UK: Weekly Tax Update – Monday, 1 December 2014

Last Updated: 9 December 2014
Article by Tina Riches

1 GENERAL NEWS

1.1 NAO report on tax reliefs

The National Audit Office has concluded there should be more effective post-implementation evaluation of tax reliefs. It found some examples where HMRC and HM Treasury proactively monitored and evaluated tax reliefs, but in general that HM Treasury and HMRC do not keep track of tax reliefs intended to change behaviour. It also reported that the departments do not adequately report to Parliament or the public on the costs against budget, on whether the aims for the reliefs are being achieved or if they work as expected; therefore their work cannot be value for money.

Concerning particular reliefs, the report highlights (amongst other things) two examples:

Share loss relief

In 2013 HMRC detected large scale abuse of share loss relief in respect of the 2006/07 tax year. However while it is investigating 80% of these claims, and has detected 20 undisclosed schemes between 2005/06 and 2011/12, there has been little or no assessment and explanation for the level of annual claims. The analysis may be complicated by the fact that the exact figure depends on whether the loss could alternatively have been set against gains in the same or future years.

Entrepreneurs' relief

With respect to entrepreneurs' relief limited high level analysis has been undertaken to understand why the cost of entrepreneurs' relief has significantly outstripped its forecast. Entrepreneurs' relief has risen by over 500% since it was introduced in 2008-09.

Although policy and legislative changes have increased access to the relief, costs have continually exceeded forecasts (the estimated cost for 2013/14 is now £2.9 billion, 3 times higher than original predictions). HMRC and HM Treasury consider that a more complete evaluation on the impact of different factors will not be possible until the policy reaches a more steady state. In May 2014, HMRC commissioned a qualitative study of 50 people to find out why they claimed the relief.

www.nao.org.uk/report/the-effective-management-of-tax-reliefs/

www.nao.org.uk/wp-content/uploads/2014/11/Effective-management-of-tax-reliefs.pdf

1.2 Revenue Scotland launches new website

In advance of the devolution of Scottish Landfill Tax (SLfT) and Land and Buildings Transaction Tax (LBTT) on 1 April 2015, Revenue Scotland has launched its website providing:

  • responses to FAQs;
  • an LBTT calculator for property and leases; and
  • a list of key dates.

It is proposed that by mid-February guidance on the devolved taxes will be issued on the website and agents and taxpayers will be able to register with the LBTT and SLfT portals so that returns can be made and tax paid.

www.revenue.scot/

1.3 Changes to taxing private residences

The UK Government has published revised plans for taxing disposals of residential property, and has confirmed that this will be introduced from April 2015. There have been some welcome changes to the original suggestions. The revised proposals will reduce the administrative headache that would have arisen from the original proposals and some non-UK residents will now not have to pay the new tax charge. The following is based on the proposals outlined in the document, although the detail is expected to be in the draft legislation due on 10 December.

What is changing?

The Government has decided that from 6 April 2015 a person's home will not be eligible for private residence relief (PRR) from capital gains tax (CGT) for a tax year unless:

  • either the person making the disposal was tax resident in the same country as the property for that tax year; or
  • where not tax resident in the country, the person (or whose spouse or civil partner) spent at least 90 midnights in that property (or across all of their properties in that country) in that tax year.

What is the impact for individuals?

Where a taxpayer has more than one property eligible for PRR they will still be able to nominate which of those properties is their main property; this covers:

  • a UK resident individual with more than one home (in the UK or overseas); or
  • a non-resident that spends at least 90 days in one or more UK homes.

This recognises those who have a significant presence in the UK. However, unless they can meet the '90 day rule', then:

  • non-residents who own a UK property – eg someone resident in Paris who also owns a flat in London; or
  • UK residents who own an overseas property – eg someone resident in Oxford who owns a holiday home in Italy

may now find they are liable to pay some UK CGT on the eventual disposal of a property located in the jurisdiction in which they are not resident.

The new '90-day rule' will be crucial in determining the tax position, effectively giving rise to a record keeping obligation for those on the cusp to prove the number of days spent in a residence.

Non-UK residents beware - exceeding 90 days in the UK might tip the balance into being treated as UK tax resident, with potentially significant consequences, requiring careful assessment of circumstances. A new statutory residence test was introduced in 2013.

Other properties

No relief will be available on the disposal of let residential properties, although a welcome point is that communal residential property (such as care homes, nursing homes, and certain student and school accommodation) will generally be excluded from the charge on non-residents.

Impact for companies, partnerships and trusts owning UK property

The Government has recognised the benefit of large-scale institutional investment companies; these will not be caught, but smaller private investment vehicles will be in charge as will non-resident partners and trustees, though PRR may be available.

For companies caught, the rate charged is due to reflect the main UK corporate tax rate, (20% from April 2015). However, disappointingly the ATED-related gains regime is to stay in place. So some companies owning residential properties may move between regimes, although ATED-related charges will take precedence to prevent double taxation.

Flexible approach to exempting pre April 2015 gains

The Government has confirmed that it will only be gains from 6 April 2015 that will be taxed. Further, in most cases, it will allow either rebasing to 5 April 2015 values or a time-apportionment of the whole gain. This flexibility is welcome and will reduce the impact of the tax at least in the early years.

How it will be administered

Non- resident individuals and companies will need to report to HMRC within 30 days of the date of completion that a disposal has been made and make a payment of the tax that is due at the same time, unless they are already in Self Assessment. The nomination is to be made at this time (rather than within two years of acquisition).

Clients considering acquiring or disposing of a residential property or changing their country of residence you may wish to take advice before taking any action.

Please get in touch with your usual Smith & Williamson contact if you would like to discuss this.

www.gov.uk/government/consultations/implementing-a-capital-gains-tax-charge-on-non-residents

1.4 HMRC digital strategy

HMRC has published an updated digital strategy paper setting out how it intends to move more towards a digital way of working. For agents there is still a commitment to more forward on the agent online self service for registering as an agent and handling agent authorisation.

The report states:

'Moving to a digital way of working

Our work will be more about handling the complex tasks that can't be taken care of automatically. Digitisation will change how we work in HMRC, automating many processes that are currently done manually. This will reduce the need for some roles and create new roles, with new skills and new flexible ways of working.

Greater analysis of digital data will mean we become better at linking third party and customer data. More transactions will be automatically risk-assessed in real time and we will find ways to respond to customers that improve their compliance. This will mean we can focus more on tackling evasion, deliberate non-payment and criminal activity.

We will design tax policy that we can implement digitally, which makes the most of the opportunities that digital services provide.'

www.gov.uk/government/publications/hmrc-digital-strategy-2014/hmrc-digital-strategy-2014#the-future

2 PRIVATE CLIENT

2.1 EU report on wealth taxes

The EU has released an overview report of current tax practices with regard to personal wealth and wealth transfer in the 28 EU Member States MS). The main conclusion is inheritance and gift taxes are not comprehensively applied across MSs, for family and economic reasons, whereas real estate and land taxes did provide significant sources of tax and were less easy to avoid. A recent workshop on policy issues in this area was held and a link to the various presentations is available.

Whilst in theory most Member States tax inheritances and real estate, in practice the design of inheritance and gift taxes – with large exemptions for family members – means that such taxes are not comprehensively applied. Though third parties and relatively high inheritances/gifts are still taxed at significant rates there seems to be a general agreement that family members (for social reasons) and family businesses (for economic reasons) should be left out of the scope of the taxes. Some Member States have even abolished such taxes for these reasons.

Real estate and land taxes are thus the only significant source of wealth tax income. Their design is simple, they target many potential taxpayers and these taxpayers cannot do much to legally avoid taxation. The main problems arising with these taxes are the difficulty of determining a reliable and accurate tax base (for taxes on possession) and setting the optimum, least obtrusive, rate (for transfer taxes). It must however be noted that these taxes are not taxes on personal wealth only as they also apply to corporate entities.

Net-wealth taxes are on the other hand on the decline. Most Member States who had these kinds of taxes have abolished them as the revenue obtained did not justify the high compliance costs and negative side effects.

http://ec.europa.eu/taxation_customs/resources/documents/common/publications/studies/2014_eu_wealth_tax_project_finale_report.pdf

http://ec.europa.eu/economy_finance/events/2014/20141113-taxation/index_en.htm

2.2 New HMRC address for SA correspondence and tax return submission

HMRC has updated the correspondence address on its website for Self Assessment (SA) enquiries and also for submitting paper returns.

Unless otherwise advised, the new address to be used to write to HMRC or send in the 2013/14 return is:

Pay As You Earn and Self-assessment
HM Revenue and Customs
BX9 1AS

You do not need to include a street name or PO Box number in this address.

www.gov.uk/government/organisations/hm-revenue-customs/contact/self-assessment

3 BUSINESS TAX

3.1 David Gauke speech on total tax contribution

In support of the UK's reduction in its headline rate of corporation tax, David Gauke has highlighted the fact that corporation tax is borne by a combination of shareholders, employees and the customer. He also mentioned the OECD's statement that corporate income taxes are the most harmful for growth as they discourage the activities of firms that are most important for growth, ie investment in capital and productivity improvements.

The CT rate reduction has been a central part of the Government's long term economic plan. While there is recognition of the 'need to continue to focus relentlessly on tackling the deficit and driving economic growth', this is complemented by a commitment to ensure there is a competitive business environment in which to succeed.

A total tax contribution report has been published by The City of London, which focuses on the contribution of the financial sector for the year to 31 March 2013 and reports that:

  • the sector paid an estimated amount of total taxes (including both taxes borne and taxes collected) of £65.0bn, or 11.7% of total UK government tax receipts;
  • total corporation tax paid by the FS sector in the period was £6.5bn (16.4% of the UK's total CT receipts), up from £5.4bn in the prior year;
  • estimated employment taxes generated by the sector increased to £28.4bn, 12.0% of government receipts from employment (2012: £27.7bn; 11.8%) and constitute both the largest taxes borne and collected averaging at £26,674 for each employee.

www.gov.uk/government/speeches/david-gaukes-speech-on-the-pwc-total-tax-contribution-report

www.cityoflondon.gov.uk/business/economic-research-and-information/research-publications/Documents/research-2013/total-tax-contribution-of-uk-financial-services-sixth-edition.pdf

3.2 Scope of exceptions to the prohibition of corporate directors

Further to its July 2013 paper on transparency and trust the Department of Business Innovation and Skills (BIS) has issued a further consultation seeking views on circumstances where use of corporate directors of UK companies should be allowed. It also covers other legal entities, including Limited Liability Partnerships (LLPs) and their corporate members.

The report comments: 'In due course, the Small Business, Enterprise and Employment Bill (currently before Parliament) and regulations (to be drafted taking into account views received prior to and in response to this paper) will together set out a new legal position in relation to the use of corporate directors in UK companies.'

The report sets out suggestions for the areas where corporate directors could continue to act and these include:

  1. Various types of companies from private and public group companies through to those listed on AIM or the London Stock Exchange together with those subject to special regulation such as relating to charities, pension funds and OEICs;
  2. Other legal entities, including:

    1. Societas Europaea (SEs); and
    2. Limited Liability Partnerships (LLPs).

On LLPs, further views are requested but no significant changes are currently proposed to the status quo relating to corporate members. The document recognises that LLP members have some parallels with company directors and some parallels with company shareholders. It recognises that LLP members have an economic stake in the LLP, and using corporate members is an important means of securing investment for LLPs. It also reports that at the moment there is no strong body of evidence suggesting abuse facilitated by corporate members of LLPs.

It is recognised that restrictions on corporate members therefore risk restricting investment in LLPs. The Government proposes to review the position in parallel with the review of the Small Business Enterprise and Employment Bill provisions covering corporate directors of companies, or sooner if compelling evidence of abuse of the LLP structure were to emerge – some abuse has already been identified.

www.gov.uk/government/uploads/system/uploads/attachment_data/file/378197/bis-14-1017-scope-of-exceptions-to-prohibition-of-corporate-directors.pdf

4 VAT

4.1 VAT and Mini One Stop Shop (MOSS) on splitting businesses

One of the problems for small businesses carrying out cross border transactions covered by the VAT place of supply of services rules that change from 1 January 2015 is that if they are not VAT registered they cannot register for MOSS. This is an EU rule rather than an HMRC imposed condition. However, HMRC has published some useful Q&As which suggest that it will permit traders not otherwise required to register in the UK for VAT to split their businesses and only register the cross border part, which can then be registered under MOSS to report cross border transactions.

HMRC has said in the Q&As that it will provide some guidance on this shortly. It has confirmed that the business splitting rules will not apply because businesses are not trying to avoid UK VAT.

It is hoped that the guidance will clarify whether the businesses can continue to run separately even if they grow to the extent that their combined supplies exceeds the UK VAT registration threshold.

See Section D: VAT registration and MOSS in the Q&As at:

www.mynewsdesk.com/uk/hm-revenue-customs-hmrc/blog_posts/eu-vat-changes-twitter-q-a-31555

4.2 VAT on pension fund management costs and services

HMRC released two long expected Revenue & Customs Briefs last week, providing further guidance on VAT in relation to pension funds.

A. Brief 43/2014 Pension fund management costs

This Brief deals with the consequences of the CJEU decision in PPG Holdings BV (C-26/12) and confirms the circumstances in which an employer can deduct VAT charged on administration and investment management services provided in relation to occupational pension schemes.

HMRC now accepts that an employer is entitled to deduct the VAT charged according to its input VAT recovery percentage, but only if the employer can provide evidence that the employer:

  • is the actual recipient of the services;
  • is a party to the contract for those services;
  • has paid for these services; and
  • holds a valid VAT invoice.

HMRC also confirms that it has extended the transitional period, during which a taxpayer can apply HMRC's previous policy, until 31 December 2015. This policy allowed a simplification where the pension scheme and the employer could apply a 70/30 split: 70% could be allocated to the investment activities of the pension scheme and 30% could be allocated to the employer's management and administration of the scheme, with input VAT being recovered accordingly.

The brief also contains guidance for making retrospective claims, however see below with regard to the VAT paid on the management of a defined contribution scheme.

www.gov.uk/government/publications/revenue-and-customs-brief-43-2014-vat-on-pension-fund-management-costs/revenue-and-customs-brief-43-2014-vat-on-pension-fund-management-costs

B. Brief 44/2014 VAT treatment of pension fund management services

This Brief deals with the consequences of the CJEU decision in ATP Pension Services (C-464/12) and confirms the characteristics of the pension funds that HMRC now accepts are, 'special investment funds' and that should be and always should have been exempt from VAT. However, HMRC clearly states that they are still considering the implications of the ATP decision, and further policy changes may follow.

In the meantime, any pension fund that has all of the characteristics set out below is regarded as a special investment fund and therefore benefits from the VAT exemption for management and certain administration services provided by the fund manager.

The characteristics are:

  • they are solely funded (whether directly or indirectly) by persons to whom the retirement benefit is to be paid (ie the pension customers);
  • the pension customers bear the investment risk;
  • the fund contains the pooled contributions of several pension customers; and
  • the risk borne by the pension customers is spread over a range of securities.

It is not entirely clear what HMRC means by 'solely' in the first point above.

Further, HMRC accepts that some funds that contain the pooled assets of personal pension schemes and that have all of the above characteristics will also fall within the VAT exemption for fund management.

There are a number of scenarios where it may not be straight forward to identify the services which qualify for exemption, eg where a scheme has a number of funds not all of which are special investment funds, and the brief provides further guidance on this.

This brief also contains guidance for making retrospective claims.

www.gov.uk/government/publications/revenue-and-customs-brief-44-2014-vat-treatment-of-pension-fund-management-services/revenue-and-customs-brief-44-2014-vat-treatment-of-pension-fund-management-services

We have taken care to ensure the accuracy of this publication, which is based on material in the public domain at the time of issue. However, the publication is written in general terms for information purposes only and in no way constitutes specific advice. You are strongly recommended to seek specific advice before taking any action in relation to the matters referred to in this publication. No responsibility can be taken for any errors contained in the publication or for any loss arising from action taken or refrained from on the basis of this publication or its contents.

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