UK Treasury Delays Application Of Its New 'Mixer' Rules

Jeremy Hetherigton-Gore, Tax-news.com, London

04 May 2000

The UK Treasury yesterday announced that it would delay applying its new 'mixer'-company anti-avoidance rules from 1st July 2000 until 1st March 2001, to give more time for companies to adjust to the new regime. However, the rules themselves are not to be softened - they remain part of this year's Finance Bill, currently being debated in Parliament.

As a sop to the business lobby, the Treasury said it would consult on two un-related tax issues, one being the treatment of capital gains on the disposal of large corporate shareholdings (mirroring the German Government's recent measures, although the problem is nowhere near as great in the UK), and the other being an improvement in the tax regime for purchases of goodwill.

At its simplest, a 'mixer' company in, say, the Netherlands, which has a double tax treaty with the UK, and which doesn't apply withholding taxes, takes profits from two other countries which have been taxed at, say 10% and 50%, mixes them together to produce a final profit taxed at 30% and remits it to the UK, where it won't be taxed any further. Had the two original profit streams been remitted directly to the UK, the profit taxed at 10% would suffer an additional 20% of taxation to bring it up to the UK's 30% corporate tax rate.

That sounds simple, but in reality international corporate tax planning is of nightmarish complexity and subtlety, and it is difficult if not impossible to know how much damage a change in the rules would eventually inflict on international companies. The rule change is basically to tax the originating profit streams directly, but there are numerous ways in which companies can mitigate the effects of such a change.

The Treasury estimated the effect of the changes at £300m extra tax, and the business lobby countered with figures as high as £6bn, although in recent days some estimates have fallen to as low as £700m. Organisations representing business, such as the CBI, the Institute of Directors and the Institute of Taxation gave the Treasury's announcement a guarded welcome, saying that they still wanted the measures withdrawn altogether for a period of deeper consultation.

In a way, an increase in the amount of tax paid is not the most important or interesting aspect of this affair - what is happening is just a further move in the very long-term game played out between the Inland Revenue and coporate tax-payers. More interesting perhaps is the contrast between old-style public companies with major operations on the ground in high-tax countries, who can do relatively little to insulate themselves from the vagaries of tax policy in their home jurisdictions, and a company such as News International, which famously pays hardly any tax at all by using complex international tax planning structures, and yet which still manages access to the capital markets in a variety of ways.

There have been a few threats over the last weeks that companies are considering deserting UK plc in favour of a more benign regime, but they may not have been too serious at this stage. Longer term, though, the development of capital-raising mechanisms on the Internet, which are now in their infancy, but will rapidly begin to offer companies a way around the need to list in bricks-and-mortar centres such as London and Frankfurt, may remove one of the main reasons for a company to have a taxable presence in a high-tax country.

The Treasury is probably right in its own terms to say that companies are 'avoiding' tax through the use of mixer companies (in the current jargon, 'mitigating' tax is OK, 'avoiding' tax is legal but reprehensible, while 'evading' tax is criminal). But a more sensible long-term view, especially at a time when the Treasury is awash with cash, would be to see that every new rule is one more straw on the camel's back, and that one day the camel will have options to escape from its burden.

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