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The ups and downs of taxation for UK tax payers

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Thursday March 21, 2013 at 10:00am
With the budget putting a focus on tax and HMRC in the news, now is probably as good a time as any to look at some of the news affecting the tax collector and the tax payer in the UK.

Barclays stops offering tax advice: Barclays always seems to court controversy; from banking pre apartheid South Africa, to aggressive pricing and bonuses and now the closure of their tax structuring unit which advised companies on using complex structures to reduce tax liabilities. No doubt a sign of the times as the spotlight is currently on this type of planning.

IHT threshold frozen to £325,000 for individuals and £650,000 for couples until at least 2019: The idea is that this will help pay for the “unfair” cost of social care for the elderly. Another subjective word used in the discussion about tax. This can only be good for accountants, like us, specialising in mitigating IHT through the non aggressive use of trusts on death. Incidentally such planning is absolutely non-aggressive and merely represents arranging your financial affairs so that on death they are more tax efficient.

Multinationals pay 5% Tax: According to the OECD the rate of corporation tax paid by international companies is around 5% compared to up to 30% for UK based business. Clearly the world has moved on with new communication technologies and the tax code has not kept pace.

It is interesting to look at just how they do this, Amazon for example is a US company with European headquarters in Luxemburg where Corporation tax is 21% (currently around 9% lower than UK) and VAT is 15% (5% lower than UK). Although Amazon has warehouses and a marketing department in the UK they are not considered permanent establishments for tax purposes. Hence, under the double tax treaty between the two countries, profits are taxed at the Luxembourg rate rather than the higher UK rate.

Starbucks is a little more complicated. Their European operation is based in Amsterdam. The UK owned Starbucks businesses buy coffee from the Netherlands with a 16.5% margin added for the service. The UK owned (that is not franchised) shops pay 4.9% on money borrowed from the Netherlands parent also. So that is how Starbucks pays very little UK tax as their buying costs are inflated thereby significantly reducing UK profits. What is more interesting is how they avoid paying corporation tax at 25% in the Netherlands. Reuters reports that up to 84% of the Amsterdam operations' annual revenue is spent on buying and roasting coffee which they get from their Lausanne operation in Switzerland. Coincidentally profits tied to international trade in commodities, like coffee, are taxed at rates as low as 5% in Switzerland. So basically their European operation buys very expensive processed and roasted coffee from their Swiss operation which has a very low tax rate according to lawyers over there.

Welcome to France: within a month of signing, David Beckham’s deal to join Paris Saint-Germain is being looked into by the French Treasury. Probably not coincidental with the Socialist French Government’s plan to bring in a top rate of tax of 75% on the wealthy.

Any finally, more inspectors: the HMRC unit responsible for examining the tax affairs of affluent individuals (i.e. those with wealth of at least £1m) is recruiting an additional 100 tax inspectors.

As a firm we are seeing clients move away from transactions with high tax risk. Luckily there are plenty of ways to avoid tax that carry no tax risk and interest and demand for this type of planning is growing.

Andy Parker
Chartered Accountant and Chartered Financial Planner

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Parker Chartered Accountants and Financial Advisors is the trading name for PLW Advisors Ltd (Registered No. 10396831), and Parker Financial Planning LLP (Registered No. OC347027). Parker Financial Planning LLP is authorised and regulated by the Financial Conduct Authority. All companies are registered in England and Wales – registered office contact details here