UK Inward Investment. Introduction. MAy 2016 IN THIS ISSUE: mercerhole.co.uk

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1 UK Inward Investment MAy 2016 Introduction Welcome to Mercer & Hole s UK Inward Investment publication, the first of our series looking at how UK tax affects internationally mobile individuals and businesses. Tax is very much in the forefront of the headlines in the UK at present and around the world the move to inter-governmental cooperation and tax transparency is gathering momentum. The UK remains a welcoming jurisdiction for businesses and individuals. Many are surprised at the generosity of some tax reliefs but the unprepared can also fall into traps which they may not be expecting. At Mercer & Hole we advise clients from around the world on not just tax but general business advice, audit and accounting requirements and we can assist with corporate reconstructions as needed. We are well practiced at working with other advisers in the home jurisdiction or obtaining the advice we need from our friends in The International Accounting Group (TIAG) or its sister alliance TAGLaw. TIAG and TAGLaw are represented in over 65 and 90 countries respectively, so there is not usually a problem in finding the answers a client needs. In this first issue we look at some of the key headlines that incomers to the UK need to know. To start with, Mercer & Hole s Henry Lowe provides practical advice on personal taxation, whilst Lynsey Lord looks at the topical issue of international tax transparency. Jacqui Gudgion highlights some of the corporate taxes and reliefs, which make the UK an attractive place to do business. Partner, Andy Crook considers UK audit legislation and its affect on those looking to set up a business in the UK. Partner, Chris Laughton examines how Corporate Advisory Services can help those with cross-border connections. And finally, Senior VAT Manager, Richard Collier contemplates what might change with VAT if the UK votes to leave the EU. Of course, this can only be a brief look at a wide range of topics and we will be delighted to talk to you if you are coming to live, work or invest in the UK. Please do get in touch with me to see how we can help you. Lisa Spearman Partner +44 (0) lisaspearman@mercerhole.co.uk IN THIS ISSUE: 02: Coming to the UK - a guide to personal taxation 03: A clear view on international tax transparency 04: Corporate Tax - what makes the UK such an attractive place to do business? 06: Auditing requirements in the UK - what you need to know 07: Corporate Advisory Services - advising businesses across international borders 08: VAT in the UK and Brexit? mercerhole.co.uk

2 mercer & hole UK Inward Investment Publication MAy 2016 Coming to the UK a guide to personal taxation THE UK TAX SYSTEM CAN STILL BE ATTRACTIVE FOR THOSE INDIVIDUALS NOT ORIGINALLY FROM THE UK AND WHO ARE TREATED AS NON UK DOMICILED INDIVIDUALS, DESPITE THE GOVERNMENT S ANNOUNCEMENT OF NEW TAX LEGISLATION LAST SUMMER. THIS IS PARTICULARLY THE CASE FOR THOSE LIVING IN THE UK IN THE SHORT TERM. Regardless of the length of the stay in the UK, there are a number of practical steps that should be ideally undertaken prior to arrival in the UK. Mercer & Hole can help to review an individual s or family s tax affairs to enable us to offer UK tax advice that should improve a client s tax position after taking up residence in the UK. This advice can include guidance with regards to re-structuring a client s affairs and bank account segregation to allow for greater flexibility and tax mitigation once they are treated as being a UK tax resident. We can work with the client or their existing investment advisor to carry out further pre-arrival tax planning in relation to investments, such as realising capital gains, disposing of UK situs assets and reviewing a portfolio to ensure it contains investments compatible with the UK tax system. A number of generous tax reliefs including Business Investment Relief and the Enterprise Investment Scheme are available on investment into companies which meet certain criteria. Broadly these reliefs can be utilised to allow tax free UK investment and, then, mitigate the tax on any profit on the investment and provide reductions via income tax relief. If a client is considering departure, we can seek to provide an efficient exit from the UK. We will then work with the tax advisers in the destination jurisdiction to facilitate a smooth transition. Non UK tax resident individuals should seek UK tax advice if they are thinking of investing in the UK, particularly in real property. Even those who do not live in the UK are thinking of selling an existing UK real property should be aware that UK reporting and potentially the payment of taxation is now required shortly after disposal of the property. Mercer & Hole can assist with the administration and provide suggestions to help improve the UK tax position. IF YOU REQUIRE ASSISTANCE WITH TAX AFFAIRS, PLEASE GET IN TOUCH AND WE WILL BE PLEASED TO HELP YOU. For those clients who have already obtained UK residence, we can monitor their global position to alleviate double taxation, whilst keeping them compliant within the UK tax framework. Mercer & Hole can provide further tax advice including inheritance tax planning that can be undertaken to preserve family wealth from the UK tax system with the use of offshore trusts. Henry Lowe henrylowe@mercerhole.co.uk

3 03 A clear view on international tax transparency THE WORLD HAS BECOME A MUCH SMALLER PLACE AND IT IS NO LONGER UNUSUAL TO HAVE INCOME SOURCES AND/OR INVESTMENTS OUTSIDE OF YOUR HOME COUNTRY. UNTIL RECENTLY YOUR HOME COUNTRY MIGHT HAVE HAD ABSOLUTELY NO KNOWLEDGE OF THIS INCOME AND ANY DOCUMENTATION MAY HAVE STAYED FIRMLY WITHIN THE BORDERS. This state of affairs is now a thing of the past and we are heading towards a world of global tax information exchange. This means, whether you have an account in the Cayman Islands, dividends from a French company or you carried out some business in the US, if you are a UK resident, then HM Revenue & Customs are going to know about it. Probably the most publicised tax information exchange agreement is the Foreign Account Tax Compliance Act (FATCA) which was enacted in 2010 by the US congress. It was phased in July 2014 and requires non-us financial institutions to report tax relevant information to the IRS. This was a game changer in the path to tax transparency and further jurisdictions including the UK have followed suit. As a result, the UK now has agreements with jurisdictions all over the world, either in the form of a separate agreement or as part of the double taxation agreement. HMRC will receive their first data under these agreements from September 2016 and the information will be backdated to By this stage, we expect HMRC to have systems in place which can easily highlight any differences in information received and information reported to them. With these details at their fingertips targeting uncompliant individuals will be an easy task. The requirement to complete a tax return has not changed and regardless of residence status, individuals who are in receipt of income arising in the UK may have a tax return filing obligation. Tax returns and tax payments are due 31 January following the end of the tax year in question and it is worth highlighting that the UK tax year quite unusually runs from 6 April to 5 April. If you have reporting requirements in the UK and/or historic UK tax liabilities Mercer & Hole can help. The failure to report income to HMRC can result in penalties of up to 200% of the unpaid tax and these will be reduced if the disclosure is unprompted. PLEASE CONTACT LYNSEY LORD OR YOUR USUAL MERCER & HOLE CONTACT IF THERE IS ANYTHING YOU WOULD LIKE TO DISCUSS. Lynsey Lord lynseylord@mercerhole.co.uk

4 mercer & hole UK Inward Investment Publication MAy 2016 Corporate Tax what makes the UK such an attractive place to do business? THE UK HAS STRIVED OVER RECENT YEARS TO ENSURE THAT IT REMAINS HIGHLY COMPETITIVE AS A PLACE TO DO BUSINESS WITHIN THE INTERNATIONAL CONTEXT. LET S JUST RUN THROUGH A FEW OF THE GENEROUS RATES, ALLOWANCES AND EXEMPTIONS WITHIN THE UK TAXATION SYSTEM THAT COMPANIES FIND ATTRACTIVE. Corporation Tax Rates Although in the past rates of corporation tax have been in the 30% plus bracket for higher profit levels, we will soon be dipping down below 20% across the board. From 1 April 2017 the rate will reduce from the current level of 20% to 19% with a further drop down to 17% with effect from 1 April This means companies can retain over 80% of tax adjusted profit to use for future expansion, re-investment in the business or stakeholder returns. Enhanced Capital Allowances 100% tax relief is given, in addition to the Annual Investment Allowance, on green assets including energy and water efficiency and very low emission cars. Where you are scoping a refit of premises it is worth liaising with a specialist to see what equipment can be sourced from assets that do qualify for the 100% allowance as this can substantially enhance tax reliefs in the early stages. Annual Investment Allowance A capped 100% allowance is available for expenditure on plant and machinery (excluding cars but including integral fixtures and long life assets). The allowance was 500,000 from April 2014 to 31 December 2015, when it was reduced to 200,000. Accounting periods straddling the dates of change have a pro-rated entitlement to the allowance (based on some complex rules). The allowance is reduced for periods of less than 12 months and for groups and certain associated companies/businesses but is nonetheless a very valuable allowance against profits. Research and Development (R&D) Tax Credits R&D tax credits provide potentially substantial tax incentives for companies that incur expenditure on qualifying research and development. The tax benefits are different depending on the size of the company. For Small and Medium Enterprises (SMEs) for every 10,000 of qualifying expenditure incurred, the company can claim a deduction of 23,000 from its taxable profits. Additionally, loss-making companies can choose either to increase the value of their losses carried forward, or to surrender the tax credits in return for a cash payment. HM Revenue & Customs will repay 14.5% of the loss (equivalent to just over 33 for every 100 of qualifying expenditure).

5 05 For large companies, the claim is 130% of expenditure. From April 2016, instead of claiming the R&D costs as a deduction from profits, large companies receive a new form of tax credit equal to 10% of the R&D costs. This receipt is taxable and will initially be used to reduce any corporate tax liability within the group. Summary There are a range of tax breaks available to companies under the UK taxation system. Although many involve detailed rules, at Mercer & Hole we are familiar with these and have vast experience of liaising with the HM Revenue & Customs to secure them on behalf of our clients. Compiling a comprehensive submission for R&D tax credits involves an in depth understanding of the rules and expert tax advice should be in order to optimise the sum claimed. IF YOU HAVE A CORPORATE TAX ENQUIRY, I WOULD WELCOME YOU TO CONTACT ME. Substantial Shareholdings Exemption (SSE) There is a potential exemption for chargeable gains (and losses) on the disposal of substantial (more than 10%) shareholdings in trading companies by a trading company or a member of a trading group. This exemption may allow a group to sell a non core business without incurring a tax charge on the disposal. Complex rules apply in order to establish whether all of the qualifying conditions for the exemption are satisfied. Jacqui Gudgion +44 (0) jacquigudgion@mercerhole.co.uk

6 mercer & hole UK Inward Investment Publication MAy 2016 Auditing requirements in the UK - what you need to know ALTHOUGH MANY OVERSEAS COMPANIES SET UP UK OPERATIONS IN ORDER TO TAKE ADVANTAGE OF OUR TAX RATES, RESEARCH AND DEVELOPMENT RELIEFS AND DIVIDEND RULES, THE WAY IN WHICH YOU SET UP YOUR COMPANY CAN ALSO AFFECT THE EXTENT OF THE REPORTING NEEDED. The compliance regime of each country is an important part of the decision making process and we can readily assist you to find the best route for you. The UK has particular requirements for audits which are at first sight generous but if a UK company is set up as part of a group (as a subsidiary) then the company may require an audit. An audit of the company will be required if the group as a whole wherever it is in the world - exceeds two out of three of the following limits: Turnover m Total assets - 5.1m Employee numbers 50 help to auditors of international groups. However, standards will inevitably differ between countries and firms. ISA 600, therefore, sets out how the auditor of holding companies must be directly involved in the audit of subsidiaries, including involvement in the planning and fieldwork. We can assist in compliance with this standard using our friends in TIAG as necessary. Other than the legal requirements for an audit there are other advantages of the work including providing and demonstrating a strong financial control over an operation particularly where it may be remote from the original business. An audit can provide peace of mind that an external check is being made on the results and financial performance of the UK entity and can help reduce supervisory costs that would otherwise have to be incurred by the original business. If the overseas holding company is already above these limits then an audit is automatically required in the UK, irrespective of the level of activity in the UK. One way of minimising the impact of these rules is to set up the group so that the UK company is, itself, a holding company with trading subsidiaries in the UK and overseas. This creates a mini group headed by the UK holding company. If the UK mini group exceeds the audit limits shown above then the UK company will have to produce consolidated audited accounts. This can include audit work on any subsidiaries outside the UK even if they are in a jurisdiction that does not require an audit on that subsidiary but may not involve the whole of the international structure. International Standards on Auditing (ISAs), in theory, harmonise the work of auditors around the world and these have been a big IF YOU WOULD LIKE TO DISCUSS HOW UK AUDIT REQUIREMENTS MIGHT AFFECT YOUR BUSINESS NOW OR IN THE FUTURE, I WOULD WELCOME YOU TO CONTACT ME. Andy Crook Partner andycrook@mercerhole.co.uk

7 07 Corporate Advisory Services advising businesses across international borders Many businesses have assets, liabilities, operations, owners legislative agenda. Using European legislation in conjunction or investors in different countries. with local insolvency law and practice is one of Mercer & Hole s particular skills. I head our international Corporate The values and risks of these cross-border connections, and Advisory Services practice and I am also a past president of the local and international laws and practices that apply to the pan-european association of restructuring professionals, them, may need to be assessed in a variety of circumstances. INSOL Europe. We commonly undertake due diligence exercises for stakeholders, both in the UK and, often working with local In the UK, even the solvent liquidation of a company requires professionals, in other jurisdictions. the services of a Licensed Insolvency Practitioner to act as a fiduciary in realising and distributing the assets. Within Strategic objectives may change or external influences may the Mercer & Hole team, we have four Licensed Insolvency dictate reappraisal in response to opportunities or threats. Practitioners, regularly undertaking this form of restructuring The result may be an acquisition or disposal transaction on behalf of overseas clients who, for fiscal, economic or or a restructuring of resources. In this age of increasing operational reasons, no longer require the corporate structure. globalisation, such exercises often involve cross-border We are also particularly experienced in acting for foreign arrangements and activity. Our approach is to handle the UK entities with UK interests in financially distressed or insolvent aspects of the transaction and, where necessary, to involve businesses. Whilst our objective will be to preserve value, fellow professionals in the other relevant jurisdictions. rescue the business and avoid insolvency where possible, we will take appointments as insolvency officeholders in UK and Financial issues can often be managed, but the challenges they cross-border situations when necessary. present when a business operates in more than one country multiply rapidly. The obvious transactional or restructuring issue is the effect of different countries interacting laws on IF YOU WOULD LIKE TO DISCUSS ANY OF THE the company. M&A transactions tend to require corporate ISSUES I HAVE RAISED IN THIS ARTICLE, and tax law together with financing input, but restructuring PLEASE DO GET IN TOUCH. can be even more susceptible to local variations, given the complexities of insolvency law. Although in principle most countries have an insolvency system designed to maximise returns to creditors from the value in the company, the detail of the way this is done can be very different. Within Europe the European Insolvency Regulation is designed to facilitate cooperation between insolvency regimes. A recast version of that Regulation comes into effect in 2017 and harmonisation of insolvency law is high on the European Chris Laughton Partner chrislaughton@mercerhole.co.uk

8 VAT in the UK and Brexit? VAT IS ALMOST CERTAINLY HERE TO STAY, REGARDLESS OF THE REFERENDUM RESULT. WHAT MIGHT CHANGE IF THE UK DECIDES TO LEAVE THE EU IS THE NEED TO CONFORM TO THE CORE VAT RULES SET DOWN IN THE EU DIRECTIVE. All EU member states must ensure that their national VAT law implements and complies with the EU Directive, along with any decisions by the CJEU (the EU Supreme Court for VAT). These stipulate the range of rates that can apply, and restrict those sales that can be made without VAT. Leaving the EU would provide the UK government with greater flexibility to alter the standard VAT rate, concessionary reduced rates and address complexities and permit concessions in more complex areas. Costs For the inward investor however, any changes will probably appear minimal and they will need to bear in mind that they are entering a country with a complex and rigorously enforced sales tax regime. Effectively this means that both businesses and individuals relocating here will need to be aware that VAT on costs will be a reality. Businesses in many cases may recover this VAT however, this is not guaranteed and is dependent on the type and structure of the business and the sales it makes. Advice should always be sought. Locally based individuals not in business will not be eligible for VAT recovery. The current rate of 20% is a significant increase in base costs and VAT applies to imports as well as local purchases. Business & Sales More importantly, those intending to pursue a business here will need to look to the VAT obligations imposed on them. Businesses, for VAT purposes, can be as simple as an individual owning and renting out a property. Setting up a company simply to employ domestic staff can be seen as a business and may require a VAT registration and VAT to be charged on the supply of those staff to other parties, including the shareholders of that company. VAT is designed to stick to any sales or deemed sales, and can also apply in cases where no specific financial income is received. For VAT it is frequently far more beneficial to register for VAT as this permits any obligations to be addressed (and penalties avoided), but more often than not permits VAT on eligible costs to be recovered, which would otherwise be lost. Inward investors, particularly those who come from a country that does not have an EU-style VAT regime, should seek VAT advice in relation to any move to the UK. Advisers are most effective when they see the full details of importations, purchases, sales, income generating activities as well as future intentions & other activities. The VAT rules are wide-ranging, but many are designed to be beneficial, so advice frequently produces positive outcomes and opportunities. IF YOU WOULD LIKE ANY FURTHER ADVICE ON VAT IN THE UK, PLEASE GET IN TOUCH. WE WILL BE HAPPY TO HELP. Richard Collier +44 (0) richardcollier@mercerhole.co.uk London t e london@mercerhole.co.uk St Albans t +44 (0) e stalbans@mercerhole.co.uk Milton Keynes t +44 (0) e miltonkeynes@mercerhole.co.uk Newsletter Disclaimer: This newsletter is a short selection of items extracted from complex legislation. Further specific advice on any matters referred to must be taken at all times. The information is given for general guidance only and publication is without responsibility for loss occasioned to any person acting or refraining from acting as a result of the information given. No part of this publication may be reproduced without the prior permission of Mercer & Hole. Firm Disclaimer: Mercer & Hole is registered by the Institute of Chartered Accountants In England & Wales to carry out company audit work. M&H Financial Planning is the trading name of M&H LLP which is authorised and regulated by the Financial Conduct Authority. M&H LLP is a Limited Liability Partnership registered in England No. OC