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Tax Newsletter April 2018

Tax Newsletter April 2018

We hope you will enjoy this issue of our Tax Newsletter.

We hope you will enjoy this issue of our Tax Newsletter.

In this issue:

  • UK Spring Statement 2018
  • Scottish Draft Budget 2018 – agreement reached
  • HMRC guidance on new non-dom rules
  • VAT: Making Tax Digital – draft VAT Regulations and Notice
  • HMRC IHT guidance on deemed domicile and UK residential property rules
  • GAAR Advisory Panel opinion on employee incentive arrangement
  • Non-UK resident company entitled to claim income tax relief for trading losses of UK PE – Upper Tribunal decision
  • Scope of OTS review of IHT published
  • UK Treasury sub-committee – inquiry into tax avoidance and evasion
  • HMRC’s anti-fragmentation consultation document

 

 

UK Spring Statement 2018 

The Chancellor of the Exchequer announced his first Spring Statement on 13 March. It was trailed as not introducing new tax measures or spending measures, but a number of interesting consultations and requests for evidence were published focusing on how the tax system should adapt to the modern world. As anticipated, the taxation of the digital economy featured most heavily in these announcements: there was firstly, an update to last Autumn’s position paper on corporation tax and the digital economy, and secondly, a call for evidence in relation to the role of online platforms in ensuring tax compliance by users. 

 

The consultations released on the day of the Spring Statement include (but are not limited to):

  • Digital economy – an updated position paper on the taxation of the digital economy, with the clear overriding message that the Government has a strong preference for coordinated, multilateral action in this space.
  • Cash and digital payments in the new economy – this call for evidence requests comments on the role of cash and digital payments in the new economy, to ensure the Government can support digital payments and the use of cash, and crack down on tax evasion and money laundering.
  • Allowing Entrepreneurs' Relief on capital gains made before dilution – this consultation proposes changes to Entrepreneurs' Relief to allow this relief for individuals who no longer hold a 5 percent interest in a company where the reduction in their percentage shareholding is due to that company issuing shares to raise capital for the purposes of its trade.
  • Taxation of self-funded work-related training – a consultation on the extension of tax relief for training by employees and the self-employed to support upskilling and retraining.
  • Tackling the plastic problem – a call for evidence on how changes to the tax system or charges could be used to reduce wastage of single-use plastics by reducing unnecessary production, increasing reuse, and improving recycling.
  • Financing growth in innovative firms: EIS knowledge-intensive fund – as part of the Patient Capital Review reforms to promote high-growth and innovative investment, the Government is consulting on the introduction of a new approved fund structure within the Enterprise Investment Scheme (“EIS”), focused mainly on investing in knowledge-intensive companies.
  • Alternative method of VAT collection – split payment – the Government has released a follow-up consultation on how a potential split payment mechanism could work to combat online VAT fraud. 
  • VAT registration threshold - as recommended by the Office of Tax Simplification (“OTS”) the Government has released a call for evidence on the effects of the current VAT threshold on the growth of small businesses.

 

 

Scottish Draft Budget 2018 – agreement reached

Following the publication of the Scottish Draft Budget last year, there have been ongoing negotiations between the parties at Holyrood to pass the Budget through the Scottish Parliament. An agreement was reached between the Scottish National Party and the Scottish Green Party on 31 January 2018, which has resulted in changes being made to the previously announced tax bands and rates for relevant non-savings income of Scottish taxpayers for 2018-19. The key change from the December 2017 proposals is that the higher rate band is now expected to start at the lower level of £43,431. The Scottish Government estimates that this will raise an additional £55 million of tax revenue.

 

 

The new rates and bands of tax are as follows:

  Rate (%) Band
Starter rate 19 £11,850* - £13,850
Basic rate 20 £13,851 - £24,000
Intermediate rate 21 £24,001 - £43,430
Higher rate 41 £43,431 - £150,000**
Top rate 46 Above £150,000**

* Assumes individuals receive the standard UK Personal Allowance.

** Those earning more than £100,000 will see their Personal Allowance reduced by £1 for every £2 earned over £100,000.

 

 

HMRC guidance on new non-dom rules

As had been awaited, HMRC have published guidance on the new rules for individuals who are non-UK domiciled and offshore trusts which take effect from 6 April 2017 and were legislated in the Finance (No.2) Act 2017. Non-UK domiciled individuals will need to make sure they are ready for these changes, and this guidance sets out an overview of the new rules for non-doms, offshore trusts and business investment relief.This HMRC guidance, entitled Deemed Domicile changes from 6 April 2017, currently consists of the following:

 

Business investment relief (“BIR”) – The existing BIR guidance has been updated to include the Finance (No.2) Act 2017 changes.

 

Cleansing of mixed funds – This guidance provides a high level summary with examples of these transitional rules which allow a window up until 5 April 2019 to enable division of the income, capital gains, and 'clean' capital elements of existing non-UK bank accounts into separate accounts. If managed correctly, this would enable any non-dom who has previously been taxed on the remittance basis prior to 2017/18, to remit to the UK without a tax charge 'clean' capital from overseas which was previously trapped within a mixed fund.

 

Deemed domicile rules – A new short high level summary explaining the deemed domicile rules.

 

Overseas Workday Relief (“OWR”) – The existing guidance (RDR4) has been updated to include the Finance (No.2) Act 2017 changes.

 

Remittance Basis Changes – A new short high level summary explaining that individuals who become deemed domiciled will no longer be able to use the remittance basis and will be taxed on worldwide income and gains.

 

Residence, Domicile and Remittance Basis Guidance (“RDR1”) – The existing HMRC guidance set out in RDR1 has been updated and expanded to include the Finance (No.2) Act 2017 changes. RDR1 now includes basic guidance about the new deemed domicile rules for non-UK domiciled individuals who are long term UK residents.

 

Trust protections and capital gains tax changes – This new guidance, which takes the form of a detailed 54 page document, primarily covers the new rules for offshore trusts. This includes income tax and capital gains tax 'protections' for offshore trusts, transfer of assets abroad legislation trust protections, how trust protections can be lost through tainting and the valuation of benefits received from offshore trusts. In addition, this guidance also covers the transitional rules enabling individuals becoming deemed domiciled in April 2017 to benefit from rebasing of certain foreign assets to their market value on 5 April 2017. It also covers the changes to the rules for temporary non-residents, foreign loss elections and carried interest gains.

 

At the moment the documents published do not yet include guidance on the Finance (No. 2) Act 2017 provisions which extend the UK IHT net to all residential properties in the UK and those who lend money or provide security to purchase UK residential property.

 

If you are a non-UK domiciled individual these new rules will impact you and there are actions you need to consider.

 

 

VAT: Making Tax Digital – draft VAT Regulations and Notice

HMRC have released for consultation the draft Making Tax Digital (“MTD”) VAT Regulations, together with a draft notice and some examples which outline the extent of the required digital links for businesses that currently have different digital record keeping options. From 1 April 2019, nearly all VAT registered businesses with a taxable turnover above the £85,000 VAT registration threshold for UK established businesses will have to comply with MTD for VAT. There are very few exemptions. Businesses have been anxiously awaiting the draft law to see what will be required of them and what they will need to do to be compliant. It does look as though HMRC have listened and acted on some of the concerns previously voiced.

 

MTD VAT involves two stages – the keeping of digital records and the digital submission of the VAT return via functional compatible software. One aim of MTD VAT is to reduce the VAT lost through errors and mistakes arising from businesses keying in figures manually.

 

The guidance confirms certain points that businesses with VAT accounting complexities such as partial exemption were anxious to know. These include the following:

  • Only some records have to be kept digitally within functional compatible software.
  • The complete set of required digital records do not all have to be in one piece of software as long as there is a digital link between the different pieces.
  • Only the following has to be kept digitally though HMRC stress that digital links for other entries (such as fuel scale charges) will reduce the chance of errors and so HMRC would clearly prefer as much data as possible to be kept and transferred digitally:
    • business name, address, VAT number and any special accounting schemes used;
    • the VAT account (the information in this will be used by the software to calculate and fill in the return);
    • total of any adjustments (not the calculations underlying them);
    • time of supply, value of supply and rate of VAT charged on supplies made;
    • for purchases and the amount of input tax that will be claimed;
    • the total value of outputs for the period broken down into the different VAT rates (standard, reduced, zero, exempt and outside the scope) - this has been significantly scaled down from original proposals; and
    • Daily Gross Takings (“DGT”) - for retailers using a retail scheme.

 

Those using the Flat Rate Scheme and the Gold Special Scheme are covered by additional requirements.

 

The guidance confirms that partial exemption adjustments can therefore be carried out outside the digital records and transferred in manually, if desired. This was an issue that had been causing concern. The guidance also confirms a 'soft landing period' of a year, during which record keeping penalties will not apply and there will be no mandatory digital link between non API enabled software and a collating spreadsheet. There will, however, have to be a digital link from the outset between the spreadsheet and the bridging software that submits the return digitally.

 

MTD will be a significant change. However, this will depend on what businesses currently do digitally. It is therefore useful to have this guidance to see what HMRC will insist on and where there is some latitude, at least for a while. This may help businesses start to make decisions about what they need to do – some larger businesses may need to do very little, while other smaller businesses whose records are less digital may require a more radical overhaul of their record keeping. The key thing to remember is that from April 2019 certain records have to be kept digitally within functional compatible software and for those in MTD the return can only be submitted via an API, which may be from API enabled software, bridging software or API enabled spreadsheet.

 

 

HMRC IHT guidance on deemed domicile and UK residential property rules

As expected, HMRC has published high level guidance on the amended deemed domicile rules for Inheritance Tax (“IHT”) and the new rules extending the scope of IHT to all residential properties in the UK. These changes also include within the scope of IHT those who lend money or provide security to purchase UK residential property. Such loans will be subject to IHT in the estate of the lender, regardless of the lender’s residence and domicile position. These new rules take effect from 6 April 2017. If you are a non-UK domiciled individual owning UK residential property these new rules will impact you and there are actions you need to consider.

 

The guidance includes:

IHT deemed domicile rules – A new short high level summary explaining the deemed domicile rules for IHT purposes; and

 

Enveloped UK dwellings and related finance – New guidance on the rules which take effect from 6 April 2017 and were legislated in the Finance (No.2) Act 2017.  This new guidance contains a series of examples which provide a useful high level outline of the operation of the new rules. 

 

 

GAAR Advisory Panel opinion on employee incentive arrangement

The General Anti-Abuse Rule (“GAAR”) allows HMRC to counteract tax advantages that arise from ‘abusive’ arrangements. For these purposes, arrangements are ‘abusive’ if they cannot ‘reasonably be regarded as a reasonable course of action in relation to the relevant tax provisions’.

 

Before invoking the GAAR, HMRC must refer the matter to the Advisory Panel for an opinion on the ‘reasonableness’ of the arrangements. 

 

 

Case summary

An employer established an employer funded retirement benefit scheme (“EFRBS”) which was funded by way of a small cash contribution and assignment of the benefit of two deeds of covenant.  The employer, the participating employees and a British Virgin Islands company then entered into a series of tripartite deeds which, through several steps, resulted in:

  • funds being made available to participating employees for their use;
  • the employer’s resources being reduced by an amount equal to those funds; and
  • the participating employees owing an equivalent sum to the EFRBS.

 

In substance, the arrangements resulted in a loan from the EFRBS to the participating employees.

 

The taxpayers contended that no income tax charges arose in relation to the arrangements (in particular, the ‘disguised remuneration’ legislation, set out in Part 7A ITEPA 2003, did not apply) and the employer was entitled to a corporation tax deduction in respect of the funding provided to the EFRBS.

 

 

The Panel’s view

The Panel noted that it is normal for an employer to establish an EFRBS in order to provide retirement benefits, and that the employee benefit legislation recognises employers have a choice of rewarding employees directly or via a trust.

 

However, the Panel formed the view that the method of funding the EFRBS and the complex series of transaction entered into to deliver benefits into the participants’ hands were ‘abnormal and contrived’, and carried out solely for tax purposes.

 

Furthermore, the arrangements were intended to exploit perceived shortcomings in the drafting of the ‘disguised remuneration’ legislation and provide participants with loans from a trust structure without triggering immediate income tax charges (and PAYE and NIC obligations).

 

This was not a reasonable course of action in relation to the relevant tax provisions, as their underlying principle was that employees should not be able to avoid a charge to tax on employment income by entering into arrangements with parties other than their employer to receive employment reward (including by way of loans).

 

 

Implications

The Panel’s opinion in this case is unsurprising, and the message clear.

 

When implemented for bona fide reasons, EFRBS are a legitimate way of providing retirement benefits. 

 

However, employers who seek to exploit such structures and ignore the ‘keep off the grass’ warning intended by the GAAR, in this case in relation to the ‘disguised remuneration’ rules, can expect a robust challenge from HMRC.

 

 

Non-UK resident company entitled to claim income tax relief for trading losses of UK PE – Upper Tribunal decision

The Upper Tribunal (“UT”) has agreed with the decision of the First-tier Tribunal (“FTT”) that a non-UK resident company was entitled to claim income tax relief for trading losses generated by its UK permanent establishment (“PE”) against letting income from its UK property rental business, even though any trading profit made by the PE would have been chargeable to corporation tax rather than income tax.

 

The UT agreed with the FTT that section 3 CTA 2009 only disapplied the parts of the Income Tax Acts that related to income tax on 'profits', which therefore could not also apply to losses. Further, the purpose of section 47 CTA 2009 was simply to make it clear that the rules in that and later chapters of the legislation should be used to calculate the losses, and this said nothing about the provisions governing the use of the loss once it has been calculated.

 

The UT also rejected HMRC's purposive construction arguments that Parliament had intended the corporate and income tax regimes to operate fully independently of each other, finding that there was no general principle which would demand the scope of application of the separate taxes to be mutually exclusive. There was also no clear reason why Parliament should have intended to prevent a company in the anomalous position of having two businesses, one subject to income tax and one subject to corporation tax, from being able to set a corporation tax loss off against general income.

 

Despite finding for the company on the domestic law points, the UT also considered at length whether HMRC's interpretation of the legislation would have breached EU rules on free movement of capital, and found that it would have done so. In this connection the Tribunal held that a Council Decision on the status of overseas countries and territories did not override the treaty provisions on free movement of capital and that property giving rise to letting income was not automatically to be regarded as a direct investment for the purposes of the treaty.

 

 

Scope of Office of Tax Simplification review of IHT published

Following the Chancellor’s request for a review of the IHT regime, the Office of Tax Simplification (“OTS”) has now published a scoping document. This document clarifies that the principal aim of the review will be to “identify opportunities and develop recommendations for simplifying IHT from both a tax technical and an administrative standpoint.” Specific issues that will be considered include the IHT submission process, the gift rules, routine estate planning, and perceptions of complexity.

 

This review has a much wider focus than just process and administrative issues and will cover: "complexities arising from the reliefs and their interaction with the wider tax framework"; and "the scale and impact of any distortions to taxpayers' decisions, investments, asset prices or the timing of transactions because of the IHT rules, relevant aspects of the taxation of trusts, or interactions with other taxes such as capital gains tax".

 

The OTS confirms the intention to consult widely amongst stakeholders, with a call for evidence early in 2018. A report will be published in the autumn of 2018 providing an initial evaluation of the current IHT regime, identifying opportunities for simplification and making simplification recommendations for the Government to consider.

 

It is possible that following publication of the OTS report in the autumn, the Government may announce its decision to move forward with some or all of the OTS's recommendations in the 2018 Autumn Budget.

 

 

UK Treasury sub-committee – inquiry into tax avoidance and evasion

In recent years, HMRC has taken steps to address public concerns about the actions of individuals and businesses who might be seen as determined not to pay their fair share of tax.

 

As a result, strategies have been launched to address offshore evasion and reduce the use of tax avoidance schemes. HMRC has sought and been given a range of new powers to strengthen its hand against so-called “tax dodgers” and those that design and sell the schemes to help them.

 

Against this background, the Treasury Sub-Committee intends to examine what progress has been made in reducing the amount of tax lost to avoidance and offshore evasion and whether HMRC has the resources, skills and powers needed to bring about a real change in the behaviour of tax dodgers and those who profit by helping them.

 

The Treasury Sub-Committee is inviting the submission of evidence in response to the following questions.

  • To what extent has there been a shift in tax avoidance and offshore evasion since 2010? Have HMRC efforts to reduce avoidance and evasion been successful?
  • Is HMRC adequately resourced and sufficiently skilled to identify, challenge and counteract existing and new avoidance schemes and ways of evading tax? What progress has it made since 2010 in promoting compliance in this area and preventing and responding to non-compliance?
  • What types of avoidance and evasion have been stopped and where do threats to the UK tax base remain?
  • What part do the UK’s Crown Dependencies and Overseas Territories play in the avoidance or evasion of tax?
  • What more needs to be done to address their use in tax avoidance or tax evasion?
  • How has the tax profession responded to concerns about its role in aiding tax avoidance and evasion? Where does it see the boundary between acceptable and unacceptable practice lie?

 

The deadline for written submissions is 31 May 2018.

 

 

HMRC’s anti-fragmentation consultation document

HMRC is inviting views on proposals to tackle tax avoidance schemes designed to move UK profits outside the charge to UK tax, often using offshore trusts and companies.

 

The consulatation document (click here) is seeking views to inform the policy design for new legislation intended to tackle such arrangements. The aim of the legislation will be to ensure that the amount of profit appropriate to UK business activity is taxable in the UK. In order to tackle the arrangements being targeted, the government is proposing a dual approach.

 

  • Proposal 1 – legislation specifically focused on the arrangements requiring profits which have been ‘alienated’ to be added to UK profits.
  • Proposal 2 – requirements to notify schemes and for faster payment of tax in dispute.

 

The consultation runs until 8 June 2018, with the reponse being published by the government in summer 2018.

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