UK: Weekly Tax Update - September 21, 2015

Last Updated: 1 October 2015
Article by Tina Riches

1 General news

1.1 Draft guidance on automatic exchange of financial account information

HMRC has published its draft guidance on the implementation of common reporting standards for automatic exchange of financial account information.

The guidance covers the Common Reporting Standard (CRS) and the incorporation of the CRS into EU law. Once finalised it is intended to incorporate amended and updated versions of the existing guidance on FATCA and the Crown Dependencies and Overseas Territories (CDOT) arrangements.

The guidance does not replace or override the CRS Commentary, but brings together the key concepts and provides additional guidance for UK-specific issues, including where there are differences between the CRS, FATCA, and CDOT rules.

One point of difference highlighted is in connection with the potential application of the rules to trusts concerning when a trust will be regarded as resident in the UK for the purposes of an agreement. The guidance comments:

  • for CDOT and the Directive on Administrative Cooperation purposes, if one or more of the trustees are resident in the UK for tax purposes then the trust is UK resident unless the trust is resident for tax purposes in another jurisdiction with which the UK automatically exchanges financial account information and the trust reports details of Reportable Accounts to that jurisdiction;
  • for FATCA purposes a trust will be regarded as resident in the UK for reporting purposes where most or all of the trustees are resident in the UK for tax purposes. Where some of the trustees, but not all, are UK tax resident, then the Trust is also to be treated as UK resident if the settlor is both resident and domiciled in the UK for tax purposes.

www.gov.uk/government/publications/informal-consultation-guidance-notes-for-the-automatic-exchange-of-financial-account-information

www.gov.uk/government/uploads/system/uploads/attachment_data/file/461418/Guidance_Notes_for_the_Automatic_Exchange_of_Financial_Account_Information.pdf

1.2 HMRC concludes consultation on penalties

HMRC has published a summary of the responses to a discussion document it issued on 2 February 2015 on how to improve the tax penalty regime.

This document summarises characteristics that HMRC (and the respondents) consider should underpin any new penalty regime.

Penalties should:

  • encourage compliance – they should not be intended to raise revenue;
  • be proportionate to the offence;
  • be applied fairly;
  • be a credible threat through being easy and cheap to collect; and
  • be consistent and standardised.

HMRC acknowledged that the current system is inconsistent and creates an administratively burdensome environment of high-volume low-value penalties, which were often successfully appealed. The ultimate goal, therefore, would be to apply fewer, but better-targeted, penalties. This would free resource at HMRC to tackle serious non- compliance.

The focus of the discussion was on penalties for lateness or inaccuracies. In the case of the former, HMRC said it would look at not charging a penalty where no tax is due, the period of lateness is short or the default is the taxpayer's first.

HMRC will consider introducing a penalty interest regime, meaning the sanction would be inherently proportional, and increasing the opportunities for reasonable excuse and mitigation.

Consideration will be given to increasing the penalty levels according to the degree of inaccuracy, the taxpayer's compliance history and/or whether the taxpayer co-operated to correct their tax position. For both types of penalties HMRC said it would look at improving its guidance and whether non-financial sanctions, such as increasing compliance burdens on non-compliant taxpayers, could be introduced.

Subject to the government's agreement, HMRC said it would issue an updated consultation document on penalties for lateness in due course and, owing to its increased complexity, a document on penalties for inaccuracy further down the line. The earliest possible date for legislation would be Finance Bill 2017.

www.gov.uk/government/uploads/system/uploads/attachment_data/file/461357/HMRC_Penalties_a_Discussion_Document_-_Summary_of_Responses.pdf

2 Private client

2.1 Scottish rate of income tax

HMRC has issued a reminder that the Scottish rate of income tax will be introduced from 6 April 2016. It adds that:

'You'll pay the Scottish rate of Income Tax if:

  • you're resident in the UK for tax purposes;
  • your main residence for most of the tax year has a Scottish postcode.' HMRC will contact potential Scottish taxpayers before April 2016. If the address HMRC holds for someone is in Scotland, he will be classed as a Scottish taxpayer.

A Scottish taxpayer's April 2016 tax code will begin with the letter 'S'.

The employers of Scottish PAYE taxpayers will be informed directly.

National Insurance contributions are unaffected by the introduction of the Scottish rate of Income Tax.

www.gov.uk/government/news/the-scottish-rate-of-income-tax

2.2 Spotlight 26 - contractor loan schemes

HMRC has issued a spotlight on contractor loan schemes indicating its view that these schemes do not work and strongly advising any contractor or freelancer who has used such a scheme to withdraw and settle his tax affairs.

The commentary on this scheme and its timing is interesting. HMRC says that it considers the scheme to be 'tax avoidance'. This seems a little odd, because tax avoidance is not itself illegal and, indeed, some users of the scheme would presumably hope that that was exactly what it was.

It goes on to say ' these arrangements artificially divert the income through a chain of companies, trusts or partnerships and pay the contractor in the form of a 'loan'. The 'loans' are claimed to be non-taxable because they don't form part of a contractor's income. However, in reality the 'loans' aren't repaid and the money is used by the contractor as if it were his or her income .'

HMRC has lost the loans-as-income point in the First-tier Tribunal (FTT) and the Upper Tier Tribunal (UT) in the Rangers case HMRC v Murray Group Holdings Limited and others [2014] UKUT 0292(TCC) so its approach can hardly be considered settled law yet, even if the view expressed is clearly the Revenue's decided opinion.

www.gov.uk/government/publications/spotlight-26-contractor-loan-schemes-too-good-to-be-true/spotlight-26-contractor-loan-schemes-too-good-to-be-true

3Trust, estates and IHT

3.1 HMRC trusts and estates newsletter

The September HMRC trusts and estates newsletter covers the following:

Finance (No 2) Bill 2015 announced changes:

  • Residence nil rate band.
  • Relevant property trust changes, tackling perceived avoidance through same-day additions to trusts, simplification by categorisation of property taken into account for the ten year charge, amongst other changes and measures dealing with certain anomalies;
  • Legislation relating to late payment interest concerning the procedures for dealing with IHT online;
  • Consultation on changes to non-domiciled rules;
  • DOTAS – the publication of draft regulations extending the scope of the IHT disclosure of tax avoidance scheme hallmark;
  • Deeds of variation: issues on trustees' residence status for Income Tax and CGT purposes. It is confirmed that only where the trustees acting during the period of non-residence are corporate will the foreign income for that period not be assessable for the year.
  • IHT online – the selective trial of the online service for what would otherwise be IHT205 reporting requirements (return of estate information) is to commence from late September to November;
  • the IHT treatment of usufructs: HMRC remains of the view that, generally, a usufruct should be treated as giving rise to a settlement for IHT purposes and will pursue the collection of tax on that basis. Its approach to such situations remains as outlined in its April 2013 newsletter;
  • IHT403 and normal 'out of income' exemption - to treat lifetime gifts made by a deceased person as normal expenditure out of income, information about the deceased's income and expenditure is required on form IHT403 page 6. HMRC has noticed a number of returns are incomplete in this regard;
  • a new version of the 41G(Trust) form has been published;
  • updates to the HMRC Trusts Estates and Settlements manual will be delayed until it has been moved to the Gov.uk website.

www.gov.uk/government/publications/hm-revenue-and-customs-trusts-and-estates-newsletters/hmrc-trusts-and-estates-newsletter-september-2015

3.2 Inheritance tax and downsizing

HMRC has published a technical note, consulting on the Inheritance Tax main residence nil-rate band (RNRB) downsizing proposals that were announced in the Summer Budget. The deadline for responses is 16 October 2015.

Summer Budget 2015 announced that anyone who downsizes or ceases to own a home on or after 8 July 2015 will still be able to use the RNRB when assets of an equivalent value, up to Ł175,000 by 2020/21, are passed on death to direct descendants.

The technical note provides further details of proposals, which will look at the percentage of the RNRB that the person has potentially forgone when he downsizes or ceases to own his main residence and make that same percentage available to the estate on death, to the extent that assets of that value go to descendants.

It also asks whether the details need further clarification and seeks views on the issues and practical difficulties in implementing the proposals. The responses will inform the draft legislation to be included in Finance Bill 2016.

It appears that the proposal, while complicated, was made to counter the fear that the new RNRB would act as a perverse disincentive for empty-nesters to downsize or for those moving into a residential home to sell their property.

www.gov.uk/government/publications/inheritance-tax-on-main-residence-nil-rate-band-and-downsizing-proposals-technical-note

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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