UK: Weekly Tax Update - Februrary 9th, 2015

Last Updated: 12 February 2015
Article by Tina Riches

1.General news

1.1 Consultation: penalties and digital communication with HMRC

HMRC has issued a discussion document asking for feedback by 11 May 2015 concerning how tax penalties would work as the use of digital communication with taxpayers increases. The document is aimed at setting out objectives and identifying options. As HMRC increases the digitisation of its communication with taxpayers, the OTS has highlighted to HMRC that the way the penalty regime operates will need to be tailored to new digital processes, with as much as possible automated.

According to HMRC, penalties play a role in influencing behaviour, in emphasising that non-compliance does not pay, and fall into three broad categories:

  • those aimed at penalising a failure to meet a time-bound obligation (eg submitting returns on time);
  • those aimed at penalising a failure to meet a regulatory obligation (eg notifying taxable status);
  • behavioural-based penalties (eg for submitting inaccurate returns and documents).

The paper sets out the concern that increased digitisation could lead to large-scale automated issue of penalties, potentially reducing taxpayers' motivation to comply, particularly where the penalties are small and therefore resource-intensive for HMRC to follow up or deal with taxpayer reaction. There is also a concern that penalties may be disproportionate where based on a percentage of tax, if filing or payment is uncharacteristically late by a very small period. Mention is made of the VAT default surcharge system which permits a warning to be issued rather than a penalty in cases of initial failure to comply, while successive failures attract progressively higher penalties.

Possible reforms for the way penalties are administered include:

  • a progressive system similar to penalty points for motoring offences, so that initial financial penalties are avoided, but more substantial penalties then apply for more serious failures or for persistent non-compliance;
  • a personalised digital tax account showing in one place all the taxes due from a taxpayer may require a move away from applying penalties on a tax-by-tax basis and towards a penalty system that is based on the overall position of the customer. This might mean there are implications for the role of interest.

1.2 Scottish tax measures

SSI 2015/36 provides that where a payment is made to Revenue Scotland by credit card in respect of tax, interest or penalties, and internet authorisation is given to make that payment by credit card, a fee of 1.4% will be charged for using the credit card.

Draft Scottish statutory instruments have been published setting out the tax rates and tax bands for land and buildings transaction tax (LBTT) and the standard rate and lower rate of Scottish landfill tax (of £82.60 and £2.60 respectively). These are due to apply from April 2015, subject to the LBTT transitional provisions for certain transactions which began under SDLT.

1.3 PAC report recommends consultation on state regulation of tax advice Industry

The Public Accounts Committee (PAC) has published a short follow-up report on 'Tax avoidance: the role of large accountancy firms', on their work advising multinational companies on international structures. The PAC recommends that HMRC should 'do more to challenge the nature of the advice being given by accountancy firms to their clients, ensure that tax liabilities reflect the substance of where companies conduct their business, and introduce a new code of conduct for all tax advisers'. It also recommended that it should consult on how it should regulate the industry and enforce such a code, including through financial sanctions.

The report did not recognise the work already progressing between the professional bodies and HMRC to update the current guidance 'Professional Conduct in Relation to Tax', which sets out tax advisers' responsibilities in this area. In addition the report seems to ignore the rule of law, the introduction of diverted profits tax and does fully recognise the OECD developments in this area nor the role for legislators worldwide in keeping the international tax system up to date.

The professional bodies need to continue to work with HMRC and demonstrate that state regulation would not be beneficial for anyone, particularly for clients who need access to independent professionals. The detailed PAC recommendations are in the report at:

1.4 NAO report by Comptroller and Auditor General-HMRC Progress Report

The National Audit Office (NAO) has issued a report on HMRC: Increasing the effectiveness of tax collection: a stocktake of progress since 2010. The report says that HMRC has made good progress towards achieving its primary objectives of maximising revenue and making sustainable cost savings. It does however also say that HMRC has much more to do to improve its performance in dealing with taxpayers and has concerns about the replacement of the Aspire contract.

The report focuses on several key areas including tackling marketed tax avoidance; the administration of personal tax, particularly in the area of PAYE; and settling large tax disputes. However, although it has improved in some areas, HMRC has 'much more to do' to improve its standard of service and will, for example, miss its targets on answering 80% of telephone calls and 80% of post within 15 days.

Perhaps more concerning, in the area of technology, is that the NAO considers there is a risk that HMRC will not build up commercial and technical capability in time to replace its Aspire suppliers' contract. This is a major challenge.

The administration of tax reliefs, which can have a big impact on the public finances, is also mentioned as needing more structured and proactive management.

2.PAYE and employment

2.1 Consultation on intermediary record keeping requirements

Summary of responses: In response to an October 2014 consultation on the information required for reports made by employment intermediaries, HMRC has announced it will reduce the amount of information to be reported and clarified a number of aspects on how the regime will work.

In September 2014 HMRC issued advance notice of the reports that employment intermediaries would need to file on a quarterly basis covering each three month period from 6 April 2015, with the first reports due by 5 August 2015. Those reports will contain details of all workers and their payments where PAYE was not operated, but the requirements will now be updated to remove the need to report:

  • worker title;
  • hours worked;
  • passport number;
  • National Identity Card Number; and
  • where a NINO is provided, the need to report Date of Birth and gender.

The regulations have also been amended so that although HMRC will require details of employed workers (other than those of the intermediary with the filing obligation), they will only require the intermediary to tell them about payments for those self-employed workers and others they have engaged where PAYE has not been operated including those engaged through offshore intermediaries.

The time frame for making nil returns has been reduced from three years to one year. The response contains some further clarification points and can be accessed from the link below.

The updated version of the draft regulation published in original form in October 2014, was not available at the time of going to press.

2.2 Consultation: Internationally Mobile Employees and Employment- related Securities

The government's consultation on Internationally Mobile Employees (IMEs) and Employment-related Securities (ERS) has concluded and a document summarising responses has been published. The consultation arose following the changes in Finance Act 2014 to ERS awards to IMEs that take effect from 6 April 2015. The changes were recommended by the Office of Tax Simplification (OTS). Their effect for income tax is broadly to apportion the awards on a time basis and the part that relates to UK duties will now be subject to income tax.

It is arguable both that this is probably fairer yet not necessarily simpler than what went before. The OTS also recognised that the treatment of the awards for NIC purposes should as far as possible be aligned. Although that must be right in theory, the problem that has emerged is that there may be circumstances where complete alignment of income tax and national insurance contributions could create double charges, UK and foreign, eg, an employee chargeable for income tax on ERS in the UK may still be within a foreign social security scheme and not liable for UK NICs.

The measure proposed in the original consultation is designed to ensure that any ERS income that is attributable to days when the individual was in a non-UK Social Security system will be disregarded and not subject to a UK NIC charge.

There will be further informal discussion with a view to publishing legislation to commence in the 2015/16 tax year (irrespective of the date of acquisition of the ERS). Guidance will also be published, which will include an explanation of how EU legislation and bi-lateral agreements can be relied upon in most cases to avoid a double charge to social security contributions, and when unilateral relief will be available.

3. Business tax

3.1 CJEU decision on infraction proceedings against UK re CTA 2010 s.119(4)

The CJEU has agreed with the UK that the point at which the 'no possibilities' test for the potential use of a non-UK but EEA resident subsidiary's losses incurred for periods beginning on or after 1 April 2006 (as introduced by Finance Act 2006), should be assessed immediately after the end of the accounting period.

The decision contrasts with the UK Supreme Court's 2013 decision ([2013] UKSC 30, ) in the case of losses incurred by the M&S group in periods up to December 2001, which concluded the no possibilities test should be determined at the date the claim is submitted.∂=1&cid=134601#ctx1

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. © Smith & Williamson Holdings Limited 2015

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Tina Riches
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