With the UK now having a new government who are eager to boost international trade, there will be a renewed focus on trade talks.
Trade Secretary Jonathan Reynolds is restarting trade negotiations with the UK’s international partners including India and Gulf nations which he stresses will have a “laser-focused” approach “on creating new opportunities for UK firms so they can support jobs across the country”.
This sounds like promising news for businesses across the nation, especially with the recent announcement that the Bank of England has cut interest rates to 4.75%, bringing the cost of borrowing down from a 16-year peak. However, while there are opportunities aplenty, there are also new legal challenges for businesses to take into account.
The UK is the world’s fourth largest exporter, last year reporting £855.4 billion in exports. Despite these encouraging outcomes, the UK hasn’t always received its fair share of taxable profits from overseas companies that operate in the UK.
To combat this, new and stricter tax avoidance legislation for multinational enterprises (MNEs) came into effect in 2024 - which larger companies with an international presence will need to navigate carefully to ensure they fulfil their heightened tax liabilities.
The newly implemented Schedule 12 of the Finance Act 2024 is designed to ensure that multinational companies that trade across borders do not unfairly avoid their domestic tax obligations by shifting profits to low-tax locations - by enforcing a minimum tax on profits.
These new measures aim to clamp down on inequitable practices to ensure greater transparency and accountability for multinational companies.
Schedule 12 applies to any multinational company trading across borders that has annual global revenues exceeding €750 million and has business activity in the UK.
These measures, called the Multinational Top-up Tax and Domestic Top-up Tax, are the UK’s implementation of the rules outlined in the Global Anti-Base Erosion (GloBE) Rules along with over 140 other countries and jurisdictions operating under the Organisation for Economic Co-operation and Development (OECD) Inclusive Framework on base erosion and profit shifting.
Countries currently enforcing the measures include Austria, Belgium, Bermuda, Bulgaria, Croatia, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Japan, Liechtenstein, Luxembourg, Netherlands, Norway, Romania, Slovak Republic, Slovenia, South Korea, Sweden, Switzerland, and United Kingdom.
Large businesses in the UK are required to publish a large business tax strategy for every fiscal year to ensure legislative compliance and avoid punitive fines or enforcements from HMRC.
Prior to the clarification, If your UK company, group, sub-group or partnership meets the criteria of holding €750 million in profits annually, or has an annual turnover of £200 million, or a balance sheet of over £2 billion, you will need to publish a large business tax strategy.
Failure to publish a tax strategy will incur a fine of £7,500, with a further £7,500 fine if not resolved six months on and consecutive additional fines of the same value for each month this continues.
HMRC has now clarified that the turnover and balance sheet test, and the MNE test are mutually exclusive, so if a UK company is part of an MNE, it does not need to publish a strategy if the global turnover is less than €750 million euros, even if it personally exceeds the £200 million turnover threshold. This provides necessary relaxation for large UK based businesses with a smaller global presence.
Further, it is clarified that the tax strategy does not need to include the financial year to which it relates.
With evolving tax laws, tax requirements might sound onerous, but there will no doubt be many opportunities for SMEs and MNEs alike to maximise their profitability and minimise their tax liabilities while complying with the relevant frameworks - but doing so can be a challenging endeavour for any business owner.
If you own or operate an international business that trades in the UK and you’re concerned about ensuring you fulfil your tax obligations in a changing legislative landscape, get in touch with our expert international tax team today.
