The tax is aimed at countering the use of aggressive tax planning techniques used by large (typically multinational) enterprises to divert profits from the UK resulting in the erosion of the UK tax base.
It is clear that the social housing sector is not a target of this new legislation. However, charities are not excluded and, as the legislation currently stands, could be caught by the wide ranging provisions. The legislation does not exclude UK-UK transactions, although such transactions are also not a target.
The DPT covers two scenarios. The first is concerned with foreign companies with a permanent establishment in the UK. The second scenario looks at companies which are creating tax advantages by undertaking transactions with connected parties that lack economic substance.
On the face of it, this would not appear to be the case with most transactions in social housing groups. However, the legislation does not have the usual anti-avoidance motive test and will catch a transaction if it results in a mismatch where there is a tax deduction in one entity with no corresponding taxable income in another, giving an overall reduction in tax payable. The legislation also states it doesn’t matter if this tax reduction is created by the operation of a relief, the exclusion of any amount from a charge to tax or otherwise.
This would seem to catch a gift aid deduction and its tax-free receipt by the charity.
For the DPT to apply, there would also have to be insufficient economic substance. This is defined as “a comparison of the financial benefit of the tax reduction with any other financial benefit referable to the transaction for the parties taken together”. It is not entirely clear whether a gift aid payment would fall within this wording, but it is difficult to get comfortable that it is not met.
KPMG has submitted representations to HMRC suggesting a change in the legislation to make it clear that charity groups using gift aid payments should be excluded from the 25% charge. Umbrella organisations such as the Charity Tax Group have also submitted representations.
If the legislation is not changed it will be necessary for an entity to notify HMRC in writing within 3 months before the end of the accounting period in which diverted profits may arise. Unlike corporation tax, DPT is not self-assessed; we would expect HMRC not to raise a charge where the statutory gift aid relief is being used appropriately. However, this creates compliance obligations and uncertainty; providers may wish to raise this with their Inspector in advance of notification to seek reassurance.
Further to the publication of the above article announcements made in the 2015 Budget have had bearing on DTP.
We are pleased to note that government has listened to representations made by us and others and it has decided to exclude gift aid payments from the diverted profits tax legislation.
The Social Housing Regulator has published its new regulatory framework and code of practice which came into effect on 1 April 2015. The implications are vast and pensions will form an integral part of any well considered governance strategy.
When you look at your current business plan how much of it relates to future pensions obligations and risks? With the introduction of the new code comes a natural time to consider whether your pensions strategy is robust enough not just to satisfy the regulator’s requirements but to make a real impact on the strength of your organisation’s resilience to stresses on the industry.
When drawing out the pensions implications of the framework you will need to focus on understanding cashflow timings by making robust and prudent assumptions and using stochastic stress testing beyond simple sensitivity testing. You will need to consider future expectations for market conditions and likely actions taken by pension scheme trustees in areas like investment strategy and prudence margins. Contributions might continue to increase for any number of reasons and it is important to understand the likelihood of these and the mitigation options available when taking a long term view of the overall risk exposure of your organisation.
It is also important to ensure that any pensions assumptions made, such as inflation, are consistent with others in your business plan. There will be significant areas of overlap between assumptions in various parts of your plan which actuarial input can help to align.
Upon its introduction, VAT was described as a simple, self-assessing tax. However accurate you may consider this statement to be, it certainly doesn’t capture the fact that the VAT never sits still for long and current VAT events continue to illustrate this. Current VAT litigation may result in further significant changes to how VAT affects housing associations. A decision in one of the current cases has the potential both to increase and decrease costs materially.
In terms of current case law, two issues stand out, the installation of energy-saving materials and the VAT treatment of temporary staff. There are important steps which can be taken to manage the risk in connection with energy-saving materials and to maximise the chances of realising a repayment in connection with temporary staff; many housing associations are already taking these with KPMG’s assistance.
Unfortunately, the dark cloud of the European Commission’s challenge to the UK’s reduced rate for the installation of energy-saving materials has been lurking on the horizon since the infraction proceedings began in June 2012. The European Commission considers that the UK’s reduced rate of VAT (5%) for the installation of energy-saving materials is ultra vires because it goes beyond the scope of what is permitted within the framework for EU-wide VAT. The case was heard on 26 February 2015 at the Court of Justice of the European Union (CJEU) and will determine whether the UK can retain the current reduced rate for the installation of energy-saving materials. If the UK is unsuccessful in defending its position, then the installation of energy-saving materials is expected to become subject to the standard rate, significantly increasing the cost of these works to many housing associations.
The UK VAT legislation is based on the EU VAT Directive, which sets out a framework for the VAT rules in each member state. The EU VAT Directive includes a list of the supplies to which a reduced rate of VAT may be applied. This includes scope for a reduced rate to be applied to the “renovation and alteration of housing, as part of social policy” and separately for “renovation and repairing private dwellings, excluding materials which account for a significant part of the value of the service supplied”. Therefore, the case will focus on whether the UK’s reduced rate for the installation of energy-saving materials falls within either of these two points.
If the UK is successful in defending its position then the UK’s reduced rate should not change. However, if the UK is unsuccessful then it will inevitably lead to change, most likely the removal of the reduced rate for all installations of energy-saving materials. Any change would be prospective and should follow the release of the decision, which can take several months from the hearing date. Additionally, as with many recent changes to the UK VAT position, there is usually a transitional period to replace the current rules. However, as any change would be triggered by the UK being found to have erred by the CJEU, it is difficult to predict its length.
The KPMG team has been liaising with finance, asset management and regeneration teams to assess the potential impact of a change and to maximise the extent to which the reduced rate can be applied to previous and current schemes. If you have incurred significant costs in connection with the installation of energy-saving materials historically, or have budgeted for them in future, then members of our team are available to help you to understand the impact of this potential change and to identify opportunities to utilise the existing reliefs for these works fully.
After the dark cloud of the challenge to the reduced rate, the silver lining is the case law in connection with temporary staff. There are currently two cases that are due to be heard by the courts that could result in a reduction to the VAT applicable to supplies of temporary staff, Adecco and Go Fair Zeitarbeit. By way of background, the usual VAT treatment for supplies of staff is that they are standard rated for VAT purposes, including both any charge for the salary of the staff supplied and any additional fee from the supplier of the staff.
The Adecco case is an appeal by the taxpayer against HMRC’s view that VAT is due at the standard rate on the full value of charges in relation to the supply of temporary workers. It is the view of Adecco that the supply they make is only the service of introducing the temporary staff and, as such, VAT should only be applied to their introductory fee. Many of you will recall that a similar appeal was successfully taken by Reed, which bodes well for the Adecco appeal, albeit this considered the VAT treatment prior to changes in the employment regulations.
If Adecco is successful and HMRC’s view is found to be invalid, then VAT charged by employment businesses on the remuneration, PAYE, NIC etc. element of charges made to employers of temporary staff has been charged in error and VAT should only be due on the fee charged for the introductory service. Accordingly, these employment agencies should not be applying VAT to similar charges in future and would have an entitlement to seek a repayment of VAT, which should be passed onto customers in line with the unjust enrichment principles.
As the usual approach is for a supplier to make a claim for under-declared VAT, then in this instance the claim would be, or already should have been made, by the employment business. We have assisted many organisations, including housing associations, to contact their suppliers to ensure claims are made by them on behalf of the housing association.
If you require assistance in protecting your position or if you have a high value of VAT at stake on temporary staff and would like to explore additional action that can be taken to protect your position and realise alternative savings then please contact us.
Go Fair Zeitarbeit is a German case and is focused on supplies of services and goods closely linked to welfare and social security work, for which the EU member states are required to have a VAT exemption. More specifically, the case will consider whether the provision of state regulated care staff by a temporary staff business can qualify for the exemption for services closely linked to welfare and social security work.
At present it is HMRC’s view that where there is a supply of staff to a party (e.g. a housing association), and the recipient of the supply of staff is responsible for providing care to the end customer, then regardless of the role performed by the staff provided (i.e. regardless of whether their work is Care Quality Commission (CQC) regulated) then the supply is usually standard rated. As a result of the Go Fair Zeitarbeit case, HMRC may have to revisit this interpretation and potentially extend the scope for supplies of temporary staff to qualify for exemption where their service is closely linked to welfare and social security work.
Please note that where a welfare service is fully outsourced, i.e. the third party do not simply provide the staff for the service but also take responsibility for the delivery itself, the services provided are likely to already qualify for exemption, provided what is being delivered is CQC regulated.
The Adecco case has been listed for hearing at the First Tier Tribunal (the lowest of the UK VAT courts) from 11 to 15 May 2015. A decision in Go Fair Zeitarbeit is expected on 12 March 2015.
Further to the publication of the article above, the Go Fair Zeitarbeit decision has now been released.
The CJEU found that the exemption for welfare services does not extend to supplies of care staff by temporary staff businesses because the temporary staff business is not governed by public law, or seen as being devoted to social wellbeing. As such, although many VAT opportunities in connection with welfare remain available, for now at least VAT is still applicable to supplies of temporary staff providing welfare services from temporary staff businesses.
April 2015 is a big date for pensions as we all gain much more flexibility in relation to our retirement. Given the pensions industry was only told about these changes a year ago, it has had to react quickly in order to be ready in time.
It is only a year since the Chancellor announced his “Freedom and Choice” policy forcing the pensions industry to react quickly in order to get ready in time. From April your employees may be able to access all of their pension at retirement, but any amount over the current limit on tax-free cash payments will be taxed at the individual’s marginal rate of income tax.
For Defined Contribution arrangements, where the pension savings are in the form of an investment fund, members should have immediate access to cash. For Defined Benefit arrangements, such as SHPS and LGPS, members will first need to transfer their benefits into a Defined Contribution arrangement, having paid for Independent Financial Advice. As ever, there are exceptions to the rule – for example, as the Defined Contribution section in SHPS is held in a trust, the trustees will need to agree to the flexibilities on offer and make changes to the rules to enable members to access them. Not all pension schemes will be amended from 1 April and if people have pensions with the unfunded public sector schemes, they will not be able to transfer these into defined contribution schemes after 1 April 2015.
Your employees will get information from the pension schemes they are in on the new options available to them, but with time being so tight, this may not have happened yet. So you should consider whether you should communicate with your employees directly about the changes. Especially where you have a number of pension arrangements, there might be advantages of having a clear and consistent message for your staff.
The changes should prompt employers to consider the “at retirement” process for their employees, not only as part of being an employer of choice, but also to manage the risks to the business. Is it a good or bad thing for an employee to transfer to a Defined Contribution scheme in order gain access to the cash? There are a number of considerations, but from a financial perspective it reduces the pensions risks in the business and so may contribute to better outcomes in a stress test of the business.
Freedom and Choice will affect your employees’ views on retirement and may well influence their plans to leave employment. So this isn’t just about pensions, this is about your people and your future plans for your workforce.
On 11 February 2015 the High Court issued an important judgement on an important area of public procurement law: modifications/variations of an existing (public) contract.
This judgement, relating to the Silver Hill scheme in Winchester, deals with a development agreement (DA) for the comprehensive redevelopment of a site by way of a mixed-use development comprising residential, retail, car parking, a replacement bus station, a civic square, a CCTV office, shop mobility, Dial-a-Ride service, market store and changes the Council attempted to introduce in favour of the developer. The original 2004 DA had been put in place without a proper public procurement process and could not be challenged for time limitation reasons.
This judgement is important for contracting authorities (including housing associations) because:
In August 2014, the Council agreed to a number of variations to the DA including removing the requirement for affordable housing and replacing a requirement for a bus station, market store, Shop Mobility and Dial a Ride with extra retail space including a new department store which was not part of the original scheme.
Mr Gottlieb, a (Tory) Councillor for the (essentially Tory) Winchester Council and a property developer himself, was concerned by these variations and subsequently challenged the lawfulness of the Council’s decision by means of a judicial review.
Mr Gottlieb’s challenge was based on the argument that the Council had acted unlawfully by failing to carry out a public procurement process in circumstances where the nature of the changes meant that it was obliged to do so.
The Court concluded that the variations to the DA, taken as a whole, resulted in a contract which was materially different in character; the use of the contract variation clause to effect the changes was not a justification as it was general and unspecific (such approach would circumvent the legal requirement and legalise the breach in all contracts). The Court noted in particular: