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Home » Business News

RSM UK’s Weekly Tax Brief – 3 November 2015…

Submitted by on November 6, 2015 – 7:00 am |


RSM UKIn this edition of RSM’s weekly round-up of the most important tax news, we cover the latest developments.

To note, next week there will be a short hiatus in the production of the Weekly Tax Brief while we publish our sector-based Autumn Statement hopes, fears and wishes. Weekly Tax Brief will be back during the week beginning 16 November when we will be revealing our full list of Autumn Statement predictions.

  1. Are HMRC bad losers?

George Bull

After losing a number of court cases in recent years, HMRC now has to repay compound interest to companies that were unlawfully required to pay VAT under a “mistake of law”. However, the Department has now announced that these repayments will be subject to corporation tax at 45 per cent. Cue a storm of outrage from the companies involved…

  1. Scottish taxpayer status – Part III

Stephen Hay

HMRC has issued the third instalment in its trilogy to determine who will be liable for the new Scottish rate of income tax (SRIT) from April next year. It’s simple if you have one home which is in Scotland, but if you have multiple homes, some of which are outside Scotland, the picture gets a little more complicated.

  1. Is the SRIT a bridge too far for employers?

Bill Longe

The introduction of the Scottish Rate of Income Tax (SRIT) will be the biggest change to PAYE since 1944 and impose inordinate burdens on employers both inside and outside Scotland. With employers already grappling with auto-enrolment, the living wage, payrolling of benefits and the abolition of dispensations, could the SRIT be a bridge too far?

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  1. Are HMRC bad losers?

One of the issues we have been following in Weekly Tax Brief over the years is the huge amount of VAT which HMRC has to repay to companies who were unlawfully required to pay the tax under a “mistake of law”.

As the companies won their cases in the courts, it became clear that very substantial amounts of interest could be payable on the tax refunds they were entitled to receive. This would not be ordinary statutory interest calculated on a simple basis, but “restitution interest” calculated on a compound basis which requires HMRC to give up the financial benefits they received because of the overpayment of tax.

HMRC has announced that these payments of restitution interest will be subject to corporation tax at the new rate of 45 per cent. In view of the size of the repayments and the substantial amounts of restitution interest view, it’s perhaps not surprising that HMRC is attempting in its own words “to reduce losses from litigation if HMRC were to be unsuccessful”. HMRC will publish its estimates of the amount of corporation tax this will yield with the Autumn Statement on Wednesday 25th November.

Predictably, the announcement has caused quite a storm:

  1. Why should HMRC tax the interest at all? After all, restitution interest was intended to remove from HMRC all of the benefits it had received through the overpayment of tax. Many think that it is a bit rich for HMRC to try to claw 45 per cent of that back now.
  1. And why 45 per cent? In the normal way, restitution interest would be taxable at no more than the prevailing rate of corporation tax, currently 20 per cent. In the early 1970s, when the tax problem began, the corporation tax rate was as high as 52 per cent. That subsequently fell with many claims relating to periods when the tax rate was no more than 34 per cent.

Advisers to affected companies are already talking about mounting a legal challenge to the latest changes. But here too the HMRC is one step ahead of them: from 26 October 2015 any payments of restitution interest made by HMRC to the companies will have the tax deducted at source. Once again, the companies will find themselves arguing with HMRC to get back tax securely locked away in HMRC’s coffers. Restitution interest on restitution interest, anybody?

  1. Scottish taxpayer status – Part III

Following the technical guidance issued by HMRC on 11 June 2015 on who would qualify as a Scottish taxpayer from 6 April 2016, which itself followed the initial technical guidance issued in May 2012, HMRC have now issued yet another technical guidance document. This proves beyond doubt that the definition of a Scottish Taxpayer is somewhat ambiguous or complex!

Well, not really if you have one home and that home is either in Scotland or elsewhere in the UK (England, Wales or Northern Ireland). If it is in Scotland then you are a Scottish taxpayer, if in the other jurisdictions then you are not. All fairly simple even if the third paper in the trilogy spends some eight pages of the 24 (ie 1/3) giving examples to this effect and tackling common misconceptions that factors such as national identity, location of work, location of income source or frequent visits to Scotland have any relevance.

However, if you have more than one home – one in Scotland and one in another jurisdiction in the UK then there are going to be a great deal of issues for a taxpayer to resolve. HMRC will look at all the facts to determine what your “close connections” with Scotland will be such as family, social and other links to determine if you have a closer connection to Scotland than elsewhere in the UK. HMRC will also, where necessary, consider the days a taxpayer spends in the Scottish residence compared with the residence in the other part of the UK.  If more time is spent in one or other then that will determine if you are a Scottish taxpayer, or not.

It now becomes apparent that, where you may have three or more homes in the UK or indeed abroad, then the matter becomes even more complex.  HMRC uses the example of a taxpayer who has three places of residence – in Fort William (125 days), Swansea (115 days) and London (115 days).  You might think that the taxpayer cannot be a Scottish taxpayer because they spend 125 days in Scotland but 230 days elsewhere in the UK. But you would be wrong. This is because the taxpayer spends more of their time in Scotland than in any one of the other parts of the UK.

Those who arrive or depart the UK under the Statutory Residence Test (SRT) will be able to have a split year treatment if they come to or leave Scotland. However, unless the SRT is at issue then no split year will apply. A taxpayer will either be a Scottish taxpayer or not for a full year dependant on the length of time they spend in Scotland.  If greater, then they are a Scottish taxpayer or if less then they are not.

Given that the third paper in the trilogy is a technical guidance paper, it must be very concerning to HMRC that with less than six months to go, the matter is clearly causing concern particularly for those taxpayers with more than one residence in the UK where one is in Scotland.

If HMRC is struggling to explain Scottish residence, how can individuals who will be caught up in this know where they stand?

  1. Is the SRIT a bridge too far for employers?

Ever since PAYE was fully introduced in 1944 employers have been HMRC’s unpaid tax collectors. This responsibility has been to calculate the tax due on employees’ wages, complete end of year returns, and pay over to HMRC each month the tax collected from employees.

By and large employers have grudgingly accepted this administrative burden as simply part of the cost of doing business in the UK. However, that burden is often put to the test when HMRC demands are too great or when things go wrong and HMRC expects employers to pick up the bill.

The introduction of the Scottish Rate of Income Tax (SRIT) will further test the patience of employers as they face this and other administrative burdens in the coming months. And contrary to popular belief it won’t just be Scottish employers that are affected. The changes will affect all UK employers with Scottish resident employees whether they are in John O’Groats or Land’s End.

From 6th April 2016 any employee who is resident in Scotland may be liable to pay a different rate of income tax from work colleagues who live elsewhere in the UK. The Scottish Parliament is due to announce the SRIT after George Osborne has released his Autumn statement on 25th November. The SRIT will be the biggest change in PAYE since 1944 as employers will now have to adapt systems to accommodate new code numbers and different calculations depending upon where employees live.

Amending payroll software is never an easy or inexpensive task. SRIT requires very significant alterations to the software to include two sets of calculations (one for SRIT taxpayers and one for everyone else), perhaps new payslips, and even to things like employee pension contributions. Bringing all of this together by 6th April next year might be a real challenge for employers already having to cope with amongst other things auto-enrolment, the living wage, payrolling of benefits and the abolition of dispensations. Could SRIT be a (Forth Road) bridge too far?


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