filing takes more than 3 months. It is crucial to note that the UK does not tax groups of companies on the mere basis of consolidated tax returns however; for the case of tax relief for possible losses that exist between companies in a group is allowed by a system of group relief. Kindly, the above forms pretty much the basis of tax consequences and administration in the United Kingdom. In case of any further clarifications, as pertaining to the above facts, do not hesitate to contact us again. Yours Sincerely, (Name) References UK Corporation Tax Act 2010. Retrieved from http://www.legislation.gov.uk/ukpga/2010/4/pdfs/ukpga_20100004_en.pdf Read More