Baker Tilly’s Weekly Tax Brief…
Tax avoidance by multi-nationals – much ado about nothing?
In the end it was the dog that didn’t bark in the night. Given the huge public attention given to the tax affairs of international corporations over the last year, people might have been expecting the government to block what many have seen as the loopholes which allow such companies dramatically to reduce their corporation tax bills.
But nothing so dramatic was revealed today. True we had some minor tinkering round the edges but nothing substantial. This is to be welcomed. Despite almost everyone acknowledging that there are structural problems in the international corporate system, these can’t be cured by sticking plaster solutions. A properly considered programme of reform, tested through consultation at every stage, is required. Hurried legislation is almost always bad legislation.
For domestic companies the main change will be the simplification of the rules which identify when companies are associated with each other. These have caused endless problems in the past and so reform here is welcomed.
But the biggest sigh of relief for small companies will be the postponement of any further changes to the rules on how loans to shareholders are taxed. There were some complex changes last year and the last thing we need is further changes before these have settled down. So the government’s decision not to introduce any further changes this year is very much welcomed but there is a sting in the tail. Reform is still being considered and I suspect that this time next year we will be writing about the hideous complexity of the new system. But at least we can enjoy Christmas without having to worry about it this year…
High net worth individuals and trustees – time to breathe easy?
The Draft Finance Bill brought some expected and unexpected changes for individuals and trustees, and as usual, some changes are welcome, others are not!
Social enterprises will benefit from an income tax relief on any investment (likely to be similar to EIS or VCT reliefs – so a range of 20% to 30%), and an exemption for capital gains tax. This will be of great benefit to these enterprises who often struggle to raise finance, and it is hoped that Government will give this relief the stability and longevity it needs.
The charge to capital gains tax on non-residents owning UK property is to be consulted on early next year, for introduction in April 2015but one residential property change from April 2014 is the reduction in main residence relief in the final period. Up to now, those needing to move before selling their main home had a period of 36 months before they would be subject to any tax on the gain. This has been reduced to 18 months, and could impact individuals differently across the country, depending on the activity of the local housing market. The move is aimed at bringing more people into the charge to capital gains tax with relatively significant additional tax forecast (from £65m to £100m per annum).
Inheritance tax on trusts has been simplified, and the filing date for tax returns and the date for payment of tax, has been made clear – six months after the IHT event. We’ve also had additional clarity on the amount chargeable to the ten year IHT charge which is now to include income accumulated for more than 5 years. Plus there will be more consultation on the controversial trust tax changes to calculation of the 10 year tax charge and the allocation of the nil rate band for multiple trusts created by one settlor.
There were other minor changes too, including the proposal for transferring £1,000 of personal allowances between married couples (worth £200 at most, it is more of a political move than a significant economic change), some alignment of CGT rules for vulnerable beneficiary trusts, correction to cultural gifts scheme and wider tax relief on loan interest to include EEA companies as required by European law.
Overall, a relatively benign set of changes which, in itself, are welcome after a number of years of big changes predominantly affecting wealthy individuals and trustees. Perhaps this is a result of the Chancellor acknowledging in his Autumn Statement speech that the wealthy already make a significant contribution to the total tax take.
Temporary Workers & Employment Agencies to pay more
One of the biggest changes for employers is the news that workers supplied through intermediaries are being targeted, which will raise a significant amount in additional and NICs.
Temporary workers make up around 5% of the workforce, with the businesses supplying them sometimes employing them directly, using agency contracts, and sometimes using sub-contractors. The tax, NIC and employment law position is different in each case, so end-users have been going for the cheapest options, which often involve reduced tax costs (and less employment red tape).
In the Finance Bill, the government has announced it is taking action against those temps who are sub-contractors. The PAYE and NIC rules for temps currently don’t apply if the worker is not obliged to provide personal service, accepting that a self-employed worker finding work through an agency is still self-employed and should be taxed as such. But that will change from 6 April 2014.
From then, if the worker personally carries out the work, or is involved in the provision of the services, the payment will have to be payrolled, so the worker will have tax and employee NICs (at 12%) deducted at source, and the agency will become liable for employer NICs (at 13.8%). The worker’s own NIC cost is therefore 3% higher than the 9% paid as a self-employed person, and the ‘employer’ agency has a completely new liability. With some agencies, workers are free to send somebody else along to do the contracted work, which has the effect of taking the payments out of the scope of PAYE and NIC rules. This freedom will, in future, not prevent the operation of PAYE and NIC at the employed rates.
The government estimates that 200,000 construction workers and 50,000 other self-employed people will come into PAYE, raising the tax and NIC take by around £520m next year. It will be interesting to see how the hard-pressed construction businesses react to the extra costs.
But imposing PAYE on subcontractors who are self-employed is not the end of the story. Some employment intermediaries have also been operating from outside the UK to avoid UK employer NICs, and they are to pay around £80m more.
In the oil & gas sector, employment of North Sea rig workers by a non-UK entity has (legitimately) been the norm for many years, and those employers with no UK place of business (like employers in other trades) have not been subject to employer NIC liabilities. That too is to change, with a new liability imposed on the last intermediary before the supply to a UK entity.
In other business sectors, there have been some offshore employers and UK end users who consider that the existing rules don’t apply. The new rules will ensure that PAYE and NIC is deducted either by an intermediary or end user in the UK. In other sectors, there have been some offshore employers deliberately flouting the existing rules that impose a UK NIC liability on the UK end-user. The new rules intend to make it easier to impose the missing liability on a business in the UK.
Partnership tax changes – three months left to prepare
Draft legislation dealing with ‘disguised salary’ of LLP members, partnerships with individual and company members, and further anti-avoidance measures was also announced today.
While HMRC has clearly listened closely to consultation responses, and amended some of the proposals to reflect this, we fear that innocent arrangements will be caught. Firms should take time now to understand how the changes will affect them, and decide what – if any – action is required. The legislation will generally take effect from 6 April 2014, with anti-avoidance measures coming into effect from 5 December 2013 to catch any tax-motivated profit allocation structures.
Under the draft legislation, a member of a limited liability partnership (LLP) will be treated as an employee for tax purposes if all the following conditions are met:
• If an individual performs services for the LLP and the amounts payable by the LLP in respect of the individual’s performance of those services will be wholly, or substantially wholly, fixed, or if variable, variable without reference to, or in practice unaffected by, the overall profits or losses of the LLP (‘disguised salary’).
• The mutual rights and duties of the members and the LLP and its members do not give the individual significant influence over the affairs of the LLP.
• The individual’s contribution to the LLP is less than 25 per cent of the disguised salary.
Mixed member partnerships:
New rules are to apply to LLPs and partnerships with individual and company members. The legislation will for tax purposes reallocate excess profits from a non-individual partners to an individual partner where the following conditions apply:
• A non-individual partner has a share of the firm’s profit;
• The non-individual’s share is excessive;
• An individual partner has the power to enjoy the non-individual’s share or there are deferred profit arrangements; and
• It is reasonable to suppose that the whole or part of the non-individual’s share is attributable to that power of arrangement.
HMRC has also restricted the ability to allocate income and capital losses between individuals and non-individual partners where it is tax-motivated.
HMRC will also seek to reallocate profits if it is seen as more than just and reasonable, which is in essence more than:
1. An appropriate notional return on capital; and
2. An appropriate notional consideration for services.
We are disappointed that HMRC has ignored many of our recommendations, and in particular those that addressed commercial concerns.
By introducing the changes on 6 April 2014, rather than allowing firms to implement the changes in the first accounting period following 6 April 2014, these changes will result in unnecessary complexities for firms and could have been avoided.
In addition, HMRC have ignored profession-wide requests not to apply such a ‘broad brush’ approach which has, as predicted, caught so many genuine partnership businesses using the structures to accumulate profits for internal investment. This now gives the partnership model a very real disadvantage in comparison to the traditional corporate model.
This is particularly disappointing for the financial services sector, which has taken an active use in these structures, and it will be seen at odds with the objectives of the FSA Remuneration Code, which encourages rather than penalises deferred remuneration and long term incentive plans.
Downloads just got dearer
As a result of EU VAT changes, the Government will legislate to change the rules for the taxation of supplies to consumer of telecommunications, broadcasting and e-services. From 1 January 2015 these services will be taxed in the member state in which the consumer is located and consequently, UK consumers will pay the UK VAT rate on all downloads, including e-books, music and film.
To avoid businesses having to register for VAT in every member state, businesses will have the option of registering in the UK and accounting for VAT due in other member states using a single UK return.
The measures are expected to impact up to 34,000 businesses, around 5,000 of which are not currently registered for VAT in the UK. Surprisingly, HMRC estimate ongoing compliance costs to be as little as £40 per business, per year. That is, £10 per quarterly filing return. Given that the online reporting form proposed by the European Commission will require up to 20 boxes of ‘administrative’ details, plus up to an additional 19 boxes identifying the value of supplies, (and applicable VAT rates) per country where the services are received, HMRC would appear to have underestimated compliance costs, and don’t appear to have consider ‘start-up’ costs at all.
By being required to charge VAT at the rate applicable in the customer’s country of residence, UK suppliers will have to understand the VAT rates and compliance rules in each country where customers are located, and consider the most efficient method of collecting and recording data concerning their customers’ location. This will therefore require businesses to ensure their IT systems and business infrastructure can adequately capture, record and declare that information. Implementing adequate data capture resources are therefore likely to prove expensive.
According to the Office of Budget Responsibility, the UK will however benefit from an additional £300 million in additional VAT revenue in the first full year of implementation. This however assumes that current spend by UK consumers will continue.
Earlier this year, Ofcom indicated that the more e-books increase in price, the less likely customers are to buy. A 20% rise in the average £3.74 cost of e-books (i.e. the equivalent of a 20% VAT hike) results in 25% less people buying the product. Indeed, if the costs of e-books rose to £10, Ofcom indicates that only 9% of consumers would continue to buy. Extrapolated, a £10 price tag on e-books alone would reduce OBR forecasted VAT revenues by some £50 million.
Stamp duty and SDLT
The stamp duty changes are very much as announced by the Chancellor in the Autumn Statement.
However, the Draft Finance Bill changes to Charity relief come, at first blush, as a major shock. In the Court of Appeal, Lord Justice Lewinson suggested that the legislation would achieve its intended purpose if the following four words were inserted: ‘to the extent that’. HMRC accepted the decision of the Court of Appeal and published a note to that effect on the 19th August. Changes to SDLT legislation may be made relatively simply by way of regulation. However, the delay in announcing the amendments that are to give effect to the decision of the Court on the 26 June 2013, and to protect against any potential abuse, would appear to be the need to carefully craft four pages of legislation. As the new legislation is not to take effect until sometime early next summer (probably mid-July 2014), the existing legislation with the Court of Appeal’s gloss applies until then. Quite bizarre!
The draft legislation does highlight a further issue – the vexed issue of the rate structure. Where a person acquires a property and the amount to be paid exceeds a set threshold, the entire sum becomes chargeable at the higher rate. This is commonly referred to as the ‘slab system’. As well as leading to the need to consider whether any part of the amount to be paid can be allocated to something not chargeable to SDLT (such as chattels commonly, but potentially confusingly, referred to as fixtures) it also requires consideration as to whether transactions are linked. In the case of the joint purchase of a property with a Charity, the legislation operates on the basis that although the part that the Charity acquires is free of SDLT, it needs to be taken into account in determining what rate of tax to apply to the other part. This would not necessarily be the case of the interests were separated by the vendor.
There will continue to be a need to carefully consider the structure of any proposed transaction to avoid unnecessary additional SDLT costs.
If you’re feeling a little weary trying to absorb all these new tax changes, take heart – isn’t the Office of Tax Simplification (OTS) there to make tax easier for us all to understand? Today’s announcements from HMRC and HM Treasury amount to no less than 673 pages of ‘draft clauses and explanatory notes for Finance Bill 2014’ and 176 pages of ‘overview’.
This seems a surprisingly large amount of new tax changes to absorb. But is it so surprising given that the 2013 Finance Act, which became law back in the Summer, comprised 648 pages, 236 sections and 51 schedules?
So much for simplification of our already complex tax system – perhaps it is time to ask if the OTS is really doing what it says on the tin?
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