UK: Weekly Tax Update - Monday 10 June 2013

Last Updated: 17 June 2013
Article by Smith & Williamson

1 GENERAL NEWS

1.1 FATCA

On 31 May HMRC published draft regulations, guidance and a tax information and impact note on implementing US FATCA.

Clause 219 of Finance Bill 2013 introduces a power to allow HM Treasury to introduce regulations for the purpose of giving effect to the Agreement, and future similar arrangements.

The draft regulations define the key terms, such as 'financial institution' and 'reportable account', included in the Agreement and also sets out the required due diligence and reporting requirements of UK financial institutions.

The draft regulations also introduce certain beneficial changes included in the final US regulations to enable UK business to benefit from these.

The draft regulations also include a targeted anti-avoidance provision and provisions relating to penalties for non-compliance, along with an appeals process.

While there is some clarity on whether certain types of trust are within the rules, this is an area where further representations on the proposals can be expected.

www.hmrc.gov.uk/fatca/index.htm

www.hmrc.gov.uk/fatca/130531-guidance.pdf

www.hmrc.gov.uk/fatca/130531-si.pdf

www.hmrc.gov.uk/drafts/uk-us-fatca-regulations.pdf

www.hmrc.gov.uk/fatca/itc-regs-2013.pdf

1.2 SDLT anti-avoidance

On 4 June the Government tabled an amendment to Finance Bill 2013 to put beyond doubt that a particular Stamp Duty Land Tax (SDLT) avoidance scheme is ineffective. The scheme uses the SDLT transfer of rights rules to avoid SDLT on the purchase of UK land. The legislation will have effect from 21 March 2012.

The extract from the ministerial statement reads:

Because of repeated avoidance in this area, at Budget 2012 the Chancellor of the Exchequer made it clear that he would not hesitate to use retrospective legislation to close down future SDLT avoidance schemes.

Acting on this warning it was announced at Budget 2013 that legislation will be introduced in the Finance Bill to close down two schemes, which use the transfer of rights rules, with effect from the date of the Chancellor's warning, 21 March 2012.

Since then a further transfer of rights scheme has been identified. The Government do not accept that the scheme has the effect intended but to remove any doubt, prompt action is being taken to protect the Exchequer.

Given the Chancellor's clear warning last year and the announcement at Budget 2013 of retrospective legislation to close down similar transfer of rights schemes, if should have been obvious to both promoters and users of this scheme that it could be subject to retrospective action.

The amendments are to clause 192 Finance Bill 2013 to increase the scope of subsale arrangements deemed ineffective from 21 March 2012 by including those involving agreements for the grant or assignment of an option entered into between 21 March 2012 and the day on which Finance Bill 2013 receives Royal Assent.

The guidance note has more information about the scheme closed down.

www.hmrc.gov.uk/budget-updates/march2013/comp-guidance.pdf

www.hmrc.gov.uk/budget-updates/march2013/index.htm

www.publications.parliament.uk/pa/cm201314/cmhansrd/cm130604/wmstext/130604m0001.htm#13060452000002

www.gov.uk/government/uploads/system/uploads/attachment_data/file/205320/002_Government_amendments_60-64_stamp_duty_land_tax_pre-completion_transactions_existing_cases_clause_192_4_June_2013.pdf

2 PAYE AND EMPLOYMENT MATTERS

2.1 Employee shareholder shares

An amendment to Finance Bill 2013 has been proposed providing that no income tax liability arises on an individual in respect of reasonable costs of relevant independent advice in connection with employee shareholder shares, whether or not they are paid or reimbursed by an employer.

www.gov.uk/government/uploads/system/uploads/attachment_data/file/205319/001_Government_amendments_56-59_employee_shareholder_shares_clause_54_schedule_22_4_june_2013.pdf

3 BUSINESS TAX

3.1 Corporation Tax: Foreign Currency Assets and Chargeable Gains

HMRC has issued a technical note and draft amendments to SI2002/1970 to take account of the Finance Bill 2013 proposals for foreign currency accounting on computation of changeable gains.

SI2002/1970 operates to ensure that exchange gains or losses on loans or derivatives, which hedge certain assets and which have previously been excluded from tax, are brought into account at a time and in a manner consistent with the tax treatment of the hedged asset. In broad terms, this means that exchange gains or losses arising on the hedging instrument that have been disregarded are brought back into account when there is a disposal of the hedged asset (other than a no gain/no loss disposal).

The affect of the amendment is to ensure that where there is a change in currency, the aggregate amount is to be retranslated from the previous currency into the new currency based on the spot rate of exchange for the day of the change in currency. This mirrors the approach in clause 65 of Finance Bill 2013.

www.hmrc.gov.uk/drafts/tn-amend-eglbaglregs02.pdf

3.2 Updated CFC guidance

HMRC has published updated draft guidance on the new CFC regime (TOIPA part 9A) which covers the following:

  • An overview of the regime;
  • The following chapters of TOIPA part 9A: 4-9; m11-14; 16-20 and 22;
  • Clearances;
  • Foreign permanent establishment anti-diversion rules.

www.hmrc.gov.uk/drafts/cfc.htm

3.3 Corporation tax reclaims and payment

HMRC has issued a note on corporation tax reclaims requesting that taxpayers remember to tick the appropriate box and that the correct payment reference code should be used with respect to tax payments.

www.hmrc.gov.uk/ct/accounting-period.htm

3.4 Consultation on modernising the taxation of corporate debt and derivative contracts

A consultation on modernising the taxation of corporate debt and derivative contracts has been published for comment by 29 August 2013.

Changes will be introduced over two years, in 2014 and 2015, with the most significant structural changes in the later year. Measures for 2014 will focus on areas where there is a current risk of tax leakage. Further formal consultation is anticipated next year. In the meantime there will be an open meeting on 27 June 2013 and a working group will be set up as a forum for ongoing detailed discussion. The following extract from the document highlights the main changes proposed:

1.5 It is intended to articulate more clearly the purpose and scope of the regime, and in particular, to clarify the role to be played by a company's financial statements in identifying and quantifying taxable amounts. Although accountancy will very often give an appropriate outcome for tax purposes, the tax regime will sometimes need to take a different approach, where that is necessary to ensure that the full amount of the profits, gains and losses from loan relationships and derivative contracts are brought into tax. The Government considers that the tax regime should be clearer as to when taxation is to depart from the accounting treatment.

1.6 The Government is proposing a change to base the loan relationship and derivative contract regimes on amounts recognised in profit or loss in a company's accounts, in line with the normal approach to calculating taxable profits. By contrast, the current tax rules recognise amounts appearing anywhere in the accounts.

1.7 There may be merit in combining the separate regimes for loan relationships and derivative contracts into a single code to reduce the length of the legislation and eliminate unintended discrepancies. This document makes no firm proposal, but invites views on the extent to which the benefits of amalgamation would justify the inevitable transitional disruption.

1.8 The Government is seeking views on the appropriate tax treatment of connected party debt and transfers of debt around a group, and options are presented on these. The general approach is to question the extent to which special rules, departing from the accounting treatment, are necessary.

1.9 A substantial overhaul of the approach to the taxation of foreign exchange (forex) and hedging relationships is proposed. Generally, only forex movements in respect of loans and derivatives held for trading or property business purposes would be taxed or relieved. Other forex movements would only be brought into account in prescribed circumstances, principally in the context of hedging relationships. As a result of this and other proposals put forward in this document, it is envisaged that the Disregard Regulations could be substantially repealed.

1.10 The operation of the loan relationships and derivative contracts rules in the context of partnerships is considered in Chapter 9. This part of the consultation runs alongside the separate and more wide-ranging review of two aspects of partnership taxation announced at Budget 2013; a consultation was launched on 21 May1. Proposals are made with a view to ensuring that the tax outcome from loan relationships and derivative contracts held through a partnership is in line with the result had each corporate partner held the appropriate proportion of the instruments directly. They also address the consequences which follow from this where there is a change in the partners' interests.

1.11 Proposals are made regarding the tax treatment of restructuring of debt, in particular where a debt is released in exchange for shares issued by the debtor. At present, where debt is released in these circumstances, the debtor is exempted from tax on the accounting credit arising. It is proposed to link this exemption explicitly to debt releases made in a "corporate rescue" where the debtor is at risk of insolvency.

1.12 The current tax treatment of compound or "hybrid" instruments, such as debt which is convertible to equity, and of instruments which include an embedded derivative, is to mirror the accounting approach by treating each component as if it were a separate instrument. As a result of anticipated changes to the accounting for such instruments, many of the special tax rules for particular instruments may become redundant. It is now proposed (in Chapter 12) to repeal a number of these rules so as to simply tax (on an income basis) holders of such instruments on the profits, gains and losses arising.

1.13 The Government is inviting comments on how the relief in respect of increases in the value of index-linked gilts attributable to inflation could be better targeted.

1.14 It is proposed that the current rules governing the taxation of corporate investors in certain collective investment schemes which hold primarily debt and derivative-type assets ("bond funds") should be repealed. The purpose of these complex rules is to counter tax avoidance, and the Government proposes to replace them with a more closely-targeted rule, perhaps including a test of purpose, so that only tax-motivated transactions would be affected. Particular rules would however be needed for offshore funds.

1.15 The Government also proposes to repeal the "corporate streaming" rules, which prevent exploitation by companies of the rate of tax applicable to authorised investment funds, which has historically been lower than the main rate of corporation tax. Following announcement of changes to the corporation tax rate from 2015, these rules are no longer regarded as necessary.

1.16 The Government welcomes comment which will help to develop anti-avoidance rules which are effective without impacting unnecessarily on genuine commercial activity where there is no tax-avoidance motivation. Two elements are proposed:

  • To replace the existing patchwork of highly specific anti-avoidance rules dealing with aspects of the loan relationships and derivative contracts regime with a single provision covering the whole code to prevent manipulation and exploitation of the rules. This would include a test of purpose and, where it applied, would require a just and reasonable remedy to the arrangements caught.
  • To update the current "unallowable purpose" rules to address certain specific areas of doubt or disagreement over their application (including where there is a fungible source of funding and where the tax advantage sought is subject to a contingency, and also to align the operation of the derivative contract and loan relationship rules – see paragraph 14.32 for the detailed proposals).

1.17 Chapter 15 invites comment on the likely impacts on companies and groups of the proposals outlined in this document, in terms of both tax payable and administrative and compliance costs.

The changes planned for Finance Bill 2014 include:

  • An overhaul of the detailed rules for companies which are members of partnerships. This will run alongside the wider consultation on partnership tax issues and is aimed at reducing risk and uncertainty.
  • Revision of the bond fund rules which determine whether returns from assets held in certain investment trusts are treated as arising from loan relationships;
  • Updating of the 'unallowable purpose rule (s441 CTA09);
  • Refining of the scope of tax exemptions applicable to index linked gilts to reduce the scope for exploitation.

www.gov.uk/government/uploads/system/uploads/attachment_data/file/205432/2013_06_05_Condoc_FINAL_FOR_PUBLICATION.pdf

3.5 CBI paper on 12 misunderstood concepts of the UK corporation tax system

The CBI has published a paper seeking to further inform the public debate on tax by setting out some explanation of twelve areas of the UK corporation tax system, with a particular focus on international tax. The report covers the twelve areas in three headings:

  • Building blocks of the tax base (losses, groups, where income is earned);
  • International cross border concepts (transfer pricing, tax residence, worldwide and territorial taxation, tax havens, controlled foreign company rules);
  • Accounting and administration (cash tax and book tax, deferred tax accounting, provision for uncertain transactions, agreement and settlement).

www.cbi.org.uk/media/2049172/tax_misunderstood_concepts.pdf

4 VAT

4.1 Machine Games Duty first returns - penalties for late filing

HMRC has issued the following note:

HM Revenue & Customs (HMRC) understands that the introduction of the new tax will be difficult for many customers, particularly smaller customers making their first return and payment. HMRC has also encountered some system issues which have confused some customers and made it more difficult for them to comply.

Exceptionally, therefore, HMRC has decided not to apply penalties for the late submission of the first returns. This only applies to these penalties. No other penalties are affected.

Customers should ignore any penalty which shows on their account.

All penalties for late filing of first returns will be cancelled. www.hmrc.gov.uk/news/mgd-first-returns.htm

4.2 Recovery of input VAT on disposal of a minority shareholding

The ECJ case C-651/11 (Staatssecretaris van Financiën v X BV) concerned VAT in the Netherlands where the taxpayer tried to argue that its sale of a 30% interest in a company was part of its general activities rather than a tax exempt sale of shares, thus giving entitlement to input VAT recovery on associated costs.

The taxpayer vendor had carried out management work for its investee company for an agreed contractual rate of remuneration. These activities ceased on the sale, and the sale took place at the same time as all the other shareholders of the investee company sold out to the buyer.

The CJEU concluded that the transfer of the shares did not constitute the transfer of the totality of the assets of a business (nor an independent part of it), and this conclusion was not affected by the fact that all the shareholders sold out to the same buyer. They also concluded that the fact that the management activities ceased on the transfer was a logical consequence of the sale and did not represent the transfer of a business which could be carried on by the purchaser (in which case it would only have applied to the contract for management services, not the shares).

As to whether there was any right to input tax deduction on costs associated with the sale, the CJEU concluded:

Since the disposal of shares at issue in the main proceedings must be categorised as an exempt transaction ...., a right to deduct will exist only if the cost of the services supplied to X [the vendor] in relation to that disposal is part of the general costs relating to its overall economic activity, without being incorporated in the sale price of those shares. It is thus for the referring court to determine whether that condition is satisfied, taking into account all the circumstances in which the transactions at issue in the main proceedings were carried out.

http://curia.europa.eu/juris/document/document.jsf?text=&docid=137829&pageIndex=0&doclang=EN&mode=lst&dir=&occ=first&part=1&cid=673681

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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