1.1 Spring Statement 2018
On Tuesday 13 March the Chancellor of the Exchequer, the Rt Hon Philip Hammond MP, presented to Parliament the first Spring Statement under the 'Better Budgets' timetable, comprising a single major fiscal event or Budget in the autumn and a shorter statement in the spring.
The Chancellor gave his response to the Office for Budget Responsibility forecasts. Of interest to taxpayers and tax advisers, he also announced a number of public consultations and calls for evidence. There were, as promised, no announcements of immediate tax changes or other new spending or policy announcements. It also provides more time for planned consultation and consideration of feedback in advance of introducing tax measures to take effect from April 2019. This represents a welcome move towards more certainty for businesses and other taxpayers.
We set out in the relevant sections below some summaries of the key consultations with tax content.
1.2 Consultation - The role of online platforms in ensuring tax compliance by users
The Government has commenced a consultation to explore how online platform providers could work with HMRC so taxpayers making money through using the platforms, better understand and meet their tax obligations. The Government has confirmed that it needs to minimise opportunities for people to exploit this area of the economy to evade their tax obligations, at the same time as supporting those who want to comply.
The initial document is a call for evidence, to help the Government explore what role platforms could play in tax administration, in the way other intermediaries, such as employers, have done in the past and continue to do. It aims to help Government understand:
- how platforms interact with their users currently;
- what the platforms know about their users; and
- more about attitudes to tax among people earning money through platforms.
HMRC has carried out research into such users. This indicates that over half saw their sharing economy activity as just a way of making some extra money rather than employment or self-employment, suggesting many may not recognise this as a potentially taxable activity, although these problems are not confined to online platform users. HMRC is also looking at successes in other countries that have already started to address these issues.
Responses are due by 8 June 2018.
1.3 Tax policy consultation tracker – outcome of CIOT/IfG/IFS proposals
HMRC and HMT have published a helpful consultation tracker covering recent and live public consultations on tax policy matters.
Consultations on tax, or with tax content, tend to be spread around gov.uk, so it will be very useful for potential respondents to have a single list to help keep abreast of consultations and their deadlines, irrespective of which government department issued them. The tracker will be updated periodically, so interested readers may wish to bookmark the link.
A consultation tracker was one of the proposals in the 'Better Budgets – Making tax policy better' report, produced by the CIOT in partnership with the Institute for Government (IfG) – a think tank that works to make government more effective – and the Institute for Fiscal Studies (IFS). Importantly, the report also proposed reducing the flow of tax change by returning to just one annual fiscal event. This has clearly also been embraced by the Government by turning the Spring Statement into a welcome fiscal non-event.
The new tracker looks remarkably similar to Smith & Williamson's own consultation tracker, which in a small way demonstrates the usefulness of contributing to consultations.
1.4 Cash and digital payments in the new economy
HMT has published a call for evidence to help it better understand the role of cash and digital payments in the new economy and ensure that legislation keeps pace with the way people pay for goods and services. It will examine the impact on different sectors, different regions and different demographics. The aim is for government to support digital payments and ensure that the ability to pay by cash is available for those who need it for legitimate purposes, whilst cracking down on the minority who use cash to evade tax and launder money.
In the UK the use of cash had fallen by 2015 to about 15% by value of all consumer spending. The growth of digital spending has rocketed, with contactless payments growing almost 20 times in the three years to June 2017. The Government wants to understand better about the use of cash, especially large cash transactions, why they are used and if there are barriers to using digital payments for larger transactions. This is an attempt to find ways to reduce tax non-compliance, much of which is in cash.
It hopes to learn from international experience; particularly, where in some countries restrictions have been placed on cash transactions to deter poor tax compliance. It is also seeking evidence to help determine what further action the Government should take to reduce tax evasion, hidden economy, and money laundering associated with cash to ensure a fair and level-playing field for tax compliant businesses. It is also looking at how government could encourage declarations of activity paid for by cash across the economy, including individuals, intermediaries and businesses; for example, by encouraging or mandating the use of receipts.
The Government is keen to understand better how digital payments can help people budget or keep a record of transactions. With the advent of MTD almost upon us, it also asks for input around the 'benefit to businesses from integrating their wider business models with a digital way of working, as money transferred digitally, rather than in cash, can be seamlessly integrated into digital accounting software.'
The consultation does not venture into the use of cryptocurrencies, which is the subject of a separate consultation from the House of Commons Treasury Committee, and which closes on 13 April 2018.
This HMT consultation closes on 5 June 2018. www.gov.uk/government/consultations/cash-and-digital-payments-in-the-new-economy www.parliament.uk/business/committees/committees-a-z/commons-select/treasury-committee/inquiries1/parliament-2017/digital-currencies-17-19/
1.5 Brexit funding allocation to Government departments for 2018-19
A written ministerial statement from Liz Truss, Chief Secretary to the Treasury, published on the day of the Spring Statement, has set out new Government funding for various Government departments other than DexEU to help with expenditure on Brexit related matters.
This should be of particular interest to readers of Tax Update as the department with the third largest allocation is HMRC. This is indicative of the significant role HMRC has in helping the country prepare for Brexit and the impact on its resources, particularly in tying up experienced people.
We pass no comment on the fact that the National Archives have a larger allocation than Scotland, Wales and NI combined.
|Department for Environment, Food and Rural Affairs||310|
|HM Revenue & Customs||260|
|Department for Business, Energy and Industrial Strategy||185.1|
|Department for Transport||75.8|
|Department for International Trade||74|
|Foreign and Commonwealth Office||29.6|
|Department for Digital, Culture, Media and Sport||26.2|
|Competition and Markets Authority||23.6|
|Department of Health and Social Care||21.1|
|Ministry of Justice||17.3|
|Food Standards Agency||14|
|Ministry of Defence||12.7|
|Office for National Statistics||2|
|The National Archives||1.2|
|Northern Ireland Office||0.4|
1.6 Report on reforming the taxation of income
The Institute for Public Policy Research Commission on Economic Justice has published a report proposing an overhaul of the current income tax system to make it more progressive and efficient.
Key findings include that the UK's current system of taxing individual incomes, combining income tax and employees' NIC, performs poorly when assessed against three simple principles of tax design; efficiency,
progressivity and system coherence.
The key recommendations are two major reforms:
- combining all rates and allowances for income tax and employee NICs into a single tax schedule. All sources of income would be taxed under the same rates, irrespective of whether the income was from earnings, savings, trusts, dividends or property rents; and
- replacing the existing system of marginal bands with a formula-based system, such that every taxpayer's marginal rate would depend on their own precise level of income and tax cliffs would be removed.
The report also proposes that pension contributions are no longer deducted from gross earnings and instead attract a single, flat rate of relief.
1.7 Finance Act 2018
Finance (No.2) Bill 2017-19 received Royal Assent on 15 March 2018, becoming Finance Act 2018.
Some of the main measures included in the Act are:
- further anti-avoidance rules for offshore settlements;
- further disguised remuneration provisions;
- new risk to capital rules for EIS, SEIS and VCTs;
- changes for partnerships;
- changes to termination payments in respect of foreign service; and
- corporate interest restriction provisions.
HMRC has also published a note on Finance Act 2018. It states that the Act includes 'tough new measures including action to tackle VAT fraud, close loopholes on offshore tax avoidance and crack down on rogue illegal waste site operators' and that this 'will help to raise an additional £1.2 billion from tackling tax avoidance, evasion and non-compliance.'
It will be interesting to see if HMRC is able to substantiate the receipt of this additional tax revenue in due course.
1.8 EU's list of non-cooperative jurisdictions updated
The European Council has updated the EU's list of non-cooperative jurisdictions.
Bahrain, the Marshall Islands and Saint Lucia have been removed from the list and the Bahamas, Saint Kitts and Nevis and the US Virgin Islands have been added.
The list is intended to promote good governance in taxation worldwide.
1.9 Offshore tax liabilities – criminal offences
HMRC has published guidance on the three new criminal offences relating to offshore income, assets and activities.
The guidance lists the three new criminal offences:
- if you fail to notify HMRC of your chargeability to income tax or CGT before the end of the notification period (earliest date can be committed: 6 October 2018);
- if you are required to deliver a tax return and fail to do so before the end of the withdrawal period(earliest date can be committed: 6 April 2020); and
- if you provide a return which, at the end of the amendment period, contains an inaccuracy (earliest date can be committed: 1 February 2020).
It notes that the additional tax must exceed the threshold amount of £25,000 and be chargeable in respect of offshore income, assets or activities.
The guidance goes on to explain the terms used, possible defences and what can happen.
While the relevant legislation came into force on 7 October 2017, the earliest dates when the offences can be committed are listed in brackets above.
1.10 Making tax digital (MTD) - HMRC directions for participants
HMRC has issued two sets of Directions for MTD for income tax and CT. These directions set out some of the rules that explain how taxpayers using the new income tax pilot will be able to use the new MTD system. They have been issued to coincide with the start of the public MTD for business income tax pilot.
The first amended directions set out the mechanism of signing up and giving and withdrawing consent for communications in both directions with HMRC, by extending the self assessment (SA) regulations to cover not only MTD but also other electronic communications with HMRC, such as by email. For MTD or SA, the giving and withdrawal of consent generally has to be through the relevant service. In other cases, where taxpayers communicate electronically with HMRC, such as in compliance checks, the authority can be by email.
The second batch of directions set out the requirements for authorising participants to submit information electronically to HMRC under MTD. This includes quarterly updates, end of year submission as well as any self-assessment of other income to be included in the end of year submission. There is no stipulation so far on how to keep electronic records. In addition, once the submission has been made, the records can be retained in either electronic or hard copy format. This will potentially be useful for people that do not have their own computer and software including where a business has closed.
2. Private client
2.1 Spring Statement – consultation on entrepreneurs' relief on gains before dilution
In preparation for legislation to be introduced in Finance Bill 2018-19, the Government is proposing to allow individuals (but not trusts) who no longer hold the qualifying 5% of shares in a company as a result of dilution to claim CGT entrepreneurs' relief (ER). This will be permitted only where the company issues capital for trade purposes.
The Government is consulting on what looks to be a welcome proposed amendment to the ER rules. This consultation had been trailed in the Budget Statement last autumn as part of its response to the Patient Capital Review. The proposal is that individual shareholders who have qualified for ER will be able to bank ER relief up to the date of a dilution caused by fund raising for the company's business. In addition to being able to claim the relief, notwithstanding that there has been no disposal at that time, the shareholder will also be permitted to defer the CGT charge until the actual disposal of the shares. The relief will not be available to trustees, for whom any reform would, the Government argues, be too complex, or to shareholders who acquired through Enterprise Management Incentive options, as the 5% shareholding threshold does not apply to them.
The consultation is set to run until 15 May.
2.2 UK tax legislation changes as a consequence of the Scottish Budget resolutions
In replacing the Scottish basic rate with a tiered Scottish starter rate, Scottish basic rate and Scottish intermediate rate (before applying the Scottish higher rate) creates a number of problems. The UK legislation is therefore being adjusted to recognise that anything not Scottish basic rate does not necessarily mean the higher or additional rate equivalents apply.
Secondary legislation has been drafted to recognise within UK taxation the tiered approach to what would otherwise be the Scottish basic rate by the Scottish Government. This includes recognising the new terms and how these bands are match to the UK basic rate band in determining reliefs, limits and threshold.
In general terms, these three rates are being matched to the UK basic rate band and take into account that additional relief is available at the Scottish intermediate rate where appropriate.
The main changes are that Scottish taxpayers who:
- pay income tax at a rate higher than the Scottish basic rate making pension contributions, net of relief at source, will be entitled to have their Scottish basic rate limit and any other Scottish rate limit above the Scottish basic rate limit increased by the amount of the grossed up contribution;
- receive a social security pension lump sum can be taxed at the new Scottish starter rate;
- are taxed only at the new Scottish rates are eligible to elect to transfer marriage allowance to their spouse or civil partner, or to receive this allowance;
- give under gift aid the rate limit, then any Scottish rate above the Scottish basic rate limit (including the new intermediate rate) is increased by the grossed up amount of a qualifying gift.
- for all taxpayers giving under gift aid, the 'grossed up amount of a gift' will be the amount of that gift grossed up by reference to the main UK basic rate only.
2.3 HMRC's decision on Eclipse LLPs and interestpayments
HMRC has confirmed its view that interest payments in relation to the Eclipse LLPs are not deductible against LLP income.
HMRC has been reviewing its position in relation to the Eclipse LLPs. HMRC successfully argued in the Courts through a lead case that the LLP was not trading and members were therefore not able to claim relief for interest payments.
Following the SC decision in this case, initially, HMRC only sought correction to returns where interest relief had been set against other income, while it considered further the position regarding offset against LLP income.
HMRC has now gone one step further, confirming its view that the interest is not in fact deductible at all, even against LLP income, but that the LLP income remains taxable. As the LLP income has been used to fund the interest payments, this will create a dry tax charge for members in these LLPs.
HMRC is likely to take steps to try to finalise matters on this basis, and we will wait to see if this point is now challenged in the Courts.
2.4 A review of the ISA regime
The Association of Accounting Technicians ISA working group has published a report containing various recommendations to simplify ISAs, and to ensure that they are fairer, more easily accessible and that take-up rates are increased.
The recommendations in the report include:
- creating a new, flexible ISA wrapper into which other products can fit: the Everything ISA. The Junior, Cash, Stocks & Shares and Innovative Finance ISAs should be folded into this new ISA wrapper. The annual ISA limit would be removed and a lifetime Everything ISA limit of £1million introduced;
- closing the Lifetime ISA to new entrants;
- ensuring any pension changes are considered separately to ISA reform; and
- continuing the Help-to-Buy ISA but without the ISA title.
2.5 Notice of enquiry valid even if only received by agent
The UT has found that a notice of enquiry that was sent to a taxpayer's old address in error, but copied to his agent, remains valid.
HMRC opened an enquiry into the taxpayer's return, which resulted in an income tax loss of £2.5 million being disallowed. HMRC sent a notice of enquiry to the taxpayer, but sent it in error to an old address that was not his usual or last known place of residence. The letter was copied to the taxpayer's agent, who had been authorised to act on his behalf by a signed form 64-8.
The taxpayer claimed that the enquiry was not valid as he had not received the notice of enquiry himself, but the FTT found in favour of HMRC.
The case has now been heard by the UT, who also found in favour of HMRC but for differing reasons.
The UT found, contrary to the FTT, that the agent had apparent and actual authority to receive a notice of enquiry on the taxpayer's behalf and therefore the enquiry notice was valid.
Tinkler v HMRC  UKUT 0073 (TCC)
3. Trust, estates and IHT
3.1 Review of charity tax treatment
The Charity Tax Commission has announced a call for evidence in respect of charitable tax reliefs. This will be the first comprehensive review of charity taxation and reliefs in over 20 years.
The call for evidence 'seeks views and evidence from anyone with relevant knowledge, expertise or experience of the system of charitable tax reliefs in the UK, including charities, donors, academics, think tanks, representative bodies, accountants, philanthropy and financial advisers, tax professionals and members of the public.'
In particular, the review is seeking comments on the following:
- the effectiveness of current reliefs;
- whether or not the existing system could be improved in order for charities to serve their beneficiaries better; and
- ideas about how the tax system can help to create an operating environment in which charities can maximise the public benefit they generate.
The deadline for responses is 6 July 2018.
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.