The corporate exit charge

Mark Joscelyne, Tax Partner, CMS

Following recent ECJ decisions, the European Commission requested the UK to amend its exit charge for companies moving their tax residence outside the UK. The current provisions deem a migrating company to dispose of, and immediately reacquire, its assets at market value at the time it ceases to be UK resident.  These rules apply to capital assets generally (within TCGA) and also intangible assets, derivatives and loan relationships (within CTA 2009).  This gives rise to liability to corporation tax on the accrued gains but, because there is no actual sale, the exit charge can cause cashflow problems, which the ECJ regards as a restriction on EU freedom of establishment.  (The ECJ does not regard the quantum of the exit charge as disproportionate, as the UK charge is only on gains accruing during the period of UK residence.)  The ECJ requires payment to be deferred, ideally until the subsequent realisation of the assets.  The UK legislation already contains limited provisions for deferral.

HMRC have today confirmed what had previously been trailed, namely that draft legislation will apply where a company incorporated in the UK or another EEA state moves its place of residence from the UK to another EEA state and carries on business there.  The company will be able to enter into one of the following two exit charge payment plans:

  • A straightforward “instalment method”, with payment of the tax in six annual instalments.  This is administratively the more straightforward as it will simply involve the tax being calculated for all the assets (as at the date of migration) and that tax then being paid in six instalments; or
  • A “realisation method”, under which the company pays the tax on the eventual realisation of the relevant asset, with a backstop date of 10 years after migration; in the case of intangible assets, loan relationships and derivatives, the tax is paid over the useful economic life of the asset in question.  This will be administratively more involved as each asset will need to be tracked, potentially over the 10 year period.

In both cases interest will be payable on the deferred tax (and so the cashflow cost will actually not be avoided).

The changes will come into effect on Royal Assent to the Finance Bill 2013 but retrospectively to the publication of the draft legislation on 11th December 2012

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