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.
Following over 18 months of uncertainty, non-UK domiciled individuals (non-doms) were expecting their UK tax position from 6 April 2017 in relation to income tax, capital gains tax (CGT) and inheritance tax (IHT) to be as set out in Finance Bill 2017 published on 20 March 2017. However, the calling of the snap General Election resulted in various clauses of the Bill being removed before Royal Assent on 27 April 2017. This included the new rules for non-doms and IHT on UK residential property owned through certain non-UK structures. Those affected are now facing yet more uncertainty as to whether the new rules will be brought into effect by the next UK Government in the form anticipated and, if they are, whether the effective start date will be 6 April 2017 as originally planned, 6 April 2018 or potentially some date in between (or perhaps an even later date).
Those now facing uncertainty as to their UK tax position include:
• UK residents who were to become deemed domiciled on 6 April 2017;
• non-doms with offshore mixed funds;
• non-dom individuals and trusts holding UK residential property through non-UK companies;
• non-doms who were looking to bring funds to the UK under the Business Investment Relief scheme; and
• the trustees of certain non-UK trusts.
Those affected will have to wait until the results of the General Election are known and for the new Government to publish the next Finance Bill, or at least release a statement setting out their intentions, before the tax results of certain actions can be known with any certainty. In the meantime, if commercially possible, those impacted should continue to take stock of their current position, ensure their records are in order and wait a little longer. Where that is not practical, steps should be taken to quantify the risks of the different options now available.
In a continuation of the trend of greater tax transparency, which combines the UK Government’s obligations under the Fourth Money Laundering Directive (4MLD) with HMRC’s move towards digitalisation, the Government is introducing a new Trust Register. In future, trustees will be required to comply with reporting regulations via an online Trusts Register. Unlike the People with Significant Control (PSC) beneficial ownership register for companies, the Trust Register will not be open to the public. It will only be available to law enforcement bodies and the UK Financial Intelligence Unit. There will also be a requirement for trustees to disclose their status as a trustee when entering in to business relationships.
As expected the Government has now published documents providing further information about this proposal. These documents include:
• a draft Statutory Instrument implementing 4MLD which is due to come into force on 26 June 2017; and
• the Government’s response to the consultation on 4MLD.
This will be an online Government register, which will apply to UK trusts. It will also apply to non UK trusts which receive income from a source in the UK or have assets in the UK on which there is a UK tax liability (this includes IT, CGT, IHT, SDLT or SDRT).
Trustees will need to update the register for each year that a trust generates a UK tax consequence. They will be required to file various details such as the identity of the settlors, trustees and all other persons exercising effective control over the trust (if any) and the beneficiaries or a class of beneficiaries. The draft proposal also includes a requirement to provide a statement of accounts for the trust, describing the trust assets and identifying the value of each category of the trust assets (including the address of any property held by the trust).
For trusts in existence at that time, the first filing deadline will be on or before 5 April 2018. For trusts created after on or after 6 April 2018, the first deadline for filing will be the date on which the trustees first become liable to pay UK taxes. There will be an annual requirement before 5 April each year to either inform the Government of any changes or to provide notification that there have been no changes. For new trusts, a new online form (41G) will be available from June 2017.
The Government has provided further information within HMRC Trust and Estates Newsletter April 2017 which can be found here.
Although the rules are still in draft form and there could still be changes to some of the details, it is anticipated that the statutory instrument will come into force on 26 June 2017. This is a significant change in reporting requirements for trusts.
It should be noted that the Government has also recently published further details of the public register of the beneficial owners of overseas entities owning UK properties (see below).
Over a year ago the UK Government published a consultation on proposals to create a public register of the beneficial ownership of overseas companies holding real estate in England and Wales, as well as requiring foreign companies wishing to bid on a contract with the UK government to identify their beneficial owners. Further detailed plans have now been published in a Call for Evidence on a Beneficial Ownership Register of overseas companies or other legal entities that own or buy UK property or participate in UK central government procurement.
Key elements of the proposal include that:
• all overseas legal entities that hold property or that can bid on central government procurement contracts will be within the scope of the new regime;
• the Government will apply rules similar to those under the PSC regime with regard to identifying beneficial owners, what reasonable steps an entity should take to do so and the required particulars that must appear on the publicly available register. Criminal sanctions will apply in respect of a number of failures to comply with the new regime;
• overseas entities that own or wish to acquire UK property must supply beneficial ownership information to Companies House and apply for a registration number. Registration of title to property will not be possible without that number. Overseas entities that already own UK property will have 12 months to comply and obtain a registration number. A restriction prohibiting the sale, long lease or legal charge of property where the overseas owner is not fully compliant with the overseas register requirement will appear on the title register;
• the registration requirement will apply to freeholds and well as leases where the initial term is at least 21 years; and
• information on the overseas register should be updated at least every two years and it will be an offence to fail to do so.
Any companies, or certain other corporate entities, that own a UK residential dwelling (enveloped dwelling) valued over £500,000 fall within the Annual Tax on Enveloped Dwellings (ATED) regime. An ATED return should be submitted to HMRC annually whether tax is payable or relief is claimed. To comply with the rules, enveloped dwellings must be revalued every five years - and a new valuation date occurred on 1 April 2017. These required revaluations will have effect for the five chargeable periods beginning on 1 April 2018. This applies to all properties owned at that date, even if acquired within the last five years.
Enveloped dwellings not in the regime (because they were worth less than £500,000 before the last valuation date) may enter the ATED regime next year. Some dwellings in the regime near the threshold could be tipped into the next tax band resulting in a higher tax charge for the next five years. As well as the five-yearly revaluation, certain other events can also cause dwellings to be revalud; eg acquisitions and practical completion of new builds. For the purposes of ATED, dwellings include buildings that are in the course of construction or adaptation for residential use.
Companies may not have filed an ATED return to date because none of the dwellings they own were valued over £500,000 at the last valuation date. For dwellings owned before 1 April 2017, companies may wish to consider revaluing dwellings before the filing date for the next ATED year (30 April 2018) where the value of the dwelling at 1 April 2017 might cause the dwelling to enter the regime or a higher tax band.
|Property Value||Annual Charge*|
|More than £500,000 but not more than £1m||£3,500|
|More than £1m but not more than £2m||£7,050|
|More than £2m but not more than £5m||£23,550|
|More than £5m but not more than £10m||£54,950|
|More than £10m but not more than £20m||£110,100|
|More than £20m||£220,350|
*Charges increase in line with inflation
A recent First Tier Tribunal (“FTT”) case is a reminder that using a small transaction to confirm with HM Revenue & Customs (“HMRC”) that a UK national with a UK domicile of origin has acquired a domicile of choice overseas in one year does not provide confirmation that the individual has maintained their non UK domicile status in future. In this case a transaction putting offshore funds into a trust, the amount of which was slightly higher than the Inheritance Tax (“IHT”) nil rate band, that would otherwise trigger a small IHT liability at that time was confirmed by HMRC in 2003 as not subject to IHT as settlor was a non-UK domiciled at that time. However, this was not a binding contract and did not preclude HMRC from opening an enquiry into a later tax year or querying the taxpayer’s domicile status.
The point at issue was not domicile status itself, but whether HMRC were bound by a conclusion reached in a particular tax year. This approach is reflected in HMRC's Residence, Domicile and Remittance Basis Manual. RDRM23040 states:
“HMRC may have given, at a particular time or times, its opinion about an individual’s domicile. Any opinions offered could well, to a great extent, have been based on the information given by the individual about his or her intentions at that time. If the individual did not take the steps that he or she said would be taken, HMRC is entitled to argue that its opinions had, thereafter, little or no continuing relevance to the individual’s UK tax liabilities.”
In recent years there have been a number of changes to the taxation of non-resident companies. These include the introduction of the Annual Tax on Enveloped Dwellings (ATED) in 2013, the introduction of non-resident capital gains tax (NRCGT) on the disposal of UK residential property interests by certain non-residents, and bringing into the corporation tax (CT) regime non-resident companies which carry on a trade of dealing in or developing UK land. As well as changes for non-resident companies, there are significant changes on the horizon for the wider CT regime, including legislation to limit the deductibility of interest expense, reform of the CT losses regime, and the lowering of the CT rate to 17% from 1 April 2020. Against this backdrop of changes, the Government are consulting on proposals to move certain non-resident companies from the income tax regime into the CT regime, to ensure parity of treatment between resident and non-resident companies in areas such as interest deductibility.
The proposal, as set out in the consultation document which can be found here, would bring certain companies with UK source taxable income from real property within the CT regime, the Government’s reasoning being that to introduce interest restriction and loss reform for non-resident companies by amending the income tax rules would involve significant changes. The following potential issues have been identified in the consultation document:
• Accounting periods – a non-resident company brought into the CT regime for the first time would have its accounting period begin on the first day on which it came into the charge to CT (6 April of the relevant financial year) with a deemed cessation of the UK property business for income tax purposes. Companies already within the CT charge will have their CT accounting period remain unaffected, with a ‘just and reasonable’ apportionment of the UK property income. In both scenarios, the Government also wishes to avoid the creation of balancing charges and allowances for capital allowances purposes.
• Computation of UK property business profits – the computational rules for income tax are very different to the rules for CT, including the taxation of interest and derivatives and the use of losses.
• CT loss reform – the CT loss reform rules will apply to non-resident companies in the same way as they are expected to apply to UK-resident companies, but will not apply to losses that arose before the UK property business came within the scope of CT. These losses will be available to be carried forward and offset against future income from the property business without restriction.
• Interest restriction – the interest restriction rules would apply in the same way to a non-resident company as they would to a UK-resident company, to ensure fairness of treatment.
• Disregard Regulations – these will apply in the same way to non-resident companies brought within the CT regime.• Management expenses – relief for these will only be given to the extent that they are directly linked to the taxable UK source income, with unused property losses extinguished when the UK property business ceases.
The Government’s plans do not currently include bringing income arising from a trade carried on in the UK otherwise than through a permanent establishment into the CT regime, as this is understood to only apply to a small number of non-resident companies, and bringing this income into the regime would cause much uncertainty for little practical benefit – however, the Government has stated that it will keep this area under review.
The Government also plans to bring NRCGT gains into the CT regime, with the existing computational rules remaining largely the same, but the consultation does not include plans to bring other gains into the CT regime. The consultation also indicates there are no plans to change the current practice in respect of deduction of income tax on interest and other payments.
The consultation is silent on whether or not there will be a requirement for iXBRL tagging of accounts.
The consultation is open for comment until 9 June 2017.
Starting from 6 April 2017, new rules are coming into force dealing with how individual landlords renting out residential property obtain relief for finance costs (e.g. mortgage interest). The transition will occur over the tax years 2017/18 to 2019/20, inclusive. Broadly speaking, the new rules mean that landlords will no longer be able to deduct all their finance costs from their gross property income before calculating their tax liability. Instead, they will have to work out their tax liability (without any deduction for finance costs) and then deduct an amount from their tax liability equal to 20% of their finance costs.
How will it impact taxpayers?
While this may sound like semantics it does in fact have some very real consequences:
• Under the current rules taxpayers effectively get tax relief on their finance costs at their marginal rate. So for example, a higher rate (40%) taxpayer paying £100 of mortgage interest per annum effectively gets tax relief of £40. Under the new rules, however, the relief will be restricted to £20 (ie 20% of £100).
• Aside from the fact that the rate of relief will be lower under the new rules, the manner of calculating the tax is changing as outlined above. Under the current rules, a taxpayer with £300 of rent and £100 of finance costs has a net profit of £200. That net profit of £200 is then allocated to a tax band to determine whether it should be taxed at 20%, 40% or 45%. Under the new rules it will be the gross income of £300 which will be allocated to tax bands to work out the tax. Once the tax is calculated, relief will then be granted for finance costs of £20 (ie 20% of £100). The key point though is that it is the £300 and not the £200 which is treated as taxable income under the new rules.
• This means that even some basic rate taxpayers could find that they have more tax to pay under the new rules – generally those who are close but below the higher rate threshold (currently £32,000 ignoring the personal allowance). Under the new rules their taxable income could be pushed up over the threshold making them higher rate taxpayers.
• The same rationale will also mean some taxpayers see their personal allowance and/or their pension contribution allowance curtailed as their taxable income is pushed up over the relevant threshold.
• And yet other taxpayers still could see their entitlement to tax credits and child benefit reduced or eliminated as their taxable income breaches those thresholds.
In all cases, however, and this is particularly relevant for the last group, the taxpayer is not economically better off even though their taxable income indicates otherwise. In fact most, if not all of them, will be worse off due to the increased tax liability.
What are the transitional rules?
As mentioned above, the new rules are being phased in from 2017/18 through to 2019/20 as follows:
|Tax Year||Percentage of finance costs deductible from rental income||Percentage of basic rate tax reduction|
|2017 to 2018||75%||25%|
|2018 to 2019||50%||50%|
|2019 to 2020||25%||75%|
|2020 to 2021||0%||100%|
As the table shows, each year the rules get closer and closer to their final state so every year between now and 2020/21 more taxpayers will be caught by the issues listed above.
Who is impacted?
The new rules only apply to individuals who own residential property. Landlords who own commercial properties or furnished holiday lettings are not affected, neither are companies holding residential property.
Following the recent trend of 'gig economy' cases, in Pimlico Plumbers Limited and Another v Smith, the Court of Appeal has held that despite being self-employed for tax purposes, the Respondent, Mr Smith was a worker and his working situation fell within the definition of ‘employment’ in the Equality Act 2010 (“the EA”) during the period that he worked for Pimlico Plumbers Limited (“Pimlico Plumbers”). This entitled Mr Smith to bring claims in respect of discrimination, holiday pay and arrears of pay.
Mr Smith, a plumber, entered into an agreement with Pimlico Plumbers. He accounted for his own income tax, VAT and social security contributions as if he was self-employed, and provided all his own tools, equipment and materials for performance of the work. Mr Smith could reject particular jobs and Pimlico Plumbers had no obligation to provide him with work.
When Pimlico Plumbers terminated Mr Smith’s agreement he brought claims for unfair dismissal, wrongful dismissal, entitlement to pay during medical suspension, holiday pay, arrears of pay, direct disability discrimination, discrimination arising from disability and failure to make reasonable adjustments, which, as a self-employed individual, he would not have been entitled to bring.
At first instance it was held that Mr Smith was not an ‘employee’. However, it was held that Mr Smith was a ‘worker’, in particular, because:
• Mr Smith was required to provide work for Pimlico Plumbers personally. There was no 'unfettered' right to provide a substitute (only job-sharing or shift swapping was allowed); and
• Pimlico Plumbers could not be considered to be a client or customer of Mr Smith's business but was better regarded as principal.
This meant he was entitled to bring claims of direct disability discrimination, discrimination by reason of failure to make reasonable adjustment and holiday pay.
Pimlico Plumber's appeal to the Employment Appeal Tribunal was dismissed, so they brought a further appeal in the Court of Appeal.
The Court of Appeal agreed that Mr Smith was a worker and stated that this case "puts a spotlight on a business model under which operatives are intended to appear to clients of the business as working for the business, but at the same time the business itself seeks to maintain that, as between itself and its operatives, there is a legal relationship of client or customer and independent contractor rather than employer and employee or worker".
The key points to take away are that:
• while certain factors will point away from employee status, other factors will point towards worker status eg:
– onerous restrictive covenants adversely impacting on an individual’s ability to work privately or for other companies;
– personal service and no ‘unfettered’ right to provide a substitute;
– minimum working hours required; and
– the company exerting such a level of control over the individual that they cannot be regarded as their customer or client.
• there can be a difference between an individual’s employment law and tax status (although one is likely to be a factor in assessing the other); and
• it is important to ensure that the contractual documentation reflects the reality of the relationship between the parties.
For a transfer payment from a registered pension scheme to be an authorised payment it must be paid to another registered pension scheme or to a qualifying recognised overseas pension scheme (QROPS). A QROPS must meet certain conditions (which confirm that the scheme is broadly similar to a UK registered pension scheme) and must undertake to provide information to HMRC when benefits are paid to members who have transferred from the UK. The Government announced at Spring Budget 2017 that certain transfers to and from QROPS requested after 8 March 2017 will be subject to a new 25% tax charge – the overseas transfer charge.
Transfers from registered pension schemes
For overseas transfers from a registered pension scheme requested after 8 March 2017 the overseas transfer charge applies if none of these conditions is met:
1. the member is resident in the same country in which the QROPS is established;
2. the member is resident in a country within the European Economic Area (EEA) and the QROPS is established in a country within the EEA;
3. the QROPS is set up by an international organisation for the purpose of providing benefits for or in respect of past service as an employee of the organisation and the member is an employee of that international organisation;
4. the QROPS is an overseas public service pension scheme and the member is an employee of an employer that participates in the scheme; and
5. the QROPS is an occupational pension scheme and the member is an employee of a sponsoring employee under the scheme.
The overseas transfer charge will also be payable if the member has not provided the scheme administrator with all the required prescribed information before the transfer is made.
Onward transfers from QROPS
The overseas transfer charge will also apply to onward transfers from a QROPS or former QROPS to another QROPS if it is made in the same tax year as the original transfer or any of the five subsequent tax years.
Transfers that were not originally caught can be subject to the overseas transfer charge. If at the time of the transfer conditions 1 and 2, above, are met but after the transfer circumstances change so that neither of these conditions are met, the overseas transfer charge will arise. This will apply if the circumstances change within the tax year of transfer or any of the following five tax years. However, the reverse is also true, ie a refund of the overseas transfer charge may be available where the scheme member’s circumstances have changed so that the pension transfer now isn’t subject to the overseas transfer charge. This will happen if the scheme member hasn’t claimed a refund in respect of that pension transfer and within 5 tax years of the transfer to which the overseas transfer charge applied.
When has a transfer request been made?
A transfer request has been made when the member has received a cash equivalent transfer value and has asked the scheme to make a transfer of all or part of the quoted amount to a named overseas pension scheme. So the new rules apply to any individuals who had requested a cash equivalent transfer value prior to 9 March 2017 but had not yet asked the trustees to make the transfer payment.
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