Autumn statement: Tax competition in the UK and ‘jumping the gun’ on BEPS

This week’s autumn statement was more like a budget than this year’s budget, according to EY, with 59 policy measures listed in the full report compared to 56 in March.

We can now expect dozens of draft Finance Bill 2015 measures to be published on 10 December for consultation.

These will include the new “diverted profits tax”, which has had some commentators observing that the UK government may be jumping the gun as international efforts to reform the outdated corporate income tax system continue.

The IFS has suggested that while the UK is proposing a unilateral measure, the idea does fit with the OECD’s base erosion and profit shifting (BEPS) agenda. Australia is reported to be considering following in the UK’s footsteps.

Devolution

We can expect further significant changes to UK taxation to be introduced in January, with draft legislation implementing further devolution of tax powers to Scotland.

The Smith Commission recommended last week that the Scottish parliament should have almost complete control over income tax, but said control of corporation tax should remain with the UK parliament.

For Northern Ireland, the UK government’s long-awaited conclusion on corporation tax was that:

it recognised “the strongly held arguments for devolving corporation tax rate-setting powers to Northern Ireland, including its land border with the very low corporation tax environment in the Republic of Ireland”; and

devolution of such powers “could be implemented provided that the Northern Ireland executive is able to manage the financial implications”.

The government will introduce legislation in the current parliament, subject to satisfactory progress in cross-party talks on agreeing budgets and putting the Northern Ireland executive’s finances on “a sustainable footing for the future”.

The IFS has noted that devolution “could introduce profit shifting and tax competition within the UK”.

The ICAEW Tax Faculty said: “It is difficult to see that a 12.5% rate could be introduced [in Northern Ireland] without substantive changes to the rest of the UK’s corporation tax system, for example introducing transfer pricing rules, profit apportionment, protection against tax motivated incorporation and perhaps even the need to apply the new diverted profits tax.”

The Chartered Institute of Taxation said the government’s announcement “fires the starting gun for tax competition for businesses within the UK, with the move sure to lead to demands for the same powers to be devolved to Scotland and Wales”.

The autumn statement also confirmed that the government is aiming for cross-party agreement on the Welsh devolution settlement by 1 March 2015, building on the current Wales Bill which includes a power (subject to endorsement in a referendum) to set Welsh income tax rates for Welsh taxpayers.