Advanced Topics in Revenue Law

Corporation Tax; International and European Tax; Savings; Charities

John Tiley, Glen Loutzenhiser

• Publisher: Hart Publishing
• Year: 2013
• Print ISBN:
  9781849464239
• Edition: 1
• eBook ISBN:
  9781782250395
• Topic: Law
• Subtopic: Tax Law
• Index: Law

The last several years have seen fundamental changes to the UK tax system. Nearly the entirety of the UK corporation tax and international tax rules have been rewritten by three new statutes – the Corporation Tax Acts 2009 and 2010 and the Taxation (International and Other Provisions) Act 2010. The UK has also implemented major new policies affecting the taxation of pensions, charities, savings vehicles, 'non-doms' and the foreign profits of UK companies. In addition, European Union law, and especially the case law of the Court of Justice of the European Union, has had an increasingly important impact on UK corporation tax and international tax law in particular. This new book on advanced topics in UK tax law is derived from material previously found in John Tiley's major text on Revenue Law that has been expanded and comprehensively updated to take account of these developments. The book deals with Corporation Tax, International and European Tax, Savings and Charities, in a manageable and portable volume for law students and practitioners. It complements the material on UK Income Tax, Capital Gains Tax, and Inheritance Tax found in Revenue Law, 7th edition. Unlike other tax law books, this text explains the new rules found in CTA 2009, CTA 2010 and TIOPA 2010 in light of its legislative predecessors. The book contains extensive references to the new legislation and also to the former enactments in ICTA 1988 and elsewhere. Those familiar with the old law but wanting to find their way round the new will find this work particularly valuable. The book is designed for law students taking advanced tax courses in the final year of their law degree course and for graduate students, but is intended to be of interest to all who enjoy tax law. Its purpose is not only to provide an account of the rules but to include citation of the relevant literature from legal periodicals and some discussion of or reference to the background material in terms of policy, history or other countries' tax systems.

PART I

Corporation Tax

1

Corporation Tax—Introduction, History and Policy

1.1	Structure of UK Corporation Tax
1.1.1	The Legislation and the Rewrite
1.1.2	Tax Credit on UK Dividends
1.2	A Brief History of UK Company Taxation
1.2.1	Before 1965
1.2.2	1965–73
1.2.3	1973–97
1.2.4	1997—New Labour
1.2.5	2010—Coalition Politics
1.2.6	Small is Beautiful
1.3	The EU Dimension
1.4	Theory and Practice
1.4.1	Significance of Corporation Tax
1.4.2	Should Companies be Taxed?
1.4.3	Profits Taxation: Classical Systems Versus Imputation Systems
1.4.4	The Arguments
1.4.5	Cash Flow Tax
1.4.6	Tackling the Bias Against Equity—Widening the Deductions
1.4.7	Tackling the Bias Against Equity—Narrowing the Deductions
1.4.8	The Cashless Corporate Tax

1.1 Structure of UK Corporation Tax

Companies resident in the United Kingdom (UK) are subject to corporation tax on their profits; the term ‘profits’ includes both income and capital gains.¹ The general rate of corporation tax is now normally 24%²; a 30% rate still applies to certain ‘ring fence’ profits,³ and lower rates apply where profits are below £1.5 million.⁴ These rates are charged by reference to ‘financial years’ which begin on 1 April each year and end on 31 March the following year; they are charged on the company whether it distributes or retains its profits. Corporation tax was introduced in 1965. Before that time corporations were subject to income tax, but not surtax, on their income, with further taxes (profits taxes) also charged on their income to make up for the absence of surtax.

1.1.1 The Legislation and the Rewrite

While the Capital Allowances Act (CAA) 2001 and Income Tax (Earnings and Pensions) Act (ITEPA) 2003 have effect on both corporation tax and income tax, neither the Income Tax (Trading and Other Income) Act (ITTOIA) 2005 nor the Income Tax Act 2007 does. ITTOIA 2005 expressly preserved Schedule A and the Cases of Schedule D for corporation tax; it did not preserve Schedule F as that applied only for income tax.

Since 2009 nearly all of the remaining corporation tax legislation has been rewritten. The rules formerly in the Taxes Act (TA) 1988 are now spread across, primarily but not entirely, the Corporation Tax Act (CTA) 2009, the Corporation Tax Act (CTA) 2010 and the Taxation (International and Other Provisions) Act (TIOPA) 2010. CTA 2009, Part 2 contains the basic charge to corporation tax in respect of both income and chargeable gains. It then follows the ITTOIA 2005 model dealing with Trading Income (Part 3) and Property Income (Part 4), before going on to Loan Relationships (Parts 5 and 6), Derivative Contracts (Part 7), Intangible Fixed Assets (Part 8), Intellectual Property (Part 9), Company Distributions (Part 9A) and Miscellaneous Income (Part 10). Parts 11–21 deal with other matters. The capital gains rules are still primarily found in the Taxation of Chargeable Gains Act (TCGA) 1992.

1.1.2 Tax Credit on UK Dividends

Where a company is subject to corporation tax, ie is resident in the UK, shareholders are liable to income tax on dividends (and other distributions) received from the company and pay tax under ITTOIA 2005, Part 4, Chapter 3.⁵ A dividend therefore comes with a tax credit attached to it; this tax credit is currently one-ninth of the dividend, so a dividend of £90 comes with a credit of £10. Assuming that the shareholder is entitled to use the credit, the income of the shareholder is the sum of the dividend (£90) and the credit (£10), or £100. Basic-rate and savings-rate shareholders pay tax at the dividend ordinary rate of 10% so that there is no further income tax to pay; this has been so for many years. Higher-rate taxpayers pay at the special dividend upper rate of 32.5%, which means that after the £10 credit the taxpayer will have to pay another £22.50. The additional dividend rate of 42.5% plus credit applies to taxpayers in the 50% income tax bracket; from April 2013 those rates will drop to 37.5% and 45%, respectively.⁶ It is a fundamental feature of the current system that the shareholder cannot, subject only to very limited exceptions, claim any repayment of the tax credit from the Revenue—and never from the company. Another fundamental feature is that a company subject to UK corporation tax generally is not subject to corporation tax on dividends received from another company.⁷

1.2 A Brief History of UK Company Taxation

1.2.1 Before 1965

The UK corporate tax system has suffered major shifts of policy in its (relatively) recent past. In the 19th century the system charged companies, like other persons, to income tax;⁸ this lasted until 1965. Until that year dividends were not subject to income tax but were grossed up to give a figure for surtax,⁹ whether or not the company paid income tax on its profits. This system was subject to two major modifications. First, the fact that a company was subject to income tax, but not to surtax, meant that it was advantageous for a high-rate taxpayer to leave income behind the veil of a company where it would be taxed at lower rates and so multiply more rapidly. Legislation was therefore introduced in 1922 to deal with ‘one-man’ companies, which took the form of a surtax direction treating the income of the companies as if it were the income of its owners and so liable to surtax.¹⁰ The legislation continued in substance, but in a new form, as part of the modern close company legislation from 1965–89.

The second modification was the introduction in 1937 of the National Defence Contribution, which in due course became profits tax.¹¹ This was an extra tax on the profits of the company, which, not being income tax, could not be recovered by the shareholder. This device could be used to levy tax at differential rates on distributed and retained profits, and was so used between 1947 and 1958.¹² The two-tax system was subject to a number of disadvantages separate from the issue of whether it should encourage the retention of profits. First, since the basic tax on the company was income tax, not only was it subject to all the complexities of matters such as the commencement and cessation provisions, but the rate would also alter whenever the Government thought it right to alter the rate in the personal sector. Secondly, profits under the two taxes were computed differently. Not only was profits tax levied on a current as opposed to a preceding year basis, but some items were deductible in computing profits for profits tax which were not deductible for income tax, thus necessitating two sets of calculations; consequently, until 1952 profits tax was itself deductible for income tax. Further, companies whose profits were less than £2,000 were exempt from profits tax.

1.2.2 1965–73

This untidy system was ended in 1965 when corporation tax replaced the previous income and profits taxes; this was a classical system. Dividends were taxed under Schedule F, which was entirely separate from corporation tax on the profits. This system was based on a view that corporations should be encouraged to retain their profits rather than distribute them to their shareholders (see further §1.4).

1.2.3 1973–97

For these years the tax system emphasised the close relationship between the shareholder and the corporation by allowing the shareholders to use a part of the corporation tax paid by the company to offset their own liability to Schedule F income tax. This was known as the imputation system because of the way in which the corporation tax paid by the company was imputed to the shareholder. Technically it was a ‘partial imputation’ system, since only part of the corporation tax paid by the company was imputed to the shareholder. In order to ensure that the tax used as a credit by the shareholder represented tax actually paid by the company, the company, when paying the dividend (or any other qualifying distribution), had to pay advance corporation tax (ACT) to the Inland Revenue. Liability to pay ACT arose whether or not th...

Table of contents

• Cover
• Title
• Copyright
• Preface
• Contents
• List of Abbreviations
• Table of Cases
• Part I: Corporation Tax
• Part II: International and European Union Tax
• Part III: Tax-preferred Savings
• Part IV: Charities
• Index