'New finance bill targets tax avoidance' is the type of headline that can cause corporate finance directors to break out in a cold sweat.

It appeared in May, after the Government announced its post-election finance bill – which is now law.

The line between tax avoidance and tax evasion, as former Chancellor of the Exchequer, Dennis Healey, said, “is the thickness of a prison wall.”

The squeeze on tax avoidance

Successive finance acts have redrawn that line.

2004’s Act introduced a rule requiring accountants and other tax advisors to tell the Inland Revenue in advance about any tax avoidance schemes they sell to companies.

The most recent, passed by Parliament in July, contained a raft of anti-avoidance measures.

Luckily many are designed to encourage new enterprises and promote expansion.

A maze of rules & regulations?

The UK’s tax rules are not always simple. Fortunately there is a network of highly professional tax advisory companies, eperienced at helping businesses.

“Getting to grips with systems, especially for foreign companies, can be like learning a new language,” says Gerry Jackson, a tax adviser at accountants Critchleys. Their clients include inward investor companies drawn to the hi-tech-industry clusters based around Oxford University.

Close scrutiny pays dividends

While headline tax rates remain business-friendly, the recent changes mean skillful navigation of the less newsworthy rules is more important than ever.

Many are, in fact, intended to support new businesses and promote business growth.

What a relief: R&D is encouraged

Among the measures designed to help technology companies are R&D tax credits.

Introduced in 2000, they provide small to medium sized enterprises (SMEs) with tax relief, which can be used either to reduce tax bills or provide a cash sum.

Similar credits were introduced for larger companies in 2002.

Her Majesty lends a hand

Canadian-owned software firm, Cognos Ltd, has used the system in the past and is about to revisit it with the help of HM Revenue & Customs (HMRC).

“Tax credits are of obvious benefit to a firm like ours – one that's involved in R&D,” says the firm's tax accountant, Alex Gray.

“We want to use the system to our best advantage, so in September we'll be sitting down with HMRC and drawing up a plan. It's very useful to us that they're prepared to be proactive.”

Can employees gain from new initatives?

A number of Inland Revenue-approved share plans, such as the Enterprise Management Incentive and the Share Incentive Plan, are designed to encourage staff share option schemes.

These can be especially important during the start up period, when firms often can’t afford to pay high salaries.

Companies can also run unapproved schemes with no limit on the number of shares that can be issued, but the approved schemes provide more favourable tax breaks.

Any incentives for inward investors?

A number of tax rules are of specific benefit to foreign companies.

“Among the most important,” says John Whiting, “is the so-called non-domicile rule, which means foreign nationals living in the UK don’t pay income tax or capital gains tax on earnings abroad which remain abroad.”

Although the rule has been criticised as a loophole, it can be a great incentive for firms wishing to send their staff to work in the UK – as well as for individuals wishing to move here and invest.

Furthermore, tax treaties with over a hundred governments mean that people from the relevant countries who work for UK-registered companies aren’t hit by double taxation.

Is there more to life than tax?

Neither John Whiting nor Gerry Jackson believe tax is the primary motivating factor for most inward investors.

Some countries, such as Ireland, Lithuania and Latvia have lower headline tax rates.

The UK has become Europe’s leading inward investment location for a variety of reasons – and not all are business-related.

“It’s rarely down to one thing,” says Whiting. “Some may even take into consideration the quality of the local golf courses!”

Story Links

HM Revenue & Customs: R&D Tax Credits

PricewaterhouseCoopers

Critchleys