1.1 Draft Finance Bill 2017 legislation and related documents
Draft legislation for Finance Bill 2017 and related documents were issued on 5 December 2017.
Personal tax measures include:
- draft legislation relating to the reform of the non-domicile rules, refinement of the business investment relief rules, and the bringing within the scope of UK IHT any overseas property whose value is derived from UK residential property. Our briefing note on these measures can be found at:www.smith.williamson.co.uk/uploads/publications/changes-taxation-of-non-doms-dec-16.pdf
- alignment of primary and secondary NIC thresholds from 6 April 2017, and with income tax at the upper end, but not at the lower end;
- from 6 April 2017, the end of the requirement to deduct tax on interest payments for OEIC's, AUT's, investment trusts and peer to peer lending platforms;
- the personal allowance and higher rate thresholds for 2017/18 to be £11,500 and £45,000 respectively;
- from 6 April 2017, performance fees will no longer be deductible from offshore fund income, but instead will be deductible for CGT purposes;
- reform of the taxation of life assurance products from 6 April 2017;
- ISA limits increased to £20,000 from 6 April 2017 (junior ISAs and child trust funds to £4,128);
- from the date of Royal Assent of Finance Bill 2017, the range of permitted investments that do not trigger the personal portfolio bond rules will be revised to include UK real estate investment trusts, overseas equivalents of investment trust companies and authorised contractual schemes. There will also be a power to amend the list of approved categories of investments; and
- for EIS and SEIS shares issued on or after 5 December 2016 will no longer be excluded from qualifying if a right exists to convert the shares from one class to another at some future date (as long as the right is not exercised during the holding period). Some refinements are also made to the VCT follow- on funding rules from 6 April 2017.
Business tax measures include:
- the reform of corporate loss relief from 1 April 2017;
- the restrictions applying from 1 April 2017 to corporate interest tax deductions above a £2m net interest threshold. The draft legislation on the public interest benefit exception and a number of other aspects, is not yet available;
- a relaxation of the substantial
shareholdings exemption for disposals on or after 1 April 2017.
This includes: – Removal of the condition that the investing
company is required to be a trading company or part of a trading
- Relaxation of the condition that the investment must have been held for a continuous period, as a minimum, from 12 months in the 2 years preceding the sale to a continuous period of 12 months in the 6 years preceding the sale;
- Withdrawal of the condition that the company in which the shares are sold should continue to be a qualifying company immediately after the sale, unless the sale is to a connected party.
- Removal of the condition that the company in which the shares are sold is a trading company, for a class of investors defined as qualifying institutional investors. The legislation contains a list of qualifying institutional investors.
- refinements to target better the patent box and hybrid mismatch rules;
- legislation for the previously announced and forthcoming re-scoping of the bank levy;
- the ability of SMEs to access the Northern Ireland corporation tax rate on the same basis as large companies;
- legislation to prevent the future use of disguised remuneration schemes by the self-employed to have effect from 6 April 2017; and
- abolition of Class 2 NIC from April 2018.
Employment tax and pension measures include:
- restrictions on the range of benefits that can be the subject of salary sacrifice arrangements from 6 April 2017, with transitional periods for existing arrangements;
- the money purchase annual allowance for pensions will be reduced from £10,000 to £4,000 from April 2017;
- from 6 April 2017, the taxation of foreign pensions and lump sums will be brought into line with the taxation of other UK pensions for UK resident individuals, along with an extension of UK taxing rights on pension exporting from 5 years to 10 years;
- from April 2018 termination payments in excess of £30,000 will attract employer's NIC;
- legislation concerning off-payroll working in the public sector that will impact payments made on or after 6 April 2017; and
- from April 2017, the denial of an employer's tax deduction for payroll costs where incurred in relation to certain disguised remuneration arrangements, unless any associated PAYE and NIC charges are paid within a 12 month period.
VAT and indirect tax measures include:
- with effect from 1 April 2017 a new
16.5% VAT flat rate for all 'limited costs' businesses
where costs of goods are either:
- less than 2% of turnover; or
- greater than 2% of turnover, but less than £1,000 a year.
- reform of the VAT DOTAS rules to require promoters to disclose from 1 September 2017; and
- an increase in the standard rate of insurance premium tax from 10% to 12% with effect from 1 June 2017.
Tax administration measures include:
- requirement to correct certain offshore tax non-compliance with penalties for non-correction by September 2018, irrespective of the reason;
- other measures aimed at tackling tax avoidance and evasion.
Overview of legislation in draft:
Draft provisions for Finance Bill 2017:
Draft explanatory notes for Finance Bill 2017:
1.2 Enquiry – is deadline met by giving notice of intention to enquire?
The HC has held that to meet the statutory deadline on or prior to the opening of an enquiry, HMRC merely has to give notice of intention to make an enquiry. There is no requirement to open the enquiry formally by the deadline.
The claimant, Mark Wickersham, sought an order for HMRC to pay him £63,188.87, plus interest, in respect of a capital loss claim included on his 2011/12 tax return and carried back to 2010/11.
TMA 1970 Sch 1A obliges HMRC to give effect to claims made outside a tax return, here the 2010/11 tax return, as soon as practicable. If HMRC gives notice, by the deadline, of an intention to enquire into a claim, however, the loss relief is suspended pending the outcome. The relevant deadline appears to have been 31 January 2014, the anniversary of the filing date for the 2011/12 tax return. Mr Wickersham asserted that HMRC failed to serve notice of an intention to make an enquiry by the deadline and so the loss claim was final.
HMRC sent two letters to the taxpayer in January and June 2013, with a schedule attached to the first letter, stating that HMRC would be opening an enquiry into the claim by separate letter.
The HC held that the schedule attached to the first letter meant HMRC had given notice sufficient to comply with the relevant requirements of TMA 1970 Sch1A. Further, even if this conclusion was wrong, they confirmed that the combination of the two 2013 letters would be notice of an intention to enquire.
HMRC also succeeded in its argument that even if it had failed to serve the taxpayer with notice of an enquiry, Mr Wickersham's claim was premature, following Da Silva (R (oao) De Silva v HMRC  EWCA Civ 40).
The principle from the De Silva case is that losses carried back to an earlier tax year must be valid losses. It follows that they cannot be so until any TMA 1970 s.9A enquiry into the loss included in the relevant return is final. Again, for a TMA 1970 s.9A enquiry to be valid, HMRC is only required to give notice of intention to enquire before the deadline. It is not necessary for a formal enquiry to be opened within the same time limit.
The HC considered that the fact that the Da Silva case related to partners rather than individuals was insufficient to distinguish Mr Wickersham's case.
1.3 OTS and the gig economy
The OTS has issued a focus paper aimed at contributing to the debate on the tax issues thrown up by the 'gig economy'. The gig economy is where organisations and independent workers contract for short-term engagements (the 'gig').
The OTS will be considering the following issues affecting different sectors that interact with the gig economy:
- the individual workers who contract for a gig: are they employed or self-employed for tax purposes? How do they interact with the tax system? Is the system simple for them?
- the platform operator: could they become more involved beyond simply sorting out their own tax position?
- the individual or company who is offering the gig: does the hirer have any role?
- HMRC: the tax system has existing rules, systems to gather data and ways of assessing it, that will apply to those working in the gig and 'sharing economies', just as to the generality of taxpayers. But what of the practicalities? What about knowing who the individuals are in the first place and then managing the increased monitoring load? and
- the Exchequer: does gig working mean lower tax receipts, particularly of employer NICs?
1.4 OTS stamp duty study terms of reference
The Chancellor of the Exchequer and the Financial Secretary to the Treasury have agreed that the OTS can carry out a review of Stamp Duty on paper transactions. The terms of reference are now available.
1.5 OTS now on a statutory footing
SI 2016/1133 set the appointed day for s.184-189 and Sch25 to come into effect as 28 November 2016. This puts the OTS on a statutory footing and with an expanded role and wider remit.
The OTS remit is to review and report on aspects of the tax system for the purpose of identifying whether and if so, how, that part of the tax system can be simplified. Its reports will be sent to the Chancellor of the Exchequer and be laid before Parliament. The OTS must also submit an annual report.
2. BUSINESS TAX
2.1 Tax advantaged venture capital schemes – the advance assurance process
Due to increasing demand for HMRC advance assurance on tax advantaged venture capital schemes (seed enterprise investment schemes (SEIS), enterprise investment scheme (EIS), venture capital trusts (VCTs) and a soon to be expanded social investment tax relief (SITR)), HMRC has issued a consultation on streamlining the service to make it more effective. Responses to the consultation are due by 1 February 2017.
The suggestion for charging for the service has been rejected at this stage. Likewise, proposals for a booking system and prioritising applications with the largest economic importance have also been rejected. The options considered are:
- do nothing;
- withdraw the service;
- introduce restrictions and limitations - examples include: limiting the services to SEIS, limiting applications to the first one or two applications by a company and limiting applications by reference to size;
- providing a service for discrete aspects of the schemes; and
- the use of standard documents.
The service is currently experiencing a high volume of demand. This seems natural bearing in mind the increasing complexity of the rules, and the desire of taxpayers for certainty before claiming reliefs. In view of the increased demand for advance assurance, the first two options listed above appear unimaginative. One way of potentially reducing excess demand for the service not discussed in the consultation document, is making the legislation simpler to understand and apply.
The consultation is at an early stage, aimed at setting out objectives and identifying options.
2.2 Requirement to notify HMRC of offshore structures
HMRC has issued a consultation on a proposed new legal requirement that intermediaries creating or promoting certain complex offshore financial arrangements notify HMRC of their creation. Responses to the consultation are requested by 27 February 2017.
The consultation sets out a proposal to require businesses that create certain complex offshore arrangements to notify HMRC of the details of such arrangements and provide them with a list of clients using the arrangements. The Government recognises that, in many cases, these arrangements are used for legitimate purposes. The measure therefore aims to target those arrangements that could easily be used for tax evasion purposes.
Businesses would be provided with a notification number, which they should in turn provide to their clients. Clients would be expected to include this number on their self-assessment tax return or personal tax account. Those who fail to comply with these requirements would incur civil sanctions.
The consultation is at an early stage, aimed at setting out objectives and identifying options.
2.3 Whether landfill used for production of methane was waste
The CA has agreed with the FTT and UT that material deposited in a landfill site that is broken down by microbes thus producing methane, which is used to generate electricity, is waste for landfill tax purposes and thus liable to landfill tax.
2.4 Patent box: designated foreign taxes for identification of a 'new qualifying patent'
SI 2016/1181 identifies designated foreign taxes for which the grantor or assignor is liable, that disqualify a licence or right from being a 'new qualifying IP right' for the purposes of the patent box regime if granted or assigned on or after 2 January 2016.
The relevant legislation to which this instrument refers is CTA 2010 s357BP.
3.1 EC proposals for the digital single market
The European Commission has published a series of proposed measures aimed at improving the VAT environment for e-commerce businesses in the EU.
The key aspects of the proposals are:
- From 2018, simplifying the VAT rules
for start-ups and micro-businesses selling online. This will
- an annual cross-border threshold for online sale of goods of €10,000;
- an annual cross-border threshold for online supply of services of €100,000.
- From 2021, extending the mini one stop shop (MOSS) for cross-border supplies of electronic services to online supplies of goods and all cross-border supplies of services.
- The intra-EU distance sales regime and the small consignment exemption on imports will be removed in line with the commitment to apply the destination system for VAT. In addition, the one stop shop will be extended to imports.
- There are proposals to permit member states to apply the same rate of VAT to electronically supplied publications as they do to printed matter.
3.2 Consultation on VAT grouping and cost sharing
In the light of two recent CJEU decisions, Larentia & Minerva (case C-108/14 and C-109/14) and Skandia America Corporation (case C-7/13), HMRC has issued a consultation on eligibility requirements for VAT group registration and cross border group arrangements. It is also interested in views on the interaction between VAT grouping and cost sharing provisions. Comments are requested by 27 February 2017.
UK VAT grouping legislation (VAT Act 1994 s.43-43D) currently allows two or more 'bodies corporate' (such as limited companies or limited liability partnerships) to register as a VAT group if:
- Each body is established in the UK; and
- They are under common control; for example, a parent company and its subsidiaries.
In the 2015 Larentia and Minerva cases, the CJEU indicated that a Member State may not restrict VAT grouping to those entities that have legal personality, unless it is justified by the prevention of abusive practices, tax evasion or avoidance.
HMRC would therefore like views on the risks and opportunities for extending VAT grouping to other entities such as, for example, partnerships. It would also like views on eligibility requirements, but is of the view that eligibility requires financial, economic and control links that must be met at all times when the group relationship exists.
In the Skandia case, the CJEU found Sweden's 'establishment only' VAT grouping was consistent with Article 11 of the Principal VAT Directive (PVD), and resulted in taxable supplies from the corporation's overseas head office to its Swedish branch in the VAT group. This decision was an exception to the earlier CJEU judgment in FCE Bank (C-210/04), which ruled that services between a fixed establishment and its head office fall outside the scope of VAT. Following the Skandia decision, HMRC put steps in place to recognise separate taxable persons created by establishment only VAT groups in other member states (R&C Briefs 2/2015, 18/2015, 23/2015).
HMRC would like views on how the measures put in place have affected businesses operationally and financially and the impact of any other CJEU decisions.
Cost sharing exemption
The cost sharing exemption (CSE) enables a special structure called a cost sharing group to be used by persons making exempt supplies or carrying out non-business activities. Costs can be recharged to group members without a VAT cost, provided certain conditions are met.
There are differences in the way the CSE is enacted across the EU and some consider that the UK should adopt a more liberal interpretation. HMRC would like views on the interaction of VAT grouping and the CSE and whether the CSE should be interpreted more liberally in the UK.
The consultation is aimed at determining the best option and developing a framework for implementation including detailed policy design.
4. AND FINALLY
A View of the Shard
A good QI or Trivial Pursuit question for you, to share at seasonal dinner parties: what is the highest marginal rate of income tax? It would of course be a schoolboy error to say 45%. Let's hope no one advised by Smith & Williamson said that. That is simply the rate for the highest levels of income, which is hardly the same thing. Many will smile knowingly and recall that the loss of personal allowance above £100,000 of income produces an old school marginal rate of 60%. This hardly raises an eyebrow these days.
But that is no means the end of the story, and we promise the ending is worth waiting for. For those on lower incomes the position can be altogether more severe. People who received tax credits can find that an increase in income only delivers an extra 30% in cash; or put another way the marginal rate of tax (and NIC and tax credit withdrawal) can be as high as 70%. If there are student loans that become repayable as well, the total reductions can hit in excess of 80%. You will have your personal view of that outcome, but no one, we suggest, would find it humorous.
No; for sad but true comedy, you have to turn the Shard. In a glorious result, at the threshold of the higher rate, for a married couple, the addition of £1 income can produce the loss of the transferable marriage allowance. This can produce additional tax of £230.40 and a truly stupendous 23,040% marginal tax rate. To represent the various marginal rates graphically using the screen in our training room, you need a line as high as the Shard.
It may be that someone in the Treasury thinks this issue is insoluble; but we say, get on with you. Or they may think such grotesqueness unimportant, and we say, shame on you. Or it could just be possible that they actually think this is fair; in which case, we stare into the abyss.
|CIOT – Chartered Institute of Taxation||FTT – First-tier Tribunal||CGT – Capital Gains Tax||PAYE – Pay As You Earn|
|HMRC – HM Revenue& Customs||UT – Upper Tribunal||CT – Corporation Tax||SDLT – Stamp Duty Land Tax|
|HMT – HM Treasury||CA – Court of Appeal||IHT – Inheritance Tax||VAT – Value Added Tax|
|ICAEW - The Institute of Chartered Accountants in England and Wales||SC – Supreme Court||IT – Income Tax|
|ICAS - The Institute of Chartered Accountants of Scotland||CJEU - Court of Justice of the European Union||NIC – National Insurance Contribution|
|EU – European Union||HC – High Court|
|EC – European Commission|
|OTS – Office of Tax Simplification|
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