UK: Weekly Tax Update - 30 November 2015

Last Updated: 1 December 2015
Article by Smith & Williamson

1.General news

1.1 Autumn Statement 2015

Smith & Williamson's summary of key measures, together with our initial commentary is on our website.

The Chancellor George Osborne set out his spending plans, forecasts for revenue and his vision for 2020.

www.smith.williamson.co.uk/uploads/publications/autumn-statement-2015.pdf

1.2 Whether interest has a UK source

Ardmore Construction and Colin Perrin have joined together in taking their cases concerning whether interest payments have a UK source to the Upper Tribunal (UT), but have lost. The joint case reiterates some of the principles to be applied in assessing whether interest has a UK source for the purpose of deducting tax at the basic rate before paying it to the lender.

The case concerned the tax treatment of loan interest paid to creditors in Gibraltar for Ardmore, and Isle of Man for Mr Perrin. There were three grounds of appeal against the decisions of the First-tier Tribunal (FTT) that the interest had a UK source:

  • the source of the interest should properly be found by ascertaining the 'nationality' or the 'residence' of the relevant loan instrument, and that the FTT erred in determining residence using a multifactorial approach;
  • if a multifactorial approach is relevant, then the FTT erred by placing too much weight on the residence of the debtor;
  • it is the place where the credit is provided that is the source of residence.

The taxpayers lost on all grounds. The following points were included in the decision:

  • the residence of the lender and the place from which the money was lent (the place of credit) are not relevant;
  • jurisdiction and the proper law of the contract are factors of little or no weight having regard to the 'Greek Bank case' (Westminster Bank Executor and Trustee Co (Channel Islands) Ltd v National Bank of Greece SA [1971] AC 945; (1970) 46 TC 472), the single previous binding case on this;
  • the absence of security is a neutral factor - the fact that the agreements specified that there should be no UK security is immaterial;
  • the fact that in the case of Mr Perrin interest payments were made from the Isle of Man and paid to a bank in the Isle of Man was of no relevance. The place at which payments are received cannot be relevant to a question of source, and the place from which payments are made is of little or no significance, as the Greek Bank case illustrates, compared to the substantive or ultimate source of payment in respect of the obligations associated with the debt;
  • the FTT was correct to have given weight to the residence of the debtor, Mr Perrin, and to the source of funds for payment and enforcement and the residence of the debtor, Ardmore, a UK incorporated and tax-resident company.

www.tribunals.gov.uk/financeandtax/Documents/decisions/Ardmore-Perrin-v-HMRC.pdf

2. Private client

2.1 Tax-Free Childcare: 10 things parents should know

HMRC has issued some guidance to parents about the new 'tax-free' childcare due to be launched early in 2017. To be eligible, parents in work need to earn over £100 a week and not more than £100,000 per year.

www.gov.uk/government/news/tax-free-childcare-10-things-parents-should-know

2.2 Scottish rate of income tax – letters to individuals

The National Audit office has published a report into HMRC's administration to date of the Scottish rate of income tax.

The report mentions that HMRC plans to communicate with Scottish taxpayers in December 2015 (delivery expected to start this week). Due to a delay by the Scottish Government in announcing the Scottish Government's budget, letters to individuals will not advise them on the actual SRIT they will pay in the 2016-17 tax year. However, the letters need to be issued shortly to give HMRC sufficient time to deal with queries from taxpayers, eg around their residence status, following receipt of the letters.

The report includes some positive comments on the work done to date to identify Scottish taxpayers and to put a SRIT system in place, although it highlights that HMRC will need to react quickly to the changing compliance environment within the UK from April 2016, when SRIT is introduced, especially if there are differential rates, which could according to the NAO encourage avoidance and evasion.

The following infographic from the report provides some useful key facts:

www.nao.org.uk/report/the-administration-of-the-scottish-rate-of-income-tax-2014-15/

3. PAYE and employment

3.1 Payrolling of benefits in kind SI 2015/1927

A statutory instrument (SI 2015/1927) has been introduced to provide for the payrolling of benefits in kind. It has effect for the 2016/17 tax year onwards.

Amongst other things it provides for the:

  • removal of the requirement for employers to report expenses paid to employees (whether deductible or not) on form P11D at the end of the tax year;
  • introduction of a scheme to authorise employers to deduct tax from employees' pay in respect of certain benefits in kind that they provide to their employees through PAYE ('payrolling benefits');
  • removal of existing requirements for employers to report benefits provided to employees on form P9D at the end of the tax year in respect of certain excluded employments;
  • PAYE under payrolling does not count towards the 50% of pay that can be deducted by an employer; And
  • by 31 May following the end of the tax year employers operating payrolling must provide a statement to employees setting out benefits payrolled and their cash equivalent.

www.legislation.gov.uk/uksi/2015/1927/pdfs/uksi_20151927_en.pdf

3.2 Consultation on exclusion of certain companies from the employment allowance

Following an announcement on 8 July 2015 the Government has issued a consultation on withdrawing the employment allowance from companies where the director is the sole employee.

The employment allowance currently reduces the majority of employers' annual NIC bills by up to £2,000. This is scheduled to increase to £3,000 from April 2016.

www.gov.uk/government/uploads/system/uploads/attachment_data/file/479346/Technical_consultation_on_companies_excluded_from_the_Employment_Allowance.pdf

3.3 Advisory fuel rates

The advisory fuel rates applicable from 1 December 2015 for repaying employees for business mileage in company cars (or for employees to repay the cost of fuel used privately) without incurring tax and NIC charges and that can be used for calculating the fuel element for VAT input tax purposes, with the rates applicable immediately before 1 December 2015 shown in brackets, are:

It is possible to continue to use the previous rates for the period 1 December 2015 to 31 December 2015, after which the new rates apply mandatorily for the purpose of calculating any tax or NIC charges.

www.gov.uk/government/publications/advisory-fuel-rates

4. Business tax

4.1 De-regulatory changes affecting LLPs and qualifying partnerships

The Department of Business Innovation and Skills (BIS) has issued a consultation running from 20 November to 21 December 2015 on simplifying the administration of LLPs and qualifying partnerships (general and limited partnerships meeting the size criteria).

The proposals are to:

  • increase thresholds used to determine the size of LLPs, enabling around 195 medium-sized LLPs to be re-categorised as small and access the less burdensome small LLPs' regime. Similarly, around 86 large LLPs will be re-classified as medium-sized and will be able to access a reduced reporting regime;
  • limit the number of mandatory notes required of small LLPs;
  • provide LLPs with the opportunity to use alternative layouts when preparing their profit and loss account and balance sheet, provided that the information given is at least equivalent to the information otherwise required by the standard formats (this is likely to be particularly useful for LLPs who are subsidiaries in a group which uses international accounting standards for consolidation purposes;
  • allow small LLPs and qualifying partnerships to prepare an abridged balance sheet and profit and loss account if approved by all members of an LLP (a micro entity regime); and
  • permit the use of the 'equity method' in individual LLP statements (a consolidation basis of accounting).

Subject to the agreement of Parliament, it is the Government's intention that the new requirements for LLPs and Qualifying Partnerships will apply to financial years commencing on or after 1 January 2016. BIS anticipates that the regulations will be made by the summer of 2016.

The revised size limits from 1 January 2016 are proposed as:

www.gov.uk/government/uploads/system/uploads/attachment_data/file/478604/BIS-15-631-consultation-deregulatory-changes-for-LLP-and-qualifying-partnerships.pdf

4.2 Corporate tax or VAT?

The Royal Economic Society's annual lecture was given by 24 November 2015 Professor Rachel Griffith from Manchester University entitled 'Does Starbucks pay enough tax? – How and why we tax multi-national firms'. The conclusion of the lecture was that corporate tax should be paid based on where multi-nationals' products are sold rather than necessarily where their accounting profits are based.

Professor Griffith argued that, surprisingly, there is relatively little evidence that the UK or US lose substantial amounts of tax revenue due to firms' avoidance activities. In discussing why that might be the case, and some of the challenges that governments face in effectively taxing firm profits, she commented:

  • the fact that a company's assets often didn't have a physical presence - such as patents, trademarks and brands - made it difficult to calculate what a firm should pay and where;
  • we currently try to tax corporate profits at the location where value is created, under international agreements formed in the 1980s. Implementation of this system is increasingly difficult in the presence of intangible and internationally mobile assets;
  • multi-national companies should pay tax on their profits based on where their products are sold, not where they are made.

www.res.org.uk/view/lectureEduTraining.html

http://personalpages.manchester.ac.uk/staff/rachel.griffith/TalksPolicy/GriffithMiller2014.pdf

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