On 1 December 2017 the Government published the summary of responses (click here) to the consultation document entitled “Tackling offshore tax evasion: A requirement to notify HMRC of offshore structures”.
Following the responses to this consultation, HMRC has decided not to pursue its plans to introduce a new legal requirement that intermediaries creating or promoting certain complex offshore financial arrangements must notify HMRC of those arrangements.
Both the OECD and EU have undertaken work on measures similar to the one proposed in the consultation. The Government therefore intends to work with international partners on the development of appropriate multi-national rules, taking into account the responses received in the consultation.
There were some interesting proposals in the original consultation but, in summary, the responses doubted that it would be possible for HMRC to design hallmarks that would be able to minimise the reporting burden for compliant taxpayers while effectively targeting areas of evasion risk, and that it may not be possible to enforce the measure offshore.
Three new ‘strict liability’ criminal offences have come into force for those with tax liabilities relating to offshore income, assets or activities, where the tax underpaid or understated is more than £25,000 in a tax year. Because of the ‘strict liability’ nature of the offences HMRC do not have to show intent, only that tax has been underpaid or understated. This marks a key shift in HMRC’s approach to such offences.
Originally consulted on in 2015, the offences were included in Finance Act 2016 and came into force as of 7 October 2017. A conviction can result in a fine or a prison sentence of up to 51 weeks, or both. There are certain safeguards provided for: the offences only relate to income and gains that are not reported under the Common Reporting Standard (CRS) and taxpayers may be able to rely on defences of ‘reasonable excuse’ for failure to notify and failure to file a return, or where it can be shown that ‘reasonable care’ was taken in cases of filing an inaccurate return.
These new measures are further evidence of HMRC’s continued crackdown on offshore tax evasion and non-compliance.
The Government has confirmed that for the first year of operation of the Trust Registration Service (the online register on which trustees are required to record details of beneficial ownership) they will not impose penalties on trustees of existing trusts so long as they have registered the trust by 5 March 2018 (the deadline was previously 31 January 2018).
It is noted that for new trusts (ie those which have incurred a liability to income tax or capital gains tax for the first time in the tax year 2016 to 2017) there is no change to the 5 January 2018 deadline (which has previously been extended from 5 October 2017 to 5 December 2017, and then to 5 January 2018). This should give HMRC sufficient time to issue unique tax reference numbers to these trusts so that their trust returns can be submitted by the 31 January 2018 deadline.
HMRC have published the responses received to their consultation on bringing UK property income and gains of non-resident companies into corporation tax. As announced at the Autumn Budget, the Government will be making this change in April 2020. To ensure the provisions work as intended, the Government will conduct a technical consultation on the draft legislation in due course. They acknowledge there will be a need for transitional provisions. Draft legislation will be published in Summer 2018.
The response which can be found here indicates that the rules will be largely implemented in line with the consultation proposals. In respect of losses the response document indicates that it is intended that existing income tax (IT) losses can be carried forward into the corporation tax (CT) regime (without any need to recalculate on a CT basis) and used without restriction provided the company continues the UK property business. After subtracting any carried forward IT loss, only the residual taxable income will be subject to the 50% loss restriction for CT losses. In terms of reducing the compliance burden, this seems like a sensible approach even though it requires tracking IT losses separately to CT losses. However it also means that carried forward IT losses will have considerably more value than CT losses after 2020, given they can be utilised without restriction.
Taxing gains made by non-residents on UK immovable property The Government announced in the Autumn Budget 2017 that it intends to tax gains made by non-residents on the disposal of all types of UK real estate from April 2019. A consultation document has been published setting out details of how the rules are expected to apply and can be found here.
Currently only gains made by non-residents on the disposal of residential property are subject to UK tax although there is an exemption for certain widely-held non-resident companies. The new rules will create a single regime for the disposal of both residential and commercial real estate and will remove the current exemption for widely-held non-resident companies. We anticipate that the widely-marketed scheme exemption will also be removed although this is not specifically mentioned in the consultation document.
In addition, the new rules will extend to indirect disposals of ‘property rich’ entities such as companies, partnerships and property unit trusts. Broadly, a non-resident investor holding
a 25% or greater interest in an entity that derives 75% or more of its gross asset value from UK real estate will also be within the scope of the new rules. The rules could also apply to an interest in settled property deriving its value directly or indirectly from UK land and to any option, consent or embargo affecting the disposition of UK land. The indirect disposal rule will also apply to a non-resident investor who holds 25% or more of the shares in a UK-REIT.
Any interests held by related parties to the non-resident at the date of disposal or within the prior five years will be taken into account when calculating whether the 25% test is met.
HMRC acknowledge that relief from tax on indirect disposals may be available under certain double tax treaties where those treaties do not contain a securitised land provision. Such treaties include Luxembourg but not Isle of Man, Jersey, Guernsey or Netherlands. However, an anti-avoidance rule has been introduced to deny treaty benefits to non-residents who enter into any arrangements or restructuring on or after 22 November 2017 with a view to benefitting from such double tax treaties.
The new rules will apply only to gains attributable to changes in value from 1 April 2019 (for companies) and 6 April 2019 (for other persons). April 2019 will therefore be a rebasing point for widely-held non-resident companies on all disposals of UK real estate and for all persons on all indirect disposals.
Rollover relief will be available to allow non-residents to defer gains on the disposal of certain business assets used for trade purposes. However, we would expect that this may be of limited use in practice.
Sovereign immune investors, registered pension schemes and overseas pension schemes will retain their existing tax benefits but could be indirectly affected depending on the nature of their holding structure.
Qualifying institutional investors may also benefit from the extended Substantial Shareholding Exemption rules that apply to the disposal of property rich companies or groups of companies.
Currently HMRC have four, six or 20 years (for mistake, careless or deliberate behaviour respectively) to assess tax that is due. There will be a consultation in spring 2018 proposing to extend the four and six year time limits such that HMRC will always be able to assess at least 12 years of back taxes for offshore non-compliance. The four, six and 20 year time limits will continue for onshore non-compliance so for the first time there is divergence on periods taxable between onshore and offshore.
The new measure announced in the Autumn Budget 2017 should also be considered in conjunction with Requirement to Correct (RTC), the legislation for which was introduced on 16 November 2017. RTC places a new legal obligation for those impacted to correct any offshore non-compliance giving rise to a UK tax liability.
RTC requires taxpayers who have outstanding offshore tax non-compliance as at 5 April 2017, and which was committed on or before 5 April 2017, to correct the position on or before 30 September 2018. Where tax liabilities have not been corrected by this date, and are subsequently established, penalties for Failure to Correct (FTC) will bite. It is the FTC which is penalised, not the original behaviour which led to the tax liability. Consequently FTC penalties could apply to even those who took reasonable care as well as those liabilities due to careless or deliberate behaviour.
Penalties will start at 200% of the tax liability (can be reduced but no lower than 100%). The only defence to FTC is that someone had a reasonable excuse why they did not correct before 30 September 2018. The provisions in the legislation specifically disqualifies tax advice received in certain situations. The significance of the new measure announced in the Budget for those who fail to take the corrective action required under RTC is that in addition to the significant penalties that apply, even more years will now be subject to tax and in turn those extra years will also be subject to the 100-200% penalties.
On 14 December 2017 Scotland’s Finance Secretary Derek Mackay introduced the proposed Scottish Draft Budget for 2018/19, which included wide-ranging changes to income tax rates and bands for Scottish taxpayers. In a move that surprised many commentators, a new 19% Starter Band and 21% Intermediate Band of income tax was announced, alongside the more widely trailed 1% increases in the Higher and Additional Rates. This represents a radical development for the UK tax system generally, and for Scottish taxpayers in particular. Whilst it should be remembered that the Scottish Government is a minority administration and will need support from opposition parties in order to pass its Budget, we expect that the proposed tax reforms will be enacted in a similar form to those set out today, especially given the other parties’ published positions on income tax.
A Land and Buildings Transaction Tax (LBTT) relief for first time buyers will be introduced which raises the nil rate threshold to £175,000 (from £145,000). Those buying a property for over £175,000 will also benefit from the relief on that portion of the purchase price below £175,000. This should provide an LBTT saving of up to £600 for first time buyers.
Scottish Landfill Tax (SLT) continues to shadow its UK equivalent and the credit for contributions made to the Scottish Landfill Communities Fund remains capped at 5.6% of an operator's total SLT liability.
No announcements were made regarding the deferred introduction of Air Departure Tax (ADT), which was originally planned to replace Air Passenger Duty (APD) from 1 April 2018. In addition, the timing of the devolution of Aggregates Levy remains unclear.
Please click here to see KPMG’s summary of the Scottish Draft Budget on a page.
The Court of Appeal has rejected a joint application for judicial review against accelerated payment notices (APNs) and partner payment notices (PPNs), served by HMRC on taxpayers taking part in various tax avoidance arrangements. The taxpayers, in two lead cases Rowe & Ors v Revenue And Customs  and Vital Nut Co Ltd & Anor v HMRC , had challenged the validity of APNs on several grounds.
The taxpayers argued that HMRC must be satisfied that an arrangement does not work before issuing an APN or PPN. The Court agreed, concluding that a designated officer put in place must take the view that the arrangements are ineffective before issuing an APN/PPN. However, HMRC's statutory powers to issue an APN/PPN are not restricted by the fact that an appeal may be pending.
It was also argued that it was an abuse of power to use APNs or PPNs as an alternative to the enquiry and appeal process. The Court accepted that it would be unlawful for HMRC to fail to take an enquiry forward once an APN or PPN had been paid, but there was no evidence this was happening.
The taxpayers had argued that the legislation did not allow for APNs to be served on people who had completed transactions associated with their tax avoidance arrangements before the legislation was passed, as this amounted to retrospective taxation. The Court dismissed this argument, stating that it would be contrary to the statutory purposes of the legislation were it not allowed to operate in relation to existing tax avoidance cases.
The Court considered the possibility that an APN could lead to taxpayers having to sell their homes or becoming bankrupt. While making no specific judgment on this, the judge stated "I would like to leave open the question whether the application by HMRC of its usual hardship rules is necessarily sufficient". It remains to be seen if HMRC will take any action in response to the Court's concerns, particularly given the difficult balance that needs to be struck between being lawfully proportionate and giving people the opportunity to opt out of paying an APN/PPN by claiming hardship.
The taxpayers argued that HMRC needed to explain the basis of the asserted tax liability and provide them with a proper opportunity to rebut the claims before the APNs/PPNs were served. The Court rejected this argument on the basis that the taxpayers were entitled to make representations to HMRC upon receiving an APN/PPN on whether their arrangements were effective for tax purposes. They also found that the representations can cover matters that are not expressly provided for and HMRC have to take these into account.
The Court did not consider that a delay in issuing an APN/PPN was in itself unfair, bearing in mind both the impact of ongoing litigation and HMRC's limited resources.
The taxpayers argued that their rights under Article 1 of the First Protocol to the European Convention on Human Rights and Fundamental Freedoms (the right to peaceful enjoyment of one's possessions) were breached. The Court rejected this argument as the Article specifically allows the State to "control the use of property … to secure the payment of taxes".
The full decision can be found here. It remains to be seen whether the Court of Appeal's decision will be appealed to the Supreme Court.
The GAAR (General Anti-Abuse Rule) Advisory Panel has released an opinion on arrangements designed to enable a Company’s sole director and shareholder (Mr A) to extract cash from the Company without incurring income tax. The arrangements involved interests in a trust and a loan from the trust, together with other complex features. Mr A sold the right to income arising in the trust with a credit to his director’s loan account. The aim of these arrangements was to provide Mr A with a tax-free amount without a loan to participator tax charge or other participator benefits charge arising on the Company.
Mr A acquired the settlor's interest in a trust together with a corresponding loan from the trust. The primary interest, the right to income arising in the trust, was then purchased by the Company from Mr A via a credit to Mr A's outstanding director's loan account. A secondary interest, the right to capital in the trust, was held by a family trust established by Mr A. The trustees of the first trust had the power to transfer the assets of the trust to the secondary beneficiary.
Mr A and the Company argued that the amount Mr A received from the Company is a market value purchase price for an asset, so no charge arises to income tax under the distributions legislation. They also argued that the existing loan to Mr A is repaid and is not replaced by another loan from the Company, and that Mr A received no other taxable benefit.
The GAAR Advisory Panel found that there was no commercial, non-tax, reason for Mr A and the Company to involve a trust in the desired goal of extracting cash from the Company, and that "contrived and abnormal steps have been adopted to avoid the tax consequences of the most likely comparable commercial transaction."
The Panel's conclusion was that the entering into of the tax arrangements was not a reasonable course of action in relation to the relevant tax provisions and the carrying out of the tax arrangements was not a reasonable course of action in relation to the relevant tax provisions.
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