Tax Talk: When size matters
Large group issues for UK small companies
If you’re the Financial Controller of a small UK company that happens to be part of a much bigger international group, it’s easy to think of your business as operating on its own for Corporation Tax purposes. However, Shona Barker explains why you still have to look at the bigger picture.
Corporation Tax payments If your UK company is taxpaying, you need to count the number of related 51% group companies carefully at the start of the accounting period. You can ignore wholly dormant companies and most non-trading holding companies, but you have to include international group members. Typically, this is what trips people up, especially where private equity is involved or where the group structure is just complicated.
If your UK company has taxable profits of more than £1.5 million divided by the number of related 51% group companies plus one, then it might have to pay tax in instalments. However, there is a de minimis exemption of £10,000 of Corporation Tax to pay, and if it’s the first period that the company has potentially fallen within this regime, it gets a free pass until the following year. Remember, these limits are all scaled up or down if you don’t have a standard 12-month accounting period. What’s more, a second and further acceleration of tax payments will also apply when profits exceed £20 million divided by the number of group entities, so this requires constant monitoring.
It can be a shock to go from paying tax nine months and one day after the end of the accounting period to making payments before you’ve closed out management financials for the year. However, the good news is, interest payable on late advance payments is always lower than the interest outstanding at that nine-month and one day point. In addition, as interest on underpaid or late paid Corporation Tax is deductible for Corporation Tax purposes, you will get tax relief for it.
Country by Country Reporting (CbCR) UK companies in large groups are subject to CbCR requirements even if they have minimal operations in the UK. If the international group to which your company belongs has a consolidated group turnover of at least €750 million, the company will be caught by the rules.
In most cases, the ultimate parent entity needs to make the filing, so it’s probably another colleague in the group responsible for dealing with it. However, if the parent happens to be in a tax jurisdiction where CbCR is not mandatory, the task could be your responsibility. Worth asking internally!
Tax Strategy If CbCR catches your company (even if another company in the group is dealing with the reporting), you may need to publish a UK Tax Strategy. Furthermore, if no upstream companies have published one, then your UK company will need to.
You will need to publish the Tax Strategy online in an easily accessible format. It must cover the group’s attitude and approach towards UK taxation. Depending on what your company does, a really long or short strategy might make sense, but it must accurately represent the position. There is no one size fits all approach for this piece of legislation!
Transfer Pricing If the group has at least 250 employees on consolidation and either an annual turnover of more than €50 million or an annual balance sheet of more than €43 million (or indeed both), you need to consider Transfer Pricing in respect of all group transactions. The rules only become mandatory in all cases when the group is deemed to be large by these measures, but when you’re part of a medium-sized group, HMRC can tell you to apply the rules. In addition, where a company has transactions with group entities in jurisdictions with which the UK doesn’t have a tax treaty (typically, but not always, tax havens), these transactions are always within the scope of Transfer Pricing rules, regardless of group size.
Transfer Pricing aims to ensure all transactions are undertaken on an arm’s length basis. So, if you have lots of recharges between group companies (for example, if another group company handles the HR function for the entire group), this could be particularly relevant.
Research and Development (R&D) If your company is doing something innovative, you might be able to claim R&D tax relief on the costs incurred in trying to achieve an advancement in science or technology (even if it fails). A critical difference between the SME and large company R&D schemes is the availability of relief for subcontracted costs. If most of your spending is on consultancy rather than direct labour, it’s essential to understand at an early stage whether your company is considered large or not.
The relevant cut off is less than 500 staff and either consolidated turnover of less than €100million or a consolidated balance sheet total of less than €86 million.
If you’re not sure if any of these rules apply to your company, or if you’ve suddenly realised that your company is bigger than you thought, please get in touch with Shona Barker or your usual PKF contact.