{"id":11781,"date":"2023-10-23T15:09:02","date_gmt":"2023-10-23T14:09:02","guid":{"rendered":"https:\/\/www.taxpolicy.org.uk\/?p=11781"},"modified":"2023-10-23T16:01:30","modified_gmt":"2023-10-23T15:01:30","slug":"complexity","status":"publish","type":"post","link":"https:\/\/heacham.neidles.com\/2023\/10\/23\/complexity\/","title":{"rendered":"The reality of tax complexity, and how to fix it"},"content":{"rendered":"\n
It\u2019s a common complaint that the UK tax system is much too complicated. That complaint is correct.<\/p>\n\n\n\n
Some of the complication is inevitable (modern life is complicated). Some is a response to avoidance. Some is driven by policy choices (e.g. VAT exemptions1<\/a><\/sup>Once you decide restaurants have to charge VAT at 20%, but ingredients should be 0%, you are on a one-way road paved with Jaffa Cakes<\/a> and giant marshmellows<\/a><\/span>). But some of the complication really is unnecessary. I’ll try to demonstrate the problem by taking one tax point that faces many companies investing in the UK, and working through each of the overlapping rules the company has to work through.<\/p>\n\n\n\n Judge for yourself how sensible those rules are, and how many are really necessary.<\/p>\n\n\n Let’s pick a simple scenario that’s realistic – indeed very common:<\/p>\n\n\n\n Like most businesses, Waystar UK will expect to get UK corporation tax relief for its interest payments.2<\/a><\/sup>I’m only covering interest deductibility and not withholding tax, VAT, or any of the other issues the arrangement would raise.<\/span> Will it?<\/p>\n\n\n\n From a policy perspective Waystar UK absolutely should<\/strong> get tax relief. It would if it borrowed directly from the market, and interposing Waystar Finco should make no difference (but is likely cheaper\/more efficient for Waystar). But that rightly cuts no ice with HMRC – the question is, what do the rules say?<\/p>\n\n\n\n There are many, many, rules that can impact tax relief\/deductibility of interest. Here’s how I’d advise Waystar UK on the main ones, with added commentary on whether each of the rules really still makes sense.3<\/a><\/sup>Like most lawyers, I was truly an expert in a very narrow field, had reasonable knowledge across a wider area, and no more than passing familiarity with anything else. Most Tax Policy Associates content is in areas where I was not truly an expert, and so I am entirely reliant on the generosity and expertise of many current and retired professionals. However the issues discussed in this article are ones where I had direct expertise. They are therefore very relevant to my past clients, but I have no financial relationship with those clients (or my former law firm, aside from my pension).<\/span><\/p>\n\n\n\n 1. Transfer pricing<\/strong><\/p>\n\n\n\n Most countries in the world have “transfer pricing<\/a>” rules. In broad terms, they say that if a company has an arrangement which isn’t on “arm’s-length terms” and it’s taxed as if it was. So if, for example, current market interest rates are 6%, and Waystar UK borrows from Waystar Finco at 10%, then it will only get a deduction for the 6%. This is pretty sensible.<\/p>\n\n\n\n The UK has a reasonably standard<\/a> implementation of the standard OECD rules<\/a> – they’ve been around for ages and are well understood. <\/p>\n\n\n\n Advice:<\/strong> Waystar UK needs to be careful of the rate it borrows under, and should be able to justify that the rate is comparable to the commercial borrowing rate it could get in the market, plus a small commercial fee for Waystar Finco’s role arranging the finance. So if Waystar UK has zero assets it will not be able to borrow anything; if it has \u00a31bn of assets it should be able to support a \u00a3200m loan. The maximum of debt it can support is a question of fact, on which Waystar’s own finance people can form a judgment.4<\/a><\/sup>And create and retain appropriate transfer pricing documentation. They could instruct a transfer pricing expert to prepare a report, but that is probably unnecessary; the more pragmatic approach is for Waystar UK to approach banks and obtain quotes as if it was borrowing itself.<\/span> This will all be a few pages of advice.<\/p>\n\n\n\n Conclusion:<\/strong> These are international rules which the UK can’t realistically change on its own. They work well.5<\/a><\/sup>At least when applied to debt, where it’s easy to establish an arm’s length interest rate. More problematic when it comes to arrangements that have no obvious market equivalent<\/span>. Keep them.<\/p>\n\n\n\n 2. Corporate interest restriction<\/strong><\/p>\n\n\n\n in 2015, as part of its Base Erosion and Profit Shifting (BEPS)<\/a> project, the OECD created a set of rules which limit the amount of interest deductibility companies can claim. <\/p>\n\n\n\n Most developed countries adopted some variant on the rules – here’s a helpful map from the OECD<\/a>:<\/p>\n\n\n\nThe scenario<\/h2>\n\n\n
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