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Tax Newsletter October 2017

Tax Newsletter October 2017

We hope you will enjoy this issue of our Tax Newsletter. Our purpose is to try and keep you abreast of topical UK tax issues which may affect you, your business, and/or your clients.


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Finance (No.2) Bill 2017

The Government has now published Finance Bill 2017 – 2019 (which we will refer to as Finance (No.2) Bill 2017). The Bill had its Second Reading on 12 September 2017, and proceeded to Committee Stage, which took place on 11 October 2017. As had been expected, there have been some changes since updated draft legislation was published in July, although the majority of these changes are minor in nature.

The most significant corporate tax measures in the Bill are mainly unchanged since the previous versions published. The legislation on corporation tax losses and hybrid and other mismatches remains almost identical to the 13 July updates whereas there are minor changes, mainly affecting infrastructure companies, to the legislation on the corporate interest restriction (“CIR”) and substantial shareholding exemption (“SSE”):

-    The CIR legislation now makes it clear that a public infrastructure asset must be an asset “in relation to the company” and there is a small change to the effective date of the joint election for two or more group companies to modify the application of the qualifying infrastructure company provisions (S435 TIOPA 2010).  

-    Within the SSE legislation there is a minor change to the new exemption for Qualifying Institutional Investors (“QII”). A QII can satisfy the substantial shareholding requirement with an investment of £20 million provided this entitles it to a proportionate percentage of the profits available for distribution or assets on a winding up.  The change is that this requirement will still be regarded as satisfied where the percentage to which theQII is actually entitled is less than the proportionate percentage, provided the difference is insignificant (having regard to the proportion which the actual percentage bears to the proportionate percentage). 

For individuals, the Bill contains the new deemed domicile rules for income tax and capital gains tax as well as inheritance tax on UK residential property owned through non-UK companies and partnerships and related finance arrangements. The rules are in line with what was published previously, with some minor concessions which reflect the delay in the legislation becoming law.  As previously announced, these new rules will be effective from 6 April 2017. 

Assuming the Bill receives Royal Assent without further amendment, long term resident “non-doms” who satisfy the new deemed domicile tests under either the 15/20 year residence rule or as ‘UK returners’, will be deemed domiciled in 2017/18 for income tax, capital gains tax and inheritance tax purposes. The associated protections for offshore trusts settled by such individuals, rebasing of non-UK assets, and ‘cleansing’ of mixed funds will also be introduced from 6 April 2017. Shares in a non-UK resident company or partnership, which in turn owns UK residential property, will have been within the UK inheritance tax net since 6 April 2017, as will certain related loans and loan collateral. 

For employers, many of the measures included in Finance (No.2) Bill 2017 have not changed from the draft legislation. However, there were minor technical changes on the disguised remuneration measures that will introduce a PAYE and NIC charge on loans from Employee Benefit Trusts and other third parties made to employees or directors on or after 6 April 1999 and which remain outstanding at 5 April 2019.

Draft clauses for inclusion in Finance Act 2018 - Changes to taxation of offshore trusts

A policy paper and draft clauses for inclusion in Finance Act 2018 have been published.  These deal with thepreviously proposed changes to the taxation of capital payments and benefits from offshore trusts, which were withdrawn by the government in March 2017.  It has been confirmed that the changes will be effective from 6 April 2018, although the tax treatment of actions taken before that date may be affected. The changes will affect all non-UK resident trusts, not just those with a non-UK domiciled settlor. 

For capital gains tax only, capital payments made to non-UK resident beneficiaries on or after 6 April 2018 will be of no effect for UK tax purposes.  This is except where made to a beneficiary in a period of temporary non-residence where the capital payment will be treated as received in the year of return to the UK. For income tax and capital gains tax, capital payments made to (including benefits enjoyed by) a close member of the settlor’s family will be treated as made to a UK resident settlor where in the year of payment/benefit the family member is either non-UK resident, or the remittance basis applies and the payment is not remitted to the UK.

The settlor will be taxed accordingly.  A spouse, civil partner, person living with the settlor as if they were a spouse or civil partner, and children of the settlor (or their spouse or civil partner) under the age of 18 are close members of the settlor’s family for this purpose.  (This rule applies for income tax from 6 April 2017 rather than 2018.) 

Again for income tax and capital gains tax, a ‘recycling rule’ will treat certain capital payments received by a beneficiary that are gifted on to another UK resident recipient as being made to the gift recipient who will be taxed accordingly, unless the original recipient has already been charged to tax on the payment/benefit. This recycling rule will apply where at the time of the original capital payment/benefit there is an intention or arrangement to gift this on to a UK resident recipient. 

The proposals are draft and subject to change, and detailed advice should be obtained on their application to specific facts and circumstances. If you would like to find out more please contact Justine Howard.

Ignorance of the new 30 day NRCGT return deadline was a reasonable excuse

The FTT concluded in the case of McGreevy v HMRC [2017] that ignorance of the new 30 day NRCGT return deadline was a reasonable excuse for a non-UK resident filing an NRCGT return late. The discussion within this case is very interesting, particularly in relation to, for example, the new rules for IHT on UK residential property, where non-UK residents may not be aware of the extended scope of the UK tax rules.

This FTT case considers penalties charged on an Australian individual, Rachel McGreevy, who disposed of a property in the UK in July 2015. The gain on the property was exempt due to principal private residence relief. In August 2016 she starting to complete her 2015/16 tax return, at which point she became aware of the need to file a NRCGT return, which she then filed. HMRC charged penalties for late filing and she appealed against these penalties. 

The tribunal judge concluded that HMRC had failed to publicise the new NRCGT requirements to taxpayers and overall communications were found to be lacking. This therefore amounted to special circumstances that should lead to a reduction or cancellation in the penalties imposed. 

This decision contrasts with Usher and another v HMRC [2016] where lay executors who had not obtained professional advice could not plead ignorance of the law as an excuse.

Trust Register

There are new rules requiring online registration for all trusts. These new rules apply to both existing trusts and to new trusts and also to non-UK trusts with a UK tax liability. 

Under existing self-assessment rules, trustees (or their agents) must register details of a new (or newly taxable to income tax or CGT) trust with HMRC by 5 October of the year after a liability to Income Tax or CGT first arises. Previously form 41G was used for this purpose. Form 41G has been replaced by online registration and the scope of registration increased. 

The registration process now has to be completed via the new Trust Registration Service (TRS), and will include providing information about the beneficial owners of the trust. 

HMRC describes the TRS as  a single online service for trusts to comply with their registration obligations, which is aimed  at improving HMRC processes around the administration of trusts, and will allow HMRC to collect, hold and retrieve up-to-date information in a central electronic register (this is not a publicregister). 

It is noted that penalties will be levied against trustees who do not comply with their new TRS obligations.  The obligations to provide details of beneficial owners arise from the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017. 

Confirmation of deadlines

For the 2016-17 tax year (i.e. the first year of TRS) to allow sufficient time to complete the registration of a new/newly taxable UK or non-UK (express) trust for income tax and CGT self-assessment and to provide beneficial ownership information, there will be no penalty imposed where registration is completed after 5 October but before 5 December 2017. 

For existing trusts which are already registered for self-assessment, the deadline for completing the information required on the TRS is 31 January after the end of tax year for income tax or CGT (so 31 January 2018 for the 2016-17 year). As stated in the HMRC note to CIOT, if the trustees of a UK or non-UK express trust incurred a liability to any of the relevant UK taxes [which include IHT, SDLT and SDRT] in tax year 2016-17, in relation to trust income or assets, then the trustees or their agent need to register that trust on TRS by no later than 31 January 2018. 

In subsequent years, the trustees (or their agent) of a trust that is either newly created in the tax year, or which incurs a UK income tax or CGT liability for the first time, are required to provide beneficial ownership information about the trust, using the TRS, by 5 October after the end of tax year. The annual confirmation for existing trusts, and for trusts becoming subject to IHT and SDLT, must be submitted by 31 January after the end of tax year. 

Agent access

The TRS became available to agents on 18 October 2017 although we are aware that there have been technical difficulties.  The intention is that agents and lead trustees will be able to enter updates for changes ofcircumstances from early 2018.

Transfer pricing adjustments jump by 90% as DPT takes effect

After a three year gap, HMRC have restarted publishing statistics on transfer pricing enquiries and adjustments, and related issues. This year, statistics on the Diverted Profits Tax (“DPT”) have been added. The headline statistic is a 90% jump in transfer pricing adjustments over the prior year to £1.6 billion. Given the very high level of ongoing enquiries, and the introduction of country by country (“CbC”) reports, we do not expect this level of adjustments to be a one-off. 

These statistics reflect our experience of a large increase in the number of transfer pricing enquiries, often conducted in conjunction with a DPT enquiry and often covering a number of years. The introduction of DPT has given HMRC an additional tool to use in transfer pricing disputes, as well as being a separate taxing opportunity in its own right. 

The length of enquiries is also increasing, with the average age of settled enquires now just short of 29months. This reflects the increasing complexity of cases (including DPT implications) and increased levels of governance within HMRC. It is possible however that this figure may drop in 2017/18, as HMRC have been accelerating enquiries this year in order to work within the window for DPT notices in respect of the first year of DPT. 

The DPT statistics show a yield very closely aligned to the anticipated yield on its introduction, at £281 millionfor 2016/17. This number includes actual DPT assessments, additional corporation tax levied as a result of HMRC intervention in respect of potential DPT charges, and behavioural change where businesses have modified their transfer pricing arrangements in order not to suffer a DPT charge. It is however unclear how this last element has been calculated by HMRC. 

The statistics also include details on Advance Pricing Agreements (“APAs”), Mutual Agreement Procedures (“MAPs”) and Advance Thin Capitalisation Agreements (“ATCAs”). 

On APAs, the statistics show a decrease in the number of applications, and APAs agreed in the year, along with an increase in the number of applications rejected. They also show a similar timeframe for reaching agreement to the prior year, which was a large increase on 2014/15. The longer timeframes reflect the need to clarify the DPT position at the beginning of the process, and the increased governance at the end. We expect APAs to continue to be a useful tool for taxpayers, albeit with a greater size and complexity threshold following the issue of a revised Statement of Practice last year. Similarly ATCAs have seen a reduction in the number of applications, along with an increase in the time to resolve.  

MAP statistics show a concerning drop in the number of cases resolved alongside an increase in claims made and the length of time to resolve them. We expect this to be exacerbated in future years, as tax authorities take different views on the recent revisions to the OECD Transfer Pricing Guidelines, and gain access to greater levels of data through CbC reporting. 

These statistics are not unexpected, and reinforce the view that Transfer Pricing and DPT will be a major focus for HMRC in the coming years, and taxpayers need to be fully prepared for potential enquiries.

Tribunal's power to reduce assessment must be interpreted broadly

In the case of Vowles v HMRC [2017], the FTT held that its power to reduce assessments under section 50(6) Taxes Management Act 1970 (“TMA”) must be interpreted broadly and thus, any amendments or assessments by HMRC can be offset by other errors in the same return, even where the time limit for amending a self-assessment has passed. 

The appellant had under-declared property income but also over-declared dividend and employment income for a number of tax years. Therefore, the tribunal was able both to offset the amounts over-declared against the amounts under-declared in order to discharge the discovery assessments made by HMRC, and to reduce the appellant's self-assessments (even though the normal time limit for amendment had passed) by removing the dividend and employment income. 

Partnership taxation - proposals to clarify tax treatment

Draft legislation has been published which provides additional clarity over certain aspects of the taxation of partnerships. This follows the response to the August 2016 consultation which was published in March 2017. It addresses the following areas: how the current rules and reporting operate where a partnership has partners who are bare trustees for another person or where partnerships are partners; the allocation of partnership profits for tax purposes; the introduction of a new mechanism for the resolution of disputes between partnersover the allocation of taxable partnership profits and losses; and a relaxation in the reporting of information for investment partnerships that report under the Common Reporting Standard (“CRS”) and who have partners who are not chargeable to tax in the UK. 

Where the beneficiary of a bare trust is absolutely entitled to the income of a partnership but is not themselves a partner of that firm, from tax year 2018/19 onwards, they will be subject to the same rules for calculating profits etc. and reporting as actual partners. Partnerships may therefore need to consider further information about such partners - for example, if the beneficiary changes tax residence, the deemed cessation and commencement rules will apply. 

For partnerships with partners who are themselves partnerships (participating partnerships), they will be required to calculate their share of income on all four possible bases of calculation (income tax, corporation tax, UK resident and non-UK resident) unless details of all the underlying partners are included on the partnership statement. This will apply to the tax year 2018/19 onwards. 

Again, from 2018/19, where a partnership is a partner in one or more partnerships carrying on a trade, profession or business, the underlying trades are to be treated as separate notional trades. As a result of this, the results must be shown separately and will be subject to separate commencement and cessation rules. 

In the case of investment partnerships which do not carry on a trade/profession or a UK property business, they will no longer be required to return the tax reference of a partner not chargeable to UK tax provided the partnership reports details of the partner to HM Revenue & Customs under the CRS. This applies to returns made after the legislation has been passed (expected to be spring 2018) and will relate to periods before or after the legislation is passed so is likely to apply to 2017/18 partnership tax returns. However, as non UK residents are chargeable to tax on UK source income this relief would only be available if the investment partnership has no such UK source income. Consequently this reduced reporting is likely to be limited. 

The legislation clarifies how taxable profits must be allocated between the partners. For accounting periods beginning on or after the legislation is passed, the taxable profits must be allocated in the same ratio as the commercial profits of the partnership. The legislation refers to the ‘partner’s percentage’ of profits/losses and this includes any fixed proportion of their profit share. This could have a fundamental impact on professional partnerships which currently do not allocate a share of the tax disallowable expenses to their ‘fixed share’ partners. This change will also inhibit the streaming of particular types of income to different partners. The proposed change does not affect the capital gains allocation rules.

The partnership return will be determinative of the allocation of profits between partners. Where partners are in dispute over the correctness of the allocation of profits/losses shown on the partnership return, a new process will be introduced to refer this to a tribunal to be resolved. This only applies to the allocation shown on the return and not to the quantum of partnership profits. It will apply to 2018/19 partnership tax returns onwards.

Court sets aside 'disastrous' transfer of business assets into trust

This case of Whittaker v Concept Fiduciaries Ltd [2017] is of interest because it implies that tax avoidance is not of itself a reason to refuse to set aside a transfer on the grounds of mistake. The Royal Court distinguished the facts of this case from 'artificial tax avoidance transactions', which it said may justify refusal to grant the relief. 

In 2008, an English business owner received tax advice to the effect that if she transferred her shares in her UK companies into Guernsey trusts, this would reduce her UK tax exposure, and that of her estate. On the basis of this advice, she transferred her shares into Guernsey remuneration trusts and sub-trusts, which were administered in Guernsey and had a Guernsey-resident trustee. When she later changed her tax adviser, shediscovered that the earlier advice was incorrect and the transfers would in fact have disastrous tax consequences. She therefore applied to the Royal Court in Guernsey under s. 69(1)(a)(iv) of the Act (which grants wide powers to the court to make an order in respect of trust property) to have the transfer set aside on grounds of mistake. 

The court considered that English law was the applicable law because the shares that were the trust property were located in England and Wales as that is where the companies’ share registers were situated. It applied the equitable doctrine of mistake articulated by Lord Walker in the Supreme Court case of Pitt v Holt [2013]: for a voluntary disposition to be set aside, there must be a mistake, which caused the disposition, which is so grave that it would be unconscionable not to set it aside. The gravity, according to Lord Walker, is to be assessed based on a close examination of the facts, including any tax consequences of the disposition for the disponor. Lord Walker commented negatively on tax avoidance but the court found that while the motive for the transaction was tax avoidance, these were not “artificial tax avoidance transactions”. 

The Royal Court noted that there was nothing “intrinsically artificial about the remuneration trust arrangements“: there was a genuine trust, with a genuine trustee, of the sort that many other similar businesses use. Furthermore, the settlor would not have made the settlement but for the tax advice, which contained serious mistakes. For these reasons, it held, the transfer should be set aside on grounds of mistake. 

The court made it clear that if this had been “aggressive tax avoidance” it would not have been overturned.

Supreme Court finds for HMRC in Rangers EBT case

The Supreme Court, in a unanimous decision, has dismissed the taxpayer’s appeal in what became known as the ‘big tax case’. This judgment brings to a conclusion a number of years of litigation around Employee Benefit Trusts (EBTs) and ‘disguised remuneration’. While it is of direct relevance to employers who have funded EBTs or Employer-Financed Retirement Benefits Scheme (EFRBS), the breadth of the conclusion may also impact more mainstream arrangements such as salary sacrifice and flexible benefits. 

In essence, this appeal concerned the question of whether amounts paid to an EBT by an employer (i.e. Rangers Football Club) for the benefit of an employee constituted taxable income for the employee as earnings (or emoluments). 


The background facts

-    When the appellant wished to benefit one of its employees, i.e. a footballer or senior executive, it did so by making a cash payment to an EBT in respect of that employee. 

-    At the same time, Rangers also recommended that the trustee of the EBT resettle the sum on a sub-trust and asked that the income and capital of the sub-trust should be applied in accordance with the wishes of the employee. 

-    Invariably the employee then requested and received a loan from the trustee of the sub-trust. 

-    These loans tended to be repayable at the end of an extended term of ten years. Interest was not paid annually but was accrued over the life of the loan to be paid at the end of the loan period. 

-    It was anticipated by both the employee and the appellant at the outset that come the repayment date, the loan would be renewed. It was envisaged that, ultimately, the loan may still be outstanding on the death of the employee at which point it would reduce the value of his estate for inheritance tax purposes. 

-    Whilst the senior executives had no contractual right to any (bonus) amounts paid to the EBT, the same could not be said for the footballers. 

-    In negotiations with the footballers, the EBT was explained to the footballer/their agent and the terms of engagement were recorded in two documents: a contract of employment which set out the remuneration which would be subject to PAYE/NIC and a side-letter in which Rangers undertook to fund the EBT in an agreed amount and to recommend to the trustee of the EBT that they fund a sub-trust for the footballer’s benefit. The lawAfter considering the authorities, the judgment summarises the law as below. This is with reference to the basic charging rule under s62 ITEPA 2003, not with regard to the special rules on benefits-in-kind (or any other charging provision). The parties had also previously agreed that whatever was decided for income tax purposes should apply equally for Class 1 NIC. 


1.    Income tax on emoluments or earnings is due on money paid as a reward or

       remuneration for the exertions of the employee.

2.    The law (as relevant to this appeal at least) does not provide that the

      employee himself or herself must receive the remuneration.

3.    Instead the law applies to payments to either:

    a)    the employee; or       

    b)    a “person to whom the payment is made with the agreement or

           acquiescence of the employee or as arranged by the employee,

           for example by assignation or assignment”.

4.    The Special Commissioners in Sempra Metals (and in Dextra) had erred in

       excluding payments to a third party from being earnings. 


Applying the law to the facts, the Court concluded that “the sums paid to the trustee of the EBT for a footballer constituted the footballer’s emoluments or earnings.” Although the senior executives had no contractual entitlement to the discretionary bonuses before they were awarded, the Court, perhaps surprisingly in light of bullet 3b) above, concluded that “that does not alter the analysis of the effect of the EBT scheme. The fact that bonuses were voluntary on the part of the employer is irrelevant so long as the sum of money is given in respect of the employee’s work as an employee.” 


KPMG view

This judgment once more demonstrates the Court taking a tough line on certain planning. After the earlier judgments in Sempra (2008) and Dextra (2002), it seemed to have been accepted that payments to EBTs were generally not earnings, albeit that when Rangers was heard last year in the Court of Session, there were clear indications that this was not the end of the story. The Supreme Court’s judgment confirms this and unfortunately for Rangers, they have come out the worse for wear at the final whistle! 

The judgment also poses wider questions around the need for the highly complicated ‘disguised remuneration’ legislation which was introduced in 2011. But with HMRC having lost the Rangers case at both the First-tier Tribunal and the Upper Tribunal, one can understand that they felt they needed something to fall back on if they lost in the higher courts as well. 

That said, the proposal to extend the ‘disguised remuneration’ rules and to charge tax on loans as if they wereremuneration from April 2019 may face more controversy as a result. As it is now clear that HMRC has always had taxing rights over the sums involved, the 2019 loan charge may appear more like a second bite at the cherry. 

A key point in this case was the Supreme Court’s view that remuneration should not be excluded from tax asearnings under s62 ITEPA 2003 where the employee agrees or acquiesces that it should be paid to a third party. 

Although legislation has been enacted in Finance Act 2017 which significantly curtails flexible benefit arrangements offered by many employers to their staff, many employers are still operating such arrangements because the benefits concerned are carved out of the new rules or because the transitional rules apply so that there is, as yet, no impact (e.g. in relation to company cars, school fees and living accommodation). 

In these circumstances, it is unclear how this judgment will apply to the arrangements, i.e. will the choices employees make mean that they are re-directing s62 earnings which are taxable accordingly and subject to Class 1 NIC? 

The announcement of a new settlement opportunity is the first indication of how HMRC intend to proceed. 

As HMRC’s blog post states: “The decision makes it clear where a sum is established as being your employment earnings you cannot avoid tax by diverting or paying them to someone else.”

The blog post continues: “The…decision impacts on a wide range of earnings-related tax avoidance schemes including EBTs, Employer-Funded Retirement Benefit Schemes (“EFRBS”), Contractor Loans schemes and self-employed benefit schemes, known collectively as disguised remuneration (“DR”) schemes.” “As a result of the Supreme Court Ruling, HMRC will be inviting participants of DR schemes to register an interest in settling their tax liabilities arising from the use of these arrangements. Settling will prevent further immediate action by HMRC, reduce interest charges that would otherwise be payable and give access to extended payment terms, where these are needed.  We will be issuing details of how to register and settle in the coming weeks….” 

HMRC previously ran settlement opportunities in this area (the EBT settlement opportunity, or EBTSO, and the contractor loan settlement opportunity, or CLSO), both of which closed in 2015. 

Anecdotal reports were that many participants in these types of arrangements adopted a wait-and-see approach and chose not to pursue a settlement. HMRC are no doubt hoping that Rangers is the key to bringing these participants to the table and finally resolving what has become a very long-running saga. It remains to be seen what settlement terms will be offered as part of this new opportunity. Given the sheer number of variants in types of arrangement, a “one size fits all” approach may not be possible. Nor is it clear how HMRC intend to apply Rangers to EFRBS cases given the decision in favour of the taxpayer in Ford v McHugh. 

For those involved, the amounts will no doubt be material and, in light of the complexity of the existing legislation, planned future legislation and the arrangements themselves, we recommend participants seek professional advice.

© 2019 KPMG Limited, a Gibraltar Limited Liability Company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

KPMG International Cooperative (“KPMG International”) is a Swiss entity.  Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm.

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