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Autumn Budget 2018: Other measures for businesses

Autumn Budget 2018: Other measures for businesses

Further announcements in the Autumn Budget that affect businesses.


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Changes to the definition of permanent establishment

Under UK domestic law, a non-resident company is generally only subject to UK tax where it is trading in the UK, either under corporation tax (if such trade is carried out through a permanent establishment (PE) as defined under domestic law) or otherwise through the income tax provisions. However, where there is an applicable double taxation agreement a non-resident company trading in the UK is generally liable to UK corporation tax only if it has a PE in the UK, typically through a fixed place of business or a dependent agent. Certain preparatory or auxiliary activities, such as storing the company’s own products, purchasing goods, or collecting information for the non-resident company, are however specifically excluded from the definition of PE under domestic law and most tax treaties. 

Under BEPS Action 7, the OECD proposed an anti-fragmentation rule to address the fragmentation of activities between closely related parties in order to artificially avoid creating a PE. The UK has chosen to apply this provision through its ratification of the OECD’s Multilateral Convention (MLI), which is due to enter in to force in 2019. The Government will legislate in Finance Bill 2018-19 to give full effect to this treaty change by updating the domestic law definition of PE to ensure treaties impacted by the MLI are subject to corporation tax rather than income tax, making the MLI changes fully effective.

This measure will therefore primarily impact multinationals resident in treaty jurisdictions with a presence currently exempt through the preparatory or auxiliary exemption under the terms of a double taxation agreement. If no double taxation agreement applies then, to the extent a non-resident is trading in the UK, such activities should remain taxable through the income tax regime even if no PE is established under the revised provisions.

Matthew Herrington 

Nicolas Gurteen

Diverted Profits Tax amendments

Updates are proposed to the UK’s Diverted Profits Tax (‘DPT’) regime, including a welcome clarification that diverted profits will only be taxed under either the DPT or Corporation Tax (‘CT’) provisions, not both.

Another key change is to extend the ‘review period’ (during which HMRC and the company are encouraged to work collaboratively to determine the extent of diverted profits) from 12 to 15 months. 

A corresponding amendment allows companies to amend their CT return during the first 12 months of the review period in order to include the diverted profits within the charge to CT. In this case, the diverted profits liable to DPT would be reduced accordingly.

In our experience, the 12 month review period has proven a very tight timeframe to reach agreement over the extent of diverted profits, so this extension is also welcomed.

Finally, an amendment will be made to close a potential tax planning opportunity, whereby CT amendments could be made to a company’s return after the review period had ended and the DPT time limits had expired.

Matthew Herrington

Nicolas Gurteen

ATAD amendments to UK Controlled Foreign Companies legislation

As announced in a guidance note published at the same time as the draft 2018-19 Finance Bill, the government will legislate in Finance Bill 2018-19 to make two changes to the Controlled Foreign Company (CFC) rules:

1. To amend the definition of control so that any interests held by associated enterprises, wherever they are resident, are taken into account when assessing control; and

2. To amend the treatment of non-trade finance profits arising to CFCs currently electing for the Chapter 9 finance company exemption to apply. Broadly it is expected this will prevent the Chapter 9 exemption from applying where the profits are attributable to UK significant people functions, resulting in a full UK CFC charge on such profits.

The first change is primarily relevant to foreign parented groups that have split shareholding structures especially where they fall below the current ‘control’ threshold. The second change is most relevant to groups with a UK based treasury function.

The changes will take effect from 1 January 2019.

Matthew Herrington

Nicolas Gurteen

Stamp Duty anti-avoidance: listed share transfers

From Budget Day transfers of listed securities to connected companies will be subject to stamp duty or stamp duty reserve tax (SDRT) on no less than their full market value at the time the charge is triggered, subject to meeting the conditions for existing stamp duty and SDRT reliefs and exemptions.

The draft legislation does not contain any exceptions that are a feature of the equivalent rule for transfers of land to connected companies (e.g. purchases by trustees in certain circumstances and corporate distributions made in specie). However, provision is made to add exceptions by regulation.

Whilst the measure should combat what HMRC have billed as “contrived arrangements being used to avoid tax” it is likely to have practical implications particularly for brokers and others with primary responsibility for accounting for SDRT on listed market transactions. They will need to have systems and processes in place to identify connected party transactions and to calculate the market value charge. 

The changes are unlikely to stop there as a consultation, due to be published on 7 November 2018, was also announced which will look at the alignment of the stamp duty and SDRT consideration rules (currently the scope of chargeable consideration for stamp duty is more limited) and introducing a general connected party market value rule. Those changes are not the type that had been proposed by the Office of Tax Simplification last year and appear to have been driven by perceived tax avoidance rather than a desire to simplify the rules.

Fiona Cole

Sean Randall 

Reintroduction of PAYE/NIC cap for SME R&D credit

In an attempt to prevent “abuse of the SME payable credit”, from 1 April 2020 the amount of the payable Research and Development (R&D) credit received by loss-making small and medium-sized enterprises (SMEs) will be capped to three times the PAYE/NIC liability of the company. The wording in the Red Book suggests that the cap has the same criteria as the measure repealed in 2012, i.e. the claimant’s total PAYE/NIC can be taken into account regardless of the number of employees actually undertaking R&D. This contrasts with the R&D Expenditure Credit (RDEC), which restricts the credit to the PAYE/NIC of individuals included in the claim.We expect the vast majority of SME claims will be unaffected, but the measure may restrict entirely legitimate claims made by companies with a very small number of staff and reliance on third party labour (externally provided workers and subcontracted R&D).The cap was abolished in Budget 2012 for good reason; it restricted the amount of cash an SME could obtain, cash that start-ups often needed to re-invest in their R&D efforts. Misuse of the relief by some taxpayers has necessitated the re-introduction of the cap. Hopefully, through the consultation, the design of the new rule can be tailored to help ensure no taxpayers using the relief as intended will suffer as a result.

David Woodward

Extension of security deposit legislation

As previously announced and consulted on, the Government will legislate in Finance Bill 2018-19 to extend existing security deposit legislation to include corporation tax and Construction Industry Scheme deductions. Minor changes have been made to the draft legislation that was published on 6 July 2018, including to remove provision for new information powers that are now considered unnecessary, and to include a technical amendment to the existing PAYE provisions. Detailed provisions will be set out in regulations, which will be published for comment.

Stephen Whitehead

Statutory remedy re advanced corporation tax

Companies likely to be affected by this announcement are those that have made common law claims against HMRC in relation to the operation of the former Advance Corporation Tax (ACT) regime.

This measure provides a non-exclusive interest return for claimants that made common law claims against HMRC in respect of ACT which was paid and subsequently set-off or repaid. It introduces a new statutory remedy in order to address the uncertainty that has arisen for both taxpayers and HMRC following a recent Supreme Court judgment.

On 25 July 2018, the UK Supreme Court gave its judgment in the case of Prudential Assurance Company Ltd v Commissioners for Her Majesty’s Revenue and Customs [2018] UKSC 39. The case related to the old ACT regime, which ceased to apply in April 1999, from when the Shadow Advance Corporation Tax regime came into effect. As part of the decision in the Prudential case, the Supreme Court overruled the House of Lords in the previous case of Sempra Metals Ltd v Inland Revenue Commissioners [2007] UKHL 34.

The claims for restitution of the time value in respect of the period from payment of ACT to set-off or repayment were based on the decision in Sempra Metals, which also stated that this satisfied the requirement that an effective remedy be available. The Supreme Court in Prudential held that there was no such restitutionary common law remedy in the circumstances of that case. HMRC consider that this creates uncertainty for other taxpayers which the proposed statutory remedy is intended to address.

It is not clear that HMRC are correct in their understanding of the implications of the Prudential judgment and their apparent interpretation and potential application of the decision for other Sempra-type restitution cases. Furthermore the scope of the proposed statutory remedy is also unclear at present. HMRC may well take this opportunity to make a further attempt to limit the consequences of the Sempra judgment which may, in turn, be subject to further challenge by taxpayers.

Richard Doran

Stephen Whitehead

Voluntary Tax Returns

Legislation will be introduced to confirm HMRC’s existing policy of treating tax returns sent in voluntarily as legally valid returns. This measure affects individuals, partnerships, trusts and companies who submit tax returns voluntarily without having received a notice to deliver a return from HMRC.

In practice HMRC has exercised discretion to accept and treat Income and Corporation tax Self-Assessment returns received from taxpayers voluntarily, on the same basis as tax returns received under a statutory notice to file. This practice has been adopted by HMRC and taxpayers since Self-Assessment was introduced in 1996 to 1997. As a result of recent legal challenges to the practice and the potential penalty implications arising from the validity of returns received voluntarily, legislation will be introduced with retrospective effect to put the practice onto a statutory basis. This removes any doubt for taxpayers that voluntary tax returns have and will continue to be accepted as valid returns.

As the measure formalises the current practice the vast majority of taxpayers will not experience any impact. HMRC believe a very small number of tax avoiders will be impacted. The reason for this has not been explained but it is likely that they were anticipating challenges to the validity of enquiry notices and other actions taken by HMRC in respect of voluntary returns in tax avoidance cases.

Kevin Elliott

Stephen Whitehead

Conditionality: Hidden economy

Following earlier consultation, the Government will consider legislating at Finance Bill 2019-20 to introduce a tax registration check linked to licence renewal processes for some public sector licences. Applicants would need to provide proof they are correctly registered for tax in order to be granted licences. The aim of this measure is to make it more difficult to operate in the hidden economy, helping to level the playing field for compliant businesses.

Stephen Whitehead

Insolvency related matters

Tax abuse and insolvency 

New legislation will allow HMRC to make directors and other persons involved in tax avoidance, evasion or phoenixism jointly and severally liable for company tax liabilities, where there is a risk that the company may deliberately enter insolvency. This change will have effect from Royal Assent to Finance Bill 2019-20.

Protecting Taxes in Insolvency

From 6 April 2020, the Government will change the rules so that when a business enters insolvency, HMRC has a degree of priority over other creditors in respect of certain taxes. This will only apply to VAT, PAYE income tax, employee National Insurance contributions and Construction Industry Scheme deductions which the Government describes as “taxes collected and held by businesses on behalf of other taxpayers”. The rules will remain unchanged for taxes owed by businesses themselves, such as corporation tax and employer National Insurance contributions. No further details have yet been published and it is unclear whether this legislation will be similar to the preferential period rules which applied until 2003. This will be legislated for in Finance Bill 2019-20.

Stephen Whitehead

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