We hope you will enjoy this issue of our Tax Newsletter. Our purpose is to try and keep you abreast of topical UK tax issues which may affect you, your business, and/or your clients.
The publication of the draft provisions for Finance Bill 2017 is a major event for taxpayers and tax advisers as it provides a significant level of detail for the forthcoming fiscal changes from April 2017. Whilst these draft clauses are for consultation, in the main, the relevant policy decisions have already been taken and expected future payments of tax booked in the Government’s budget. It is now solely a matter of fine tuning the draft legislation before Parliament commences its debates later next year. Overall the Finance Bill follows on from the consultations published over the summer and consequently is the enactment of the proposed policies of the previous Conservative administration.
We have summarised below the main areas of interest in the Finance Bill 2017 for non-UK domiciled individuals and non-UK residents.
From 6 April 2017 UK residential property owned through certain non-UK structures will be brought within the charge to UK inheritance tax (IHT) regardless of the residence and domicile status of the ultimate owner. Any debt used to finance such property will itself be subject to IHT in the lender’s hands.
To the extent that shares (or other interests, including loans) in non-UK close companies and interests in overseas partnerships derive their value from UK residential property, from 6 April 2017 that value will be within the scope of IHT. Offshore ownership structures which have previously shielded the value of UK residential property ultimately owned by non-UK domiciled individuals (non-doms) from IHT, will be liable to the tax for the first time. IHT charges will potentially arise on the death of and following certain gifts made by non-doms as well as during the life of certain trusts established by them (‘ten year anniversary’ and ‘exit’ charges). This will be the case regardless of whether the individual is UK resident or non-UK resident. The legislation makes it clear that the new rules will override all double tax treaties unless tax is paid in the overseas treaty jurisdiction.
Close companies and partnerships
The following assets will be subject to IHT to the extent that their value is attributable to UK residential property:
Where the UK property is held indirectly via underlying companies and/or a partnership, interests whose value is less than 1% of the total value of an underlying company or partnership will be disregarded and the chain of indirect ownership broken.
Value subject to IHT and debts
Where an IHT charge arises on shares etc. under the new rules, the IHT liability will be calculated on the open market value of the shares (or other interest) to the extent that their value is attributable to UK residential property. In determining the value of an interest in a close company, the liabilities of the close company will be attributed to all of its property pro rata. The liabilities attributable to the residential property will be deductible in determining the value within the scope of IHT.
Under the original proposals, debts that related exclusively to the property were to be deductible when calculating the value for IHT purposes, unless the borrowing was from a connected party. In response to concerns that this could result in a double IHT charge, the Government’s solution contained in the legislation and other documentation published on 5 December 2016 is to treat any debt used to finance the acquisition, maintenance or repair of UK residential property as an asset subject to IHT in the hands of the lender, with look through provisions where the lender is itself a non-UK close company or partnership. Similarly, any security or collateral for such a debt will be within the scope of IHT in the estate of the provider of the security. Whilst this removes the potential for double counting, it would appear to defeat certain IHT mitigation options which the Government previously appeared to accept when the provisions relating to debts were revised in 2013. The application of these rules to debts, whenever created, seems unduly harsh and a restriction to debts created after 19 August 2016 (when an iteration of the provision was first announced), if not to those created after the Finance Act 2017, would be welcomed.
UK residential property
The rules will apply where the shares’ (or other interest’s) value is attributable to any UK residential property, whether that property is occupied or let and whatever the property’s value (subject to limited exceptions such as care homes). A property which is being constructed or adapted for residential use will be treated as UK residential property.
The rules will not apply to the extent that the asset’s value is derived from commercial property. It is to be welcomed that previous proposals to include a property which had had a residential use at any time in the last two years have been dropped. Rather, it will simply be the use of the property at the time that the IHT event arises that will be relevant. Legislation is still awaited for properties used for both residential and non-residential purposes.
Two year tail
Newly included in the 5 December 2016 draft legislation are provisions such that following sale of close company shares or partnership interests which would have been within the scope of the new IHT rules, or indeed repayment of a lender’s loan, the consideration received (or anything which represents it) will continue to be subject to IHT for a two year period following the sale or repayment. This appears to be a provision introduced to combat specific anticipated avoidance. However it will, as drafted, have a wider effect and give rise to an IHT charge in normal commercial situations even where UK residential property is no longer held. It should be noted that there is no such “tail” where it is the property itself, rather than the shares in the company which owns the property, which is disposed of.
Targeted anti-avoidance rule
Any arrangements the whole or main purpose of which is to avoid or reduce the IHT charge on UK residential property will be disregarded. This anti-avoidance provision is extremely widely drawn.
Proposals to impose a liability for any outstanding IHT charge onto the directors of a company which holds a UK residential property have been dropped following consultation. The Government is continuing to consider how to effectively enforce the extended IHT charge. It is difficult to see how this can be fully achieved.
Unwinding existing structures
There are no reliefs from other taxes, notably capital gains tax and stamp duty land tax, where existing property structures are unwound. Those considering alternative ownership options in light of the changes will need to fully understand the tax implications of so-called ‘de-enveloping’.
The new rules will apply to IHT chargeable events on or after 6 April 2017. Certain gifts made before that date may become liable to IHT where the donor dies on or after 6 April 2017.
From April 2017 non-UK domiciled individuals who are long-term UK residents will become deemed UK domiciled for all UK taxes, aligning the income tax and capital gains tax treatment with the current deemed domicile rules for inheritance tax.
In addition, individuals born in the UK with a UK domicile of origin who have acquired a non-UK domicile of choice elsewhere will be deemed domiciled in the UK once they return to the UK (returners).
How is deemed domicile defined post 6 April 2017?
Non-UK domiciled individuals will become deemed UK domiciled for all UK taxes once they have been resident in the UK for 15 of the previous 20 tax years.
The 15/20 test is based on the number of years that an individual has been resident in the UK, and will include years of residence in the UK where the individual was under the age of 18.
To determine whether or not an individual is resident in the UK in a particular tax year for the purposes of the 15/20 test, for 2013/14 and later tax years the statutory residence test (SRT) will apply. For tax years prior to 2013/14, an individual’s residence will be determined in accordance with case law rules and HMRC practice in force during the relevant tax year.
For the 15/20 test, any tax year which is a split year for the SRT will nonetheless be counted as a year in which the individual is UK resident.
Can deemed domicile status be lost?
An individual can lose their deemed-UK domiciled status for income tax and capital gains tax purposes if they become non-UK resident and remain non-resident for at least six consecutive tax years. However, an individual will only need to leave the UK and remain non-UK resident for four consecutive UK tax years to lose their deemed UK domicile for IHT purposes.
If an individual does break their deemed domicile status in this way but subsequently comes back to the UK, they will be eligible to claim the remittance basis until the 15/20 test is met once more, assuming they retain their non-UK domiciled status under general law.
What about ‘returning non-doms’?
Individuals born in the UK with a UK domicile of origin who have acquired a non-UK domicile of choice under general law will become immediately deemed domiciled for income tax and capital gains tax purposes if and for so long as they are UK resident after 5 April 2017.
However, there will be a grace period for IHT purposes only, designed to prevent such ‘returning’ individuals who only plan to stay in the UK for a short time from being unfairly impacted. For example, this should prevent such people from having to rewrite their Wills. Therefore, returning non-doms will not be treated as deemed domiciled in the UK unless they have been resident for at least one of the two years prior to the year in question.
The IHT changes for returning non-doms could have a significant impact on any non-UK structures which were established during a period of non-residency.
What are the consequences of becoming deemed domiciled?
Both UK resident individuals who are deemed domiciled in the UK under the 15/20 rule and returning non-doms will be subject to income tax and capital gains tax on their worldwide income and gains (respectively). The remittance basis will not be available to them, subject to the £2,000 de minimis below.
Foreign income arising and foreign gains realised prior to the tax year in which the individual becomes UK resident and deemed domiciled, in respect of which the remittance basis is claimed, will continue to be subject to UK tax only if they are brought to the UK. This will mean that ongoing care is needed in respect of funds from prior years which have not been subject to UK tax.
Going forward, a UK resident and deemed domiciled individual whose foreign income and gains (including foreign income and gains arising within any offshore companies/trusts and deemed to be theirs under the relevant UK anti-avoidance provisions) in a tax year do not exceed £2,000 and which are not brought to the UK, will not be subject to UK tax on those income/gains (no claim for the remittance basis will be required).
Whilst deemed domiciled in the UK an individual’s worldwide assets will be liable to IHT on certain lifetime gifts and, importantly, on death.
Do non-doms need to take any action before 5 April 2017?
While these deeming provisions were first announced in the 2015 Summer Budget, the draft clauses of Finance Bill 2017 were only published by the Government on 5 December 2016. Therefore, the challenge is for affected taxpayers to assess what these changes will mean for them prior to 6 April 2017, after when the remittance basis can no longer be claimed.
Non-doms need to:
Transitional arrangements will be introduced on 6 April 2017 to help non-UK domiciled UK resident taxpayers who have claimed the remittance basis for many years to adjust to paying their UK taxes on the arising basis for the first time. Such provisions include the facility to rebase offshore assets for capital gains tax (CGT) purposes and the ability to rearrange funds within overseas bank accounts to allow for remittances from overseas clean capital in priority to taxable income and gains, marking a significant shift in the current position.
However neither of these provisions will apply to ‘returning non-doms’ i.e. those individuals who were born in the UK with a UK domicile of origin who have since acquired a new foreign domicile of choice whilst non-UK resident, but who then become UK resident again post-6 April 2017. They will also not apply to assets held by non-UK trusts/companies on 6 April 2017.
The transitional arrangements are as follows.
Cleansing of mixed funds
Who can benefit?
Many non-doms have existing mixed funds where it would be beneficial to segregate out the various components of that fund. A common scenario is having a single bank account containing a mixture of capital, income and gains arising from different sources and spanning several tax years. Where these funds are held in a single account rather than segregating each source individually, this would constitute a mixed fund.
The new rules announced by the Government will enable any non-dom, who has been taxed on the remittance basis prior to 2017/18, to rearrange their mixed funds held in non-UK bank accounts to their consitutent parts eg the income, capital gains, and ‘clean’ capital elements. This includes those where the remittance basis applied without being claimed (for example when an individual’s foreign income or gains were less than £2,000 so the remittance basis applied automatically).
The Government have called this ‘unmixing’ of mixed funds “cleansing”.
In order to qualify for cleansing the non-dom does not need to have their mixed fund on 5 April 2017 (as was proposed by the Government’s August 2016 consultation document).
What is the impact of the cleansing of mixed funds?
The current remittance basis rules governing mixed funds (ie most commonly non-UK sited bank accounts consisting of a mixture of so called ‘clean’ capital, income and capital gains) dictate that taxable income and capital gains of a given tax year are treated as remitted before non-taxable ‘clean’ capital. The current rules also prevent the separation of these elements into different offshore accounts. Non-doms have therefore often found their offshore ‘clean’ capital ‘trapped behind’ other taxable amounts by the application of these rules, where appropriate account segregation has not been operated.
This transitional arrangement will be in place for the 2017/18 and 2018/19 tax years only and will apply to nominated transfers of money only from a mixed account to another account.
Individuals will, for example, be able to identify untaxed income in mixed bank account A, and transfer it into a new segregated income account B.
Being able to make these bank transfers will give non-doms the one-off ability to rearrange their overseas bank accounts. This will to allow them to remit any ‘clean’ capital from overseas which was previously trapped in a mixed fund in priority to taxable income and gains. Being able to do so will allow non-doms more accurately to manage their tax exposure when bringing monies to the UK and provides an incentive to invest in UK expenditure.
Do I need to make an election?
The two year window will be available to all non-UK domiciled individuals who have been taxed on the remittance basis at some stage prior to 6 April 2017.
No election is needed under draft legislation but the un-mixing of funds has to be nominated by the account holder. This is likely to mean that an account holder must give the relevant financial institution (eg their bank) the correct instructions in order for any transactions to have the desired UK tax effect. Non-domiciled taxpayers should therefore be wary of giving their bankers incorrect or unclear instructions, or of assuming that they will be able to benefit from this relief automatically without giving any written instructions at all.
Is there anyone who will not be able to benefit?
Individuals born in the UK with a UK domicile of origin are specifically excluded from benefiting.
Who can benefit?
Individuals becoming deemed domiciled on 6 April 2017 under the 15 out of 20 year rule will be able to benefit from rebasing of their foreign situated capital assets to their market value on 5 April 2017, for CGT purposes.
What is the impact of rebasing?
On a future sale of an asset triggering a gain within the charge to CGT, only capital gains accruing from 6 April 2017 onwards would be subject to CGT.
There will be no need to hold sale proceeds offshore to benefit from this protection.
Do I need to make an election?
Rebasing will apply to a disposal automatically unless the taxpayer makes an election for the rebasing not to apply.
Will rebasing apply to all foreign assets?
Rebasing will only apply to unrealised gains in directly held assets, ie it does not apply to assets held in wrappers like trusts and companies.
The rebasing only relates to capital gains subject to CGT, so certain assets such as so-called ‘non-reporting funds’ will be specifically excluded from the rebasing provisions.
Untaxed income/gains originally invested to acquire assets eligible for the rebasing will not benefit from protection under rebasing and a tax charge may still therefore arise if the disposal proceeds are remitted to the UK.
Rebasing will only apply to assets held on 5 April 2017 that have been non-UK situated at any time between the period starting on 16 March 2016 and ending on 5 April 2017. This is a concession in favour of the taxpayer granting more favourable conditions than were first announced and may provide an opportunity for rebasing of a wider class of assets than previously envisaged, eg non-UK sited assets could be appointed from a non-UK trust prior to 5 April 2017.
Specific rules have also been drafted concerning company reorganisations, where shares in one company have been received as consideration for a sale of shares in a different company. These are intended to ensure a consistent approach is applied across various holdings.
Are there any other conditions?
Rebasing will only apply for individuals who have paid the remittance basis charge in any year before 5 April 2017 and who become deemed domiciled under the 15 out of 20 year rule on 6 April 2017.
Individuals who elect for rebasing not to apply to a disposal will be able to make the election within the period ending four years after the end of the year of disposal. Once made, the election is irrevocable.
Is there anyone who will not be able to benefit?
Treatment of non-UK trust income and capital gains
The Government has settled on a new regime that will give a ‘protected’ status to offshore trusts made before, and not added to after, an individual becomes deemed domiciled, with settlors being charged to income tax and capital gains tax on benefits and capital payments received.
The UK tax regime applying to non-UK settlements and corporate structures from 6 April 2017 will be as set out below.
Capital gains tax – protected trusts
There will be a ‘protected trust’ regime so that capital gains of a non-UK trust will not be attributed to a UK resident settlor becoming deemed domiciled in the UK under the 15 out of 20 year rule. The protections will continue to apply provided the settlor makes no direct or indirect additions to the trust on or after the date at which they become deemed domiciled in the UK. The settlor of a protected trust will instead be taxed under the ‘capital payments’ regime set out below. Protected trust status will not apply to a settlor resident and deemed domiciled in the UK under the ’returning domicile’ rule, and therefore these individuals will have trust gains attributed to them for years in which they are resident in the UK.
In considering whether trust protection is maintained, additions to trusts will be disregarded if these are made on arm’s length terms or where a settlor meets trust expenses that are in excess of its income for a tax year.
Capital gains tax – capital payments regime
Capital gains arising to protected trusts will be taxable in accordance with the existing rules that match trust capital gains to capital payments received by beneficiaries. These rules will be reformed for all non-UK trusts from 6 April 2017, irrespective of the domicile status of the settlor.
As under current rules, trust capital gains will be matched to capital payments received by beneficiaries and taxed on them accordingly. Any beneficiary domiciled or deemed domiciled in the UK will be taxed on the matched capital payment on the arising basis.
There are some refinements to the rules that will apply from 6 April 2017:
Non-UK income of a non-UK trust and its underlying companies will not be treated as arising to the settlor. Instead the income will only be treated as the settlor’s if he or a close family member receives a benefit from the trust, and the close family member is not already taxed on the benefit under existing rules. This would suggest that a UK resident beneficiary not claiming the remittance basis in respect of the benefit would be charged to tax on the benefit in priority to the settlor.
A deemed domiciled recipient of a benefit will be taxed on the arising basis.
UK income of the trust and its underlying companies will be taxed on the settlor on the arising basis.
It is expected that this treatment will only apply for so long as the trust is ‘protected’ (i.e. no additions to the trust on or after the time that the settlor becomes deemed domiciled). This point will be confirmed when legislation is available.
These new rules do appear to present an opportunity for such trusts and underlying companies to use non-UK income to invest in and meet expenses in the UK without any tax consequence for the settlor or other beneficiaries, provided there is no benefit to these individuals from this use of the income. However, income arising from such investments would be taxable on the settlor.
UK and non-UK income of a non-UK company not owned through a trust will be taxable on a deemed domiciled individual who set up the company on the arising basis.
Close family members
For both the income and CGT rules close family members will be the settlor, spouse or civil partner of the settlor (or those living with the settlor as such), and the minor children of all of the preceding categories.
Valuation of benefits
New rules are proposed to fix the valuation of non-cash benefits received from trusts. These benefits would include use of assets or provision of loans at beneficial rates of interest. These rules are proposed to provide certainty of treatment but may produce higher tax costs than some of the current methods of valuation which are based on practice and case law.
Business Investment Relief (BIR) will be reformed from 6 April 2017 with the objective of making the BIR scheme more attractive to non-UK domiciled investors.
BIR was introduced in 2012 permitting non-UK domiciled individuals to remit funds to the UK for qualifying investment purposes without otherwise creating a taxable remittance.
From 6 April 2017, BIR will be extended to include investments made in a new qualifying entity, a “hybrid company”. Broadly this is a company which is not exclusively a trading company or a stakeholder company (a company investing in trading companies), which qualifies under the established BIR rules, but rather is a hybrid of the two.
At the same time, for a BIR investment to qualify, the period during which an eligible trading company must start to trade, an eligible stakeholder company must start to hold investments in eligible trading companies, or a hybrid company must similarly qualify as such, will be increased to five years.
Where a company becomes non-operational and a BIR investment ceases to qualify, the grace period during which action must be taken to manage the risk of a tax charge otherwise arising will be increased to two years from the date the investor became aware of the fact the company is not operational.
Another extension to BIR sees acquisitions of existing shares already in issue potentially qualifying for BIR from 6 April 2017; there will be no requirement for shares to have been newly issued as was previously the case.
Rules which withdraw BIR will be narrowed such that they will only apply where an individual (or relevant person) receives value from any person in circumstances which are directly or indirectly attributed to the investment. This removes the provision whereby any value received from an involved company, even where such value is not attributed to the individual’s investment, could otherwise see BIR withdrawn.
Finally, BIR continues to be denied in respect of investments made in partnerships. Although HMRC policy has been to deny BIR claims in connection to investments made in corporate partners of partnerships, the legislation has been expanded to now explicitly exclude corporate partners from the BIR rules.
HMRC have stated their intention to continue reviewing other potential reforms proposed as part of the consultation, with a view to further extending the application of BIR in the future.
The “Requirement to Correct” (RTC) and the associated new “Failure to Correct” (FTC) penalties potentially apply to anyone with historic unpaid UK tax liabilities relating to overseas assets, for example, UK resident and domiciled individuals, UK resident non-UK domiciled individuals and offshore trustees. It applies equally to those who have deliberately evaded tax and those who have failed to pay the correct amount of tax through a careless error.
Summary of proposal
The Draft Finance Bill 2017 includes a new “requirement to correct” historic offshore tax evasion and non-compliance. It introduces a new obligation for taxpayers to ensure that undeclared UK tax liabilities in respect of offshore interests relating to all periods up to and including 5 April 2017 are fully disclosed to HMRC before 30 September 2018. Liabilities in respect of income tax, capital gains tax and inheritance tax are within the scope of RTC.
The end date of 30 September 2018 corresponds with the date by which all countries committed to the OECD’s Common Reporting Standard (CRS) will be exchanging data with HMRC.
Taxpayers who fail to correct historic errors in the ‘RTC period’ (6 April 2017 to 30 September 2018) face much tougher new penalties for their ‘Failure to Correct’ (FTC). FTC penalties include:
These new penalties are far harsher than any chargeable under present legislation.
The only defence for those who fail to correct liabilities in the RTC period is a ‘reasonable excuse’ for not meeting the obligation. The scope of ‘reasonable excuse’ will be based on existing provisions in law, and the draft legislation seeks to clarify in which circumstances taxpayers can and cannot rely on tax advice they have received as a reasonable excuse for not having corrected their tax affairs during the RTC period.
The method that taxpayers will use to make corrections will depend on their circumstances. For example, corrections can be made by submitting outstanding tax returns, by delivering information to HMRC through an enquiry or another method agreed with an officer of HMRC, or by using an existing method for disclosure (for example the Worldwide Disclosure Facility (WDF) – see below - or the Contractual Disclosure Facility (CDF) which might be more appropriate for more serious cases).
In order to prevent tax falling out of assessment during the correction period, and to give HMRC a reasonable period to take action after the end of that period, RTC introduces extensions to existing assessment periods. This will mean that any tax that is potentially assessable at 6 April 2017 will remain assessable until at least 5 April 2021.
Key Changes since previous proposals
The provisions of the Draft Finance Bill 2017 contain a number of key changes from the consultation document released in August 2016. The key changes are:
The ‘RTC period’ runs from 6 April 2017 to 30 September 2018. Taxpayers are required to correct all offshore tax non-compliance issues that exist for all periods up to and including 5 April 2017, and taxpayers will have until 30 September 2018 to make any correction required.
If you require any further information or advice with regard to the above changed for non-doms and non-UK residents, please contact Justine Howard or Gregory Jones.
HMRC have announced a new Worldwide Disclosure Facility (WDF) to enable those who may be affected to come forward to settle their tax affairs. This was launched on 5 September 2016.
The WDF requires the disclosure of UK tax liabilities that relate wholly or partly to an offshore issue and requires:
The WDF provides no immunity from prosecution, and is not the only way to make a disclosure to HMRC.
Please contact Justine Howard for more detail in this area.
HMRC issued a consultation to tackle offshore tax evasion on 5 December 2016.
This consultation sets out HMRC’s intention to introduce a new legal requirement for businesses creating or promoting certain complex offshore financial arrangements. These businesses will be required to notify HMRC of the details of the arrangement and provide a list of clients using them.
Although certain arrangements are utilised legitimately, the new requirement is to target those utilising such arrangements for tax evasion purposes.
Please see a link to the consultation, which will remain open until 27 February 2017.
Proposals for sanctions to be imposed on the Enablers of Tax Avoidance were published for consultation in the summer. The proposals recommended tax-geared penalties for those involved in the ‘chain’ of tax avoidance where that tax avoidance is defeated. It caused a raft of concerns across the profession due to the broad definitions of ‘enabler’ and ‘tax avoidance’ (which included DOTAS arrangements and transactions ineffective due to any anti-avoidance provision). Further it proposed that a defeat would be triggered when a taxpayer settled or otherwise agreed that the tax advantage did not arise. The initial proposals included little in terms of safeguards and were silent on transitional provisions meaning concerns were raised that the proposals could impact on historic behaviour.
A response document was published alongside the draft Finance Bill. In brief, the sanctions should now only apply to ‘abusive’ transactions and the draft legislation adopts the wording of the GAAR in this respect. The other proposals for sanctions to apply to DOTAS arrangements, Follower Notices, and transactions that fail due to an anti-avoidance rule have been dropped.
The sanctions will still apply where a taxpayer settles or agrees that the relevant tax advantage does not arise (as opposed to only applying after a matter has been litigated). However, the more focussed scope should help allay the vast majority of the concerns in this respect. The legislation also confirms that the measures will only apply to arrangements entered into after Royal Assent and the financial penalties will now be fee-based rather than tax-geared.
Overall the revisions to the proposals mean the sanctions will now be focussed on the actions of those involved in abusive schemes leaving reputable advisers free to continue providing legitimate advice on commercial transactions.
HMRC has issued guidance on the additional IHT nil-rate bank available for a deceased individual’s residence inherited by direct descendants on or after 6 April 2017, where the estate is worth not more than £2m. An estate will also be entitled to the additional nil-rate band where an individual has downsized, sold, or given away their home after 7 July 2015.
Please see the link for further information with regard to this guidance.
This case concerned an application from the taxpayers for the closure of HMRC enquiries into their Stamp Duty Land Tax (“SDLT”) returns in respect of a marketed tax arrangement which was similar to Project Blue. Due to the large number of clients who had entered into these arrangements, and the homogenous nature of the transactions, HMRC agreed in writing with the promoter that they would only request information and documentation from a sample of the taxpayers involved. If a taxpayer who had not provided information asked for a closure notice, HMRC would go to tribunal to request further time to obtain this information.
Following the First-tier Tribunal (“FTT”) decision in Project Blue, HMRC wrote to a number of taxpayers with a ‘Settlement Invitation’ that set out HMRC’s view that the tax arrangements in question did not work, and inviting the taxpayers to settle. The letter stated that if they did not settle, then they would need to provide a number of documents to HMRC to allow the case to be taken to tribunal, and gave them 30 days to provide all of the requested documents. The taxpayers in this case did not provide the information requested, and applied for closure notices. HMRC refused to issue closure notices on the basis that the information had not been provided.
The taxpayers took their case to the FTT, setting out their view that the Settlement Invitation letters from HMRC set out HMRC’s position to the point that a closure notice could be issued, and since the enquiries had been open for five years, that HMRC had enough information to close the enquiries without requiring further information from them.
The FTT criticised the letters from HMRC as “ill-drafted”, giving the impression that HMRC had sufficient information to close the enquiries. However, given that the taxpayers were being advised by the promoter and therefore would be aware of the agreement made at the sampling stage, they concluded that the taxpayers would be aware that they had not provided sufficient information to close the enquiries, and therefore their application for closure notices were rejected. The FTT also said that they had “no jurisdiction to set a time frame for closure pending the requested disclosure”. What this means is not entirely clear, but it appears to suggest that the Tribunal can only set a fixed period (under Sch 18 para 33(1), not a period which is conditional or dependent on the provision of information by the taxpayer.
We have seen a number of cases recently which consider what constitutes a closure notice. HMRC began using 'nudge' techniques in 2012, trying to persuade taxpayers to drop their tax avoidance schemes by issuing Settlement Invitation letters like the one in this case. HMRC did not foresee the risk that these would damage their position and we would therefore expect HMRC to more carefully word their correspondence with taxpayers in the future.
Draft legislation contained within the Finance Bill 2017 deals with four specific issues identified by the Chancellor as part of the 2016 Budget - changes to tackle the continued use of disguised remuneration (“DR”) arrangements, changes to introduce a charge on loans made prior to the introduction of the DR rules on 9 December 2010, transferring the liability to employees in certain cases, and extending the DR legislation to self-employed persons.
Continued use of schemes
The proposals cover the following:
When the DR provisions were introduced in 2011, a decision was made by HMRC to grandfather loans made prior to 9 December 2010. The Finance Bill 2017 contains clauses that will introduce a new loan charge from April 2019 to tax such loans.
In summary, if such a loan is outstanding as at 6 April 2019, and the loan was made after 5 April 1999, the full amount outstanding on 6 April 2019 will generally be taxed at that time. Relief will be available for cases where the employer has settled PAYE and NIC on or about the time of contribution (e.g. under the Employee Benefit Trust (“EBT”) settlement opportunity) and as a consequence the loan amount will already have effectively been taxed.
Transfer of liability
Draft legislation will see an extension to HMRC's powers to pursue the employee rather than the employer when a DR arrangement is used. HMRC believe that the current rules need supplementing in cases including the following:
Extension to self-employed persons
The Finance Bill also sees the introduction of a self-employed loan charge, similar to the one proposed for employee loans. This will apply to loans previously made to self-employed individuals and which are wholly or partially outstanding as at 5 April 2019. HMRC say that they are keen to put beyond doubt that schemes under which taxable receipts by self-employed persons (and members of partnerships) are converted into non-taxable amounts, or which seek to match a taxable receipt with a deduction for purported business expenses which are in reality a diversion of earnings, do not work.
An Employment Tribunal has decided that two Uber drivers are 'workers' for the purposes of the Employment Rights Act 1996. The distinction between employees, workers and the self-employed is not always straightforward, involving detailed questions of fact about what and how people do their job 'on the ground'. However, it is a really important distinction because it determines entitlement to a number of important statutory protections. Whilst employees are the most protected categories, workers are entitled to significantly more protection than the self-employed. It is this which makes this decision important not just to Uber, but to other 'gig' economy and other employers who use large numbers of 'contracted', non-employed staff.
In particular, the decision gives Uber drivers entitlement to:
As workers, Uber drivers do not benefit from the protection of unfair dismissal and redundancy legislation (amongst other things), but it is important to note that is not what they were claiming.
This decision has been eagerly awaited and will be of concern to the large number of employers who use non-employment methods of engaging with their staff to give them flexibility, and perhaps more relevantly, workforce costs savings. Entitlement to protection from the Working Time Regulations and National Minimum and Living Wage legislation in particular, is likely to significantly add to payroll costs and require a review of working practices. In respect of the latter, the definition of what amounts to working time will make these models less flexible and more expensive.
All of that said, it is important to note that this is a First-tier Employment Tribunal decision and will undoubtedly be appealed by Uber. It is therefore likely that most employers will continue to watch the case progress but will not do anything differently in the short-term. It is also fact specific to Uber drivers, although as the case progresses more general principles are likely to emerge.
The Uber ruling is significant and comes alongside wider Government scrutiny around employment status, which has seen the following recent moves:
The Uber case highlights the ever increasing scrutiny to which the employment status of workers is now subject. Moving beyond fundamental questions of tax and employment law compliance, this is an issue which is now rapidly assuming critical importance for businesses and individuals from a socio-economic perspective. We will watch with interest to see the wider ramifications of this ruling both in the UK and elsewhere in the world, for those businesses which operate similar business models.
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