UK: Weekly Tax Update - Monday 13 May 2013

Last Updated: 22 May 2013
Article by Smith & Williamson

1 GENERAL NEWS

1.1 Queen's Speech and National Insurance

The Queen's speech included an announcement concerning a National Insurance Contributions Bill, the main elements of which will be for:

  • reducing employer NICs bills each year by, from April 2014, entitling every business and charity to a £2,000 Employment Allowance;
  • extending the General Anti-Abuse Rule to NICs, reinforcing the Government's commitment to tackle abusive avoidance;
  • strengthening legislation to prevent the use of offshore employment payroll companies (intermediaries) to avoid employer NICs; and
  • removing the presumption for self-employment for limited liability partnership members.

www.gov.uk/government/uploads/system/uploads/attachment_data/file/197434/Queens-Speech-2013.pdf

1.2 Tax Professionals' Forum

As part of restoring the UK's reputation for a predictable, stable and consultative tax system, the Government established the Tax Professionals Forum shortly after the 2010 election to ensure that the Government's commitments on better tax policy making were subject to independent scrutiny.

The Forum have recently produced their second annual report which includes the following review of the way in which new tax legislation was formulated during the period under review:

"There are five stages put forward in the Framework in the process of making tax legislation. For most consultations, the Forum believes these five stages are both needed and useful. The reasons for this depend on the circumstances. For example, in formulating policy, the Government may have formulated a proposal which goes further than is necessary to achieve the particular policy objective, may be unaware of the effect the proposal may have on other areas, or may not have taken into account other existing legislation. An open formulation of policy allows engagement with the taxpayer.

It is pleasing to report that the period has shown a number of good examples where the five stages have been or are being followed, in particular the consultations on the changes to the CFC rules, the Statutory Residence test, the reform of the taxation of non-domiciliaries, tax relief for decommissioning and a number of others. These have resulted in the taxpayer having a clear understanding of government policy, and policies being developed more effectively and efficiently.

In contrast, however, in other cases, consultations have started:

  • part way through the process (such as that on the provisions relating to the transfer of assets abroad and gains made by offshore close companies),
  • without a clear articulation of the policy involved (for example, on IR35 and Controlling Persons), or
  • without an discussion of the policy (for example, the changes to SDLT on properties owned by non-residents through companies, investment funds and others and the cap on income tax reliefs).

The Government has indicated that concerns over possible avoidance and forestalling mean that it is difficult for some of the changes identified above to follow the normal consultation stages. In our view, such arguments have to be weighed carefully in the balance against the risk of flawed legislation as a result. We believe that the above consultations would all have benefited from going through all five stages of the consultation process.

We believe a key part of making good legislation is the minimisation of surprises. The March 2012 Budget contained a number of detailed tax proposals that raised considerable concerns regarding operational or practical viability, or indeed delivery of the underlying policy rationale. These included the so-called 'pasty tax' and the cap on charitable donations, which were subsequently abandoned. It is far better to plan, consult, reflect and then legislate if necessary. We would therefore encourage future changes of a similar nature to follow the normal, five-stage process."

www.hm-treasury.gov.uk/d/taxprofessionalforum_270313.pdf

2 PRIVATE CLIENT

2.1 Statutory residence test

From 6 April 2013 the rules that determine if someone is resident in the UK for tax purposes change, based on the yet to be enacted provisions included in Finance Bill 2013, with the rules which determine an individual's tax residence put on a statutory basis.This is known as the Statutory Residence Test (SRT).

For the majority of people whether or not they are resident for tax purposes is quite straightforward under the test and their position is not changed. For those with complex circumstances the SRT will generally provide more certainty about their residence status.

HMRC has published guidance to help a taxpayer decide if they are resident in the UK for the purposes of paying tax.

In addition, HMRC will be launching an on-line residence indicator in the next few weeks to help people understand their residence status.

The residence indicator is intended to give an indication of residence status after answering a few straightforward questions such as how many days are spent in the UK, where there is a home and family ties.

www.hmrc.gov.uk/migrantworkers/tax-non-uk.htm

3 PAYE AND EMPLOYMENT MATTERS

3.1 Employer Annual Return deadline

A reminder that the deadline for submitting the 2012/13 Employer Annual Return is 19 May 2013.

4 BUSINESS TAX

4.1 Liability to ITEPA s222 tax on late reimbursement to employer

An employee can be held liable to tax on a tax as a result of reimbursing his employer more than 90 days after the 'relevant date' in respect of the employee's tax due under PAYE and paid on their behalf by the employer where deduction at source is not possible. The First tier Tribunal considered the meaning of 'relevant date' in a case involving an individual, Mr Manning, and tax due on the exercise by him of options to acquire shares.

Mr Manning exercised his option on 28 October 2007 to acquire shares at a cost of £7,636 that were worth £111, 579. The employer did not, however, inform the employee of the amount of PAYE to be reimbursed until 28 March 2008, and the employee reimbursed the full amount on 11 April 2008.

HMRC contended that the relevant date for reimbursing the PAYE was 26 January 2008 and assessed Mr Manning to tax under ITEPA s222. However, the tribunal found that scheme rules provided that the shares did not unconditionally vest until the PAYE reimbursement had been made within 30 days of the 'exercise of the warrant' which date it held to be 28 March 2008. It held this was the 'relevant date' for ITEPA s222 purposes, and that therefore the PAYE had been reimbursed in time and no s222 tax was due. Included in the decision is the following comment:

Section 222 was introduced to prevent grossly abusive schemes designed to avoid PAYE tax and NICs. There was nothing remotely abusive about Tradedoubler Limited's share option scheme. It was designed, as we have already observed, to make sure that every employee exercising an option under the scheme made good to Tradedoubler Limited every penny of the PAYE tax due within 30 days. And yet HMRC conducted their PAYE investigation without apparently troubling to look at the Scheme Rules. Nor did the assessing officer nor did the officer who conducted the review. The result is that, unless Mr Manning had appealed, HMRC would have earned a substantial windfall gain at his expense. We understand that Mr Manning was already heavily out of pocket as the result of his participation in the option scheme and that the assessment has caused worry and stress for him. We understand also that Mr Manning was not the only employee of Tradedoubler Limited to have suffered the same fate. When Parliament introduced section 222, they expected it to be properly and carefully exercised. The section is not, as HMRC sought to argue in this appeal, "mechanistic in effect". We echo the concerns expressed by Lord Neuberger in Chilcott

www.bailii.org/uk/cases/UKFTT/TC/2013/TC02666.html

4.2 Offshore funds draft regulations

Following the introduction of SI2013/661 to deal with offshore funds and anti-avoidance, HMRC has issued further draft regulations to deal with technical amendments to The Offshore Funds (Tax) Regulations 2009. The draft regulations are available for comment until 31 May 2013.

In some cases there can be a technical mismatch between the rules for calculating total reported income and the amount reported to individual investors under the existing offshore reporting fund rules.

Where a fund operates 'full equalisation' (as defined in the Regulations) and returns part of the capital cost of a new subscription to the investor in the first reporting period then the Regulations will be amended so that the capital returned can be set off against the first distribution made.

In a case where a fund calculates its reportable income for a reporting period over several 'computation periods' making up the reporting period a change will allow excess expenses of one computation period to be set against income of another within the same reporting period. This will remove a potential distortion to the calculation of reportable income where computation periods are used.

Further minor amendments are made to the Regulations and to other provisions relating to offshore funds to up-date references and terms and for the purposes of clarification.

www.hmrc.gov.uk/drafts/offshore-funds-may13.htm

www.hmrc.gov.uk/drafts/offshore-funds-amendment-2-regs2013.pdf

www.hmrc.gov.uk/drafts/em-offshore-funds-amendment-2-regs2013.pdf

4.3 CBI proposes seven tax principles for UK business

The CBI has put forward seven principles on tax that it is encouraging all UK businesses and companies operating in the UK to follow. They are:

Tax Planning principles

  1. UK businesses should only engage in reasonable tax planning that is aligned with commercial and economic activity and does not lead to an abusive result.
  2. UK businesses may respond to tax incentives and exemptions
  3. UK businesses should interpret the relevant tax laws in a reasonable way consistent with a relationship of "co-operative compliance" with HMRC.
  4. In international matters, UK businesses should follow the terms of the UK's Double Taxation Treaties and relevant OECD guidelines in dealing with such issues as transfer pricing and establishing taxable presence, and should engage constructively in international dialogue on the review of global tax rules and the need for any changes.

Transparency and reporting principles

Relationships between UK businesses and HMRC should be transparent, constructive and based on mutual trust with the result that HMRC should treat business fairly and with respect, and with an appropriate focus on areas of risk.

  1. UK businesses should be open and transparent with HMRC about their tax affairs and provide all relevant information that is necessary for HMRC to review possible tax risks.
  2. They should work collaboratively with HMRC to achieve early agreement on disputed issues and certainty on a real-time basis, wherever possible.
  3. Firms should seek to increase public understanding in the tax system in order to build public trust in that system, and, to that end:

    • they should consider how best to explain more fully to the public their economic contribution and taxes paid in the UK; and
    • this could include an explanation of their policy for tax management, and the governance process which applies to tax decisions, together with some details of the amount and type of taxes paid.

What underpins the principles?

This statement of principles is intended to promote and affirm responsible business tax management by UK businesses. These principles are based on five key observations:

  • Public trust in the tax system is a vital part of any flourishing democracy
  • Transparency and co-operation between HMRC and business contributes to greater compliance and a better functioning tax system
  • Most businesses comply fully with all applicable tax laws and regulations, recognising the obligation of the UK government to protect a sustainable tax base
  • Tax is a business expense which needs to be managed, like any other, and therefore businesses may respond to legitimate tax incentives and statutory alternatives offered by governments
  • UK businesses contribute significantly to the UK economy and pay a substantial amount of tax comprising not only corporation tax, but also National Insurance, business rates and other taxes.

What is the aim of the principles?

  • To enhance co-operation, trust and confidence between HMRC, UK business taxpayers and the public in regard to the operation of the UK tax system
  • To promote the efficient working of the tax system to fund public services and promote sustainable growth.

www.cbi.org.uk/media/2051390/statement_of_principles.pdf

www.cbi.org.uk/media/1456721/tax_and_british_business_making_the_case.pdf

5 VAT

5.1 CJEU decision on non-taxable persons in VAT groups

Following the CJEU decision in case C-85/11 concerning Ireland, the CJEU has decided in case C-84/11 that the inclusion of non-taxable persons in VAT group as permitted in the UK is not contrary to the VAT directive.

http://curia.europa.eu/juris/document/document.jsf?text=&docid=136793&pageIndex=0&doclang=EN&mode=lst&dir=&occ=first∂=1&cid=1539996

6 TAX PUBLICATIONS

NTNB267 - Taxation of pensions – Changes in limits

Overview of the reduction in Annual Allowance and Life Time Allowance from 6 April 2014, fixed protection 2014 and individual protection.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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