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Home » Business News

RSM’s Weekly Tax Brief – 30 March 2016…

Submitted by on April 4, 2016 – 7:10 am |

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

  1. Will multinationals’ country-by-country tax reporting soon be made public?

George Bull

It’s beginning to look as though making public the country-by-country reporting of multinational corporations might be an easy win for those concerned with restoring the credentials of tax systems worldwide.

  1. Devolution of taxes leads to baffling complexity

Andrew Hubbard

The publication of the Finance Bill reminds us that there can no longer be a single structure of tax rates and allowances for the whole of the UK – now we need to cater for the Scottish, and potentially Welsh, rates of tax too.

  1. Tax judge confirms that the FCO is part of government

Andrew Hubbard

The tax and National Insurance treatment of diplomats and government employees posted abroad is a difficult and complex topic. Pity then the poor judge involved in a recent case involving the Foreign & Commonwealth Office…

  1. Ruling leaves search and rescue pilots with soaring tax bills

Andrew Hubbard

Why a recent spat with the taxman over accommodation has left a rescue helicopter team on Stornoway with spiralling tax costs…

  1. Last call for pre-year-end tax planning

Karen Clark

With 5th April less than a week away, it’s time to get your skates on if you want to take advantage of year-end tax planning. But before you do, read our advice on the best ways to save yourself some hard-earned cash.

  1. Investors face greater uncertainty as tax avoidance clampdown takes hold

Rebecca Reading

The OECD’s recent crackdown on tax avoidance by multinationals will inevitably hit corporate earnings, so is it time that investors started to modify their expectations?

  1. Cash continues to be king

George Bull

Last year HMRC issued a call for evidence as to whether cash continued to facilitate tax evasion and money laundering. The results have just been published, and it seems you might not want to throw out what’s under your mattress just yet…


  1. Will multinationals’ country-by-country tax reporting soon be made public?

We reported last week on a meeting of the UK All-Party Parliamentary Group on Responsible Taxation, convened to hear evidence on the application of the OECD’s BEPS initiative. The chair and vice-chair of the meeting challenged calls to maintain company confidentiality on the basis that the rights attaching to the limited liability status of a company are matched by responsibilities to disclose financial and other information on the public record. Companies were warned that they could not assume that “commercial confidentiality” would be accepted indefinitely.

It was beginning to look as though an easy win for those concerned to restore the credentials of tax systems worldwide might be to make public the country-by-country reporting of multi-national groups. Three specific developments reinforce this view.

First, the EU proposal for public disclosure of certain information on a CbC basis for multinational groups is expected to be published by the European Commission in April 2016. This has alarmed MNCs more than BEPS CbC, especially consumer-facing businesses that are worried about journalists with an eye for a headline armed with a basic level of information and little interest in seeking clarification for the reasons behind it. This reputational risk is removing the issue of disclosure from the tax department and placing it firmly in the boardroom.

Second, the UK’s position. Page 23 of the Business Tax Roadmap published by HMRC on Budget Day sets out the intentions of the UK government in no uncertain terms: ‘The government believes there is an opportunity to go beyond the outcomes of the BEPS project and enhance transparency over multinationals’ tax affairs by requiring them to make the details of tax paid publicly available on a country-by-country basis. The UK will therefore

press the case for public country-by-country reporting on a multilateral basis.’

Finally, as if to echo this, on 24th March the Australian Tax Office published the tax information of 321 Australian-owned resident private companies, under the corporate transparency legislation introduced in late 2015. The legislation enabling this publication has been briefly repealed following representations from investors that the disclosure endangered their security and privacy. The reintroduction of the legislation and the publication of the data followed the Australian Senate’s conclusion that the risks of disclosures to private investors were exaggerated.

All the signs are that CbC reporting will be made on the public record sooner rather than later.

  1. Devolution of taxes leads to baffling complexity

Easter treats come in different forms. While you were probably enjoying an Easter egg hunt I was getting my adrenaline rush from reading the Finance Bill. No comment required.

In most years the first few sections, which set out the tax rates and allowances, are a gentle introduction to what follows. In 2009, to take a random example, rates and allowances were all set out in little more than a dozen lines. This year by contrast the same material occupies 13 pages. What on earth is going on?

There are a couple of reasons. The first is, ironically, tax simplification. For any individual the fact that the first £5,000 of dividend income or £1,000 of savings income is (generally) tax-free is a simplification, but the legislation needed to create these exemptions is anything but straightforward.

Second, and perhaps more significant, is that for the first time we are seeing the effect of tax devolution on the structure of tax rates and allowances. No longer can the Finance Bill set out a single rule for the whole of the UK. It now needs to cater for the Scottish, and potentially, Welsh rates of tax on some, but not all forms of income. So we end up with convoluted paragraphs such as:

‘In relation to an individual who is a Scottish taxpayer, references in this section to income which would otherwise be charged at a particular rate are to be read as references to income that would, if the individual were not a Scottish taxpayer (but were UK resident), be charged at that rate (and subsection (5) is to be read accordingly).’

At the moment this legislative complexity has no practical effect because rates and allowances are the same all across the UK. But if, as seems likely an incoming Scottish government does legislate for different rates and allowances, it will have real consequences.

We already know that the system under which HMRC identifies Scottish taxpayers is having some teething problems. What will happen if, as a result of this, taxpayers subject to Scottish rates and allowances end up paying the wrong tax? Are we going to see separate rules for penalties across the various jurisdictions? After all, Scotland has its own version of the GAAR.

This is not the place to debate the principle of devolved taxation, but it is inevitable that as it becomes a reality the legislation will become ever more complex. If things continue at this rate my entire Easter holiday in a few years will give me no time whatsoever for chocolate. And for me that would be a step too far!

  1. FCO is part of government, tax judge confirms

An old joke for you. A man was wandering along Whitehall looking lost. A woman went up to him and said ‘Can I help?’ The man said ‘Can you tell me which side the War Office is on please’. She replied ‘Ours, I hope’.

You can see that I have missed my true vocation as the natural successor to Eric Morecambe.

So apart from bringing a little happiness into your life, why I am resurrecting a very old joke in this week’s Tax Brief? Because I was reminded of it in a remark from the judge in a recent tax case. He said ‘It seems to me that the Foreign & Commonwealth Office is clearly part of government’. Was there any doubt?

Why did he say this? He was in fact dealing with a serious matter – the question of whether a police officer seconded to work in Kosovo was liable to pay National Insurance contributions. Police officers are not employees – they hold an office. For UK purposes the distinction is irrelevant because office holders pay PAYE and NIC in the same way as employees. But some international agreements only apply to employees. The agreement with Yugoslavia, which was held to apply to Kosovo, was in this category. If he was holding the office of constable while in Kosovo he was not covered by the agreement and hence not subject to NIC. But if he was employed in government service while in Kosovo he was subject to NIC. He was on secondment with the Foreign & Commonwealth office. If it was part of government then he was caught. Hence the judge had to decide whether the FCO was part of government. Some Prime Ministers have speculated about the FCO’s ultimate loyalty but I think (indeed hope) that the judge came to the right conclusion.

The tax and NIC treatment of diplomats and government employees posted abroad is a complex topic with its own quirks – watch out next time you see me because I might corner you and start to explain how it all works…

  1. Ruling leaves search and rescue pilots with soaring tax bills

Like me you have probably been enjoying The Night Manager on TV. My only criticism was that there was not enough about taxation in it! What was the tax residency of the main character and did he have to pay tax on the value of the accommodation at the hotel? I hear that there is a second series to come, so maybe there will be a chance to fill in these holes in the plot!

Accommodation is a difficult area in the tax system, as was recently shown in a tribunal case concerning the search and rescue helicopter team operating out of Stornoway on the Isle of Lewis. The team had to be available at 45 minutes notice to launch the helicopter which meant that they had to live within 15 minutes driving of the airport. The team were not provided with accommodation by their employer, but they were provided with an accommodation allowance, which they could use to meet the costs of rent or mortgage payments.

The individuals claimed that their accommodation allowance was not taxable, or in the alternative, that they should get a tax deduction for the accommodation costs. HMRC challenged this and the case was heard by the tax tribunal. The result was a completely victory for HMRC.

There was never any serious doubt about the treatment of the accommodation allowance. It was clearly employment income. If that were not the case it would be open to any employer to designate part of a salary as an expense allowance and claim it was not taxable.

More interesting was the question of the tax deduction for the expenses. The individuals claimed that it was a requirement of their duties that they lived close to the base and therefore the costs were an allowable deduction. The judge was not impressed. In the first case he pointed out that Lewis was a relatively small island and that most of it was only 15 minutes’ drive from the airport. Furthermore almost all of the employees at the airport did live within 15 minutes, regardless of whether they were emergency call out staff or not: it was simply that most of the accommodation on the island was within 15 minutes of the airport.

But the judge also considered the test for deductibility: for employees this is that the expenditure is wholly, exclusively and necessarily incurred in the performance of the duties of the employment. They failed on all four limbs of the test. The main purpose of the expenditure was normal living and it was not necessary for an employee to live in a particular house. Had the employer made it a condition of employment that a specified employee had to live in a specified house it is possible that the ‘necessary’ condition would have been met – but a general requirement to live near the place of work is not enough. So there goes my claim for accommodation expenses on the basis that I need to live near the office in case I am called in to write an emergency tax article at 3 in the morning!

Job-related accommodation provided by the employer is a different matter and had the company provided the team with living accommodation there would have been a respectable argument that the benefit was not taxable. The individuals here got themselves thoroughly confused between the two very different sets of tax rules and ended up facing a large tax bill.

  1. Last call for pre-year-end tax planning

As 5 April approaches, don’t forget those last few bits of pre-year-end tax planning – for example, maximise your pension contributions, make sure you have used your ISA allowance and other reliefs and allowances such as the CGT annual exemption, and try to avoid the effective tax rate of 60% on income between £100,000 and £121,200 by making a pension contribution or gift aid donation.

However, one of the most significant changes from 6 April 2016 will be to the taxation of dividends. A dividend of £50,000 taken before 6 April 2016 will cost £12,500 in tax for a higher-rate taxpayer and £15,278 for an additional-rate taxpayer. After 6 April 2016, a £50,000 dividend will incur a tax liability of £14,625 for a higher-rate taxpayer and of £17,145 for an additional-rate taxpayer.

In both cases this assumes that the first £5,000 of the post-6 April 2016 dividend is tax-free, i.e. you have no other dividend income. As this ‘tax-free’ dividend allowance forms part of your basic-rate band, it could mean that you will pay more tax on other income which is ‘pushed’ into the higher- or additional-rate tax bands. Outside shareholders may not have much say in when a dividend is voted, but owner-managers of companies should certainly consider whether to take a larger dividend before 6 April 2016.

Paying a dividend before 6 April 2016 will accelerate by a year the date on which the tax is payable and consideration also needs to be given to the effect on payments on account for 2015/16 (and 2016/17) of paying a dividend pre-year-end, especially if a claim to reduce 2015/16 payments on account has already been made.

However, following the recent Budget changes to CGT rates, most investors would be wise to wait to sell assets (other than residential property or carried interest) until after 6 April 2016. But don’t forget that the Stamp Duty Land Tax changes come in on 1 April 2016, not 6 April 2016, so time is short to complete the purchase of a second or subsequent property which is not replacing your main residence.

  1. Investors face greater uncertainty as tax avoidance clampdown takes hold

A rudimentary grasp of arithmetic is all that is required to understand that the crackdown on tax avoidance by multinationals must hit corporate earnings. The OECD estimates that up to $240bn per year in tax is lost due to base erosion and profit shifting, so if the BEPS measures work then earnings will inevitably reduce.

In the longer term, we might expect that some of this will be recovered from customers by higher prices. However the initial problem for corporates is trying to predict what the additional tax bills might be. Gone are the days when a back of the envelope percentage of pre-tax profit will suffice in terms of estimating the tax charge. The interplay of the international tax systems, with governments all chasing a bigger share of the tax take, is a one-way street as far as companies are concerned.

The OECD is clear that the new international tax approach is intended to be even-handed, but at this early stage, as governments start to implement, the multinationals must deal with both increased tax costs and greater uncertainty and volatility in the tax line, with a consequential effect on earnings. Earnings have always been affected by a degree of judgement in the tax charge – deferred tax assets in particular can be subjective. The tax avoidance clamp-down is taking this to another level. Not only are tax authorities questioning more, the changes in the rules themselves represent a major shift in approach, matching tax to value creation is practically much harder than it is conceptually and so investors may have to modify their expectations of certainty as things adjust.

  1. Cash continues to be king

Alarmed that cash continues to facilitate tax evasion and money laundering, in November 2015 HMRC issued a call for evidence ‘Cash, tax evasion and the hidden economy’. With some HMRC personnel making no secret of their desire to abolish cash, the potential implications were immense.

The results have now been published. HMRC’s principal conclusion is: ‘Although cash usage is in decline, cash is still used by millions of consumers and businesses every day and is unlikely to disappear in the foreseeable future. Cash is popular for a number of reasons – it is quick to use, dependable and universally accepted. It can be used as a store of value or for budgeting. It is the primary (and in some cases the only) means of payment for significant numbers of people. There is unlikely to be a single replacement for cash as a payment method.’

So cash continues to be king. And HMRC continues to fret about tax evasion and money laundering, both facilitated by cash. On these points the report overlooks one important aspect of real life: with interest rates so low, there’s no incentive to keep cash in the bank. Nothing new there, then.

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