Weekly Market Commentary written on 29th March 2019 and issued on 1st April 2019

Parliamentary Votes make Brexit No Clearer
Last week we have had yet more votes on Brexit and are still no clearer about what will ultimately happen. As we write this the government is having yet another go at getting its universally despised deal over the line, but this time with the fun twist that her replacement gets to tear up whatever has been agreed and plunge us all back into darkness at a later date.

At this stage it looks unlikely to pass and a longer extension will be required while the Commons cobbles together a compromise that it can live with and possibly puts back to a confirmatory referendum. On the plus side utter disdain for the way Brexit has been handled by the government is one of the few things holding the country together.

Bonds: Sovereign Bonds Rally in Weak Global Environment
Last week saw a convergence of gloomy global growth outlooks from central banks drive sovereign prices up. In turn yields (interest rates) of German bunds were negative for the first time since 2016, and the US 10-year government bond yield dipped to its lowest level this year. By exiting riskier assets and locking into longer term yields, it indicates investors are expecting low growth and for interest rates to fall.
The bond market already believes the next move by the Fed will be a rate cut this year (70 per cent probability) with the committee already having ruled out further rate hikes in 2019. Another factor driving fear into the markets is the yield curve inversion. The spread between the ten-year and three-month government bonds inverted at the end of last week and continues to remain negative. An inverted yield curve is used as a signal of slowing growth and a precursor that a future recession is likely to happen in one to two years.

Turkey: Lira Rout Sparks Government Currency Crackdown
Last week Turkey created a currency crunch in order to halt the slide on the Lira, which it blames on JP Morgan for starting. The overnight cost of borrowing liras on offshore swap markets jumped over 1,200 per cent. This effectively puts local banks under huge pressure to not provide liquidity to foreign investors and more importantly, constrains them from betting against the currency. With local elections only a few days away, the move is only expected to be temporary.

Subsequently, the only other way to reduce Turkish exposure is to dump stocks and bonds, which investors have been doing by the bucketload. Turkey’s benchmark, the ISE National 100 index fell close to five percent earlier last week. Turkey 5-year credit default swap which essentially is the cost of insuring exposure to Turkey’s sovereign debt rose by 42 basis points to 451bps.

UK: Majestic Wine set to Close Stores
House of Fraser and Pound World have both collapsed in the last year and last week, Majestic Wine added itself to that list by announcing plans to close its UK stores although how many will be shut will not be announced until June. The company is instead going to undergo a name rebrand and focus on increasing its online subscription arm Naked Wines which it acquired in 2015 for £70m. Naked Wines are eyeing up expansion to the US which is a key driver of growth for the business. The US direct to consumer market is expected to grow by 15 per cent on an annual basis.
Meanwhile, retail sales are starting to become impacted by a disorderly Brexit. Sales volume fell sharply for the month of March by 18 per cent and marked a four-month run where sales haven’t grown. Anna Leach, CBI head of economic intelligence, said: “Even accounting for Easter timing, the high street’s poor run continues. While real wage growth is picking up, consumer confidence has been hit by escalating uncertainty over Brexit and concern over the economy’s future.”

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Corporate Residence

How easy is it to avoid UK corporation tax by registering a company abroad? From time to time the question of corporate residence and the resulting tax implications is raised. Often, it’s in the context of an enquiry about registering the company abroad in a low tax jurisdiction to reduce corporation tax on trading profits. Generally speaking, unless a company is actually and substantially centrally managed and controlled from the proposed low tax jurisdiction then there will be absolutely no UK tax benefit, despite what anyone may say.

So, if the business is transacting in the UK and the real management and control is in the UK, registering the company abroad is really not worth pursuing. Even if, substantially, the central management and control of the company is outside of the UK (not an easy test to satisfy) there is another issue to consider in the light of the Organisation for Economic Co-operation and Development (OECD), and UK in particular, attack on the erosion of taxable profits generated in the UK.

Here is the latest HMRC statement on this:
The general rule is that a company which is not resident in the UK [and remember, it is first necessary to overcome the “central management and control” test – see above] has to pay UK Corporation Tax only if:

it has a permanent establishment in the UK;
the economic activity that generates its profits is carried out in the UK.
What is a permanent establishment?
A permanent establishment is where a company has a presence in a country through which trade is carried out. There are two types of permanent establishment:

  • a fixed place of business;
  • a dependent agent.
  • A fixed place of business is generally a building or a site which the non-resident’s personnel have at their disposal and use to carry out the non-resident’s business. An office, a factory or a shop, for example, can all be a fixed place of business.

A dependent agent is a person who is not independent of the non-resident company and regularly does business for the company, usually by concluding contracts on its behalf.

What determines the location of economic activity?
Many different elements contribute to a multinational’s economic activity, including sales, employees, technology, physical assets and intellectual property. The tax authorities need to work out which of these are developed or take place in a particular country and how much profit is attributable to them.

Simply having customers in the UK does not mean that a company is carrying out its economic activity here. This is because having UK customers is not the same as having a permanent establishment in the UK. There is a difference between a non-resident company that is trading from abroad with customers in the UK, and one that is actually trading in the UK.

Websites and group companies
Having a UK website does not mean that a non-resident company has either a fixed place of business in the UK or a dependent agent in the UK. All of the trading activity could be taking place outside the UK.

Most multinational businesses are not single companies, but a group of companies, only some of which will be operating in the UK.

For example, sometimes a company from outside the UK sells to UK customers via the internet. Another group company in the UK provides warehousing, distribution or other services and support to the selling company. Where this takes place, the UK service company will be taxed only on the profits of its own business, ie. the services it provides to the selling company.

This is not tax avoidance; it is simply the way that Corporation Tax works, ie. it applies to individual companies.

UK companies operating overseas
Most major economies operate Corporation Tax in the same way as the UK, so UK resident companies are treated in a similar way in other countries. In other words, UK companies do not pay Corporation Tax to another country on the profits from sales in that country, unless they trade through a permanent establishment there. Instead, they pay Corporation Tax on those profits in the UK.

So, a UK resident company that is selling its goods overseas via its website will pay Corporation Tax in the UK, and not in the countries where its customers are physically located.

What is happening now?
The concept of a ‘permanent establishment’ and how multinationals are taxed in different countries is not new. As far back as the 1920s, the League of Nations created draft tax treaties to prevent companies from being taxed twice on the same income in different countries. These rules are now part of modern tax treaties, which follow a model developed by the OECD.

What has changed is the way in which businesses operate, not least because of their ability to sell online in many different countries. This has raised questions about whether the tax rules for permanent establishments need to be updated to address these fundamental changes.

The UK has led the way in initiating and implementing the OECD/G20 Base Erosion and Profit Shifting (BEPS) project, which was set up to review and improve the function of international tax rules. The question of what constitutes a permanent establishment was one strand of this work and proposals to amend the international rules were announced in October 2015.

92 countries are working together on an instrument designed to implement the revised definition by amending existing tax treaties.

Further OECD/G20 work on the guidance on the principles for attributing profits to permanent establishments is also in progress.

In the meantme, pending Global reform, in November last year, the Government published a consultation proposing a new Digital Services tax to apply from April 2020. For more information, please see our bulletin of 13 November 2018.

So, you can see that merely registering in another (low tax) country and satisfying the requirements of the law of that country to establish residence there will not be enough alone to secure a UK tax advantage. The central management control test and the generation of profit from trading in the UK are likely to provide significant barriers to legitimate and permissible avoidance of UK tax for businesses run from, and trading in, the UK.

Mid-Life MOT

The Department of Work and Pensions has launched a Mid-Life MOT webpage. “We all need to take stock at key points in our life, and the decisions you make now about money, work and health can help you get the retirement you want.

Many of us are living longer, and if we want to enjoy later life, staying healthy and planning to have enough money to live on really matters. Getting older is an opportunity to focus on what’s important to you, and a mid-life MOT is a good place to start.

Perhaps you’ve been meaning to get to grips with your pension plans, explore working differently or make sure you’re looking after your health? The mid-life MOT is a package of support that gives you access to free, professional and independent guidance to help you with pension planning, working options and staying healthy.”

Scam Victims

Scam victims lose more than £1m each to fraudsters Intelligence gathered by members of the multi-agency Project Bloom group, which was set up to tackle pension scams, has found some people who had managed to put away more than £1 million have lost their retirement funds to criminals.

New Action Fraud data reveals that two people have reported that they have lost the seven-figure sums. However, as it is believed that the majority of scam victims never contact the authorities, this total may only be a fraction of the total number of people who have handed over such large pension pots.

On average, victims of pension scams lost £91,000 each to fraudsters in 2017. They reported receiving cold-calls, offers of free pension reviews and promises that they would get high rates of return – all of which are key warning signs of scams.

End of tax year tips

For most people, the end of the tax year isn’t a big occasion. Yet when the 2019/20 year tax year starts on the 6 April, it’ll bring several important changes for your money. Many of them are automatic: your income could be boosted, whether by the increasing minimum wage or rising tax brackets. However, the end of the tax year also means the end of several allowances that could reduce the tax you pay – and therefore, save you money. Many don’t roll over, and so not using these allowances by 6 April means you lose them forever.

Here are some top tips:

  • Start with ISAs
  • Pay into your pension
  • Clear out your investments
  • Give £3,000 to your kids
  • Top up your National Insurance contributions