On March 23, the UK Government announced its budget and tax proposals for the UK tax year April 2011–April 2012. Significant changes include:

• Corporation Tax—Corporation Tax, payable by UK tax resident companies and the UK branches of non-UK resident companies, is to be reduced to 26% from April 2011, and it will then drop by 1% each year to 23% from April 2014.
• Double Tax Treaties—New measures have been announced to combat the use of the UK’s double tax treaties to avoid UK tax. These will target both UK residents (individuals, trustees and companies) who use tax avoidance schemes and overseas residents who claim benefits to which they should not be entitled under the UK double tax treaties. The Government will circulate draft legislation for comment in the fall with a view to passing legislation in 2012.

• Bank Levy—There will be increases in the UK bank levy payable by UK-based banks and the UK branches of overseas banks from January 1, 2012. The new rates will be 0.078% for short-term liabilities and 0.039% for long-term liabilities.
• New Criteria for Investment Trust Companies—An investment trust company is a widely held quoted company which operates as a UK-based retail investment fund in corporate form. Investment trust companies have traditionally been faced with strict limitations on what they can invest in and strict rules mandating diversity of investment. The Government announced plans to liberalize these rules to allow investment trust companies to follow a wider range of investment practices.
• Amendments to the Offshore Funds Rules—The UK maintains rules which provide for a UK investor selling or redeeming its interest in an offshore fund to be taxed on income (at rates of up to 50%) instead of capital gains (at an 18% flat rate). An offshore fund can avoid these rules by becoming a "reporting fund," in which case any UK investors are taxed every year on any income of the fund (regardless of whether or not they have received it) but, in return, are only taxed on capital gains on a disposal of their units. At present, many offshore funds have found it difficult to become "reporting funds" because of issues over equalization arrangements and concerns as to whether frequent trading in certain investments constitutes income. The Government intends to introduce changes to the Offshore Fund Rules which, it claims, will deal with these issues.
• Tax Transparent Funds—The Government intends to introduce measures to create a type of UK tax transparent fund (i.e., no UK tax at fund level). The legislation will be introduced in 2012 and the Government will consult on this measure in June 2011.
• Passport System for UCITS—At present, there is a risk that a Luxembourg or Irish Undertaking for Collective Investment in Transferable Securities (UCITS) may be treated as being UK resident (and subject to UK tax at fund level) if it has a UK investment manager. The Government has announced that this will no longer be the case, so that a UCITS will not be resident in the UK for tax purposes if it is established and regulated in another European Economic Area state.
• Non-Domiciled Persons Rules—At present, individuals who are UK tax resident but domiciled overseas are obliged to pay UK tax only on UK-source income and capital gains unless they "remit" (broadly, bring in) the proceeds of any overseas income or capital gains into the UK. Individuals who have been resident in the UK for at least seven out of the last nine tax years are obliged to make an annual election for "non-dom" status and pay an annual flat fee of £30,000 (approximately $48,000). The Government has announced that it will be consulting about increasing this annual flat fee to £50,000 (approximately $64,000) for non-domiciled individuals who have been UK tax resident for 12 or more years. The Government will also consult about introducing a new statutory test of residence for individuals to replace the existing, highly ambiguous combination of case law and tax authority practice.
• Controlled Foreign Companies (CFCs)—These are, broadly, companies in low tax jurisdictions which are controlled by one or more UK companies. The present position allows the UK tax authorities to impute profits earned by CFCs back to their UK shareholders. The UK Government, as part of an initiative to prevent UK companies from moving out of the UK, has announced:

1. An intention to fully reform the CFC rules so that, generally, the attribution rules will apply only to the profits of CFCs which have been artificially diverted elsewhere. There will be a partial exemption for finance companies, resulting in a charge of only one quarter of the full rate of UK corporation tax. By 2014, this will mean that the effective tax rate for these companies will be only 5.75%. The Government will consult on draft legislation in May 2011 to take effect in 2012.
2. A series of interim reforms to include: an exemption for CFCs whose main business is patent exploitation where the intellectual property and CFC have little underlying connection to the UK, a three-year "holiday" from the rules for CFCs which only become UK CFCs because a foreign parent has been taken over by a UK group, and a de minimis exemption for profits below £200,000 (approximately $322,000).

• Foreign Branch Tax Exemption—UK companies will not generally be taxable on the profits of foreign branches except where they make election to make these profits taxable. The election, once made, will be irrevocable.

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