HMRC Consultation: Strengthening Tax Avoidance Sanctions and deterrents

24 August 2016

Last Wednesday HMRC published it’s latest consultation document focusing on the arena of tax avoidance.

We will be responding formally to the consultation in due course but for now here is a summary of the main points.

Timeline

17 August 2016 - Consultation Document Published
12 October 2016 - Consultation closes
Later this year - Response document will be published
Future Finance bill - Legislative changes

Key Points

  • Increase sanctions against enablers of tax avoidance
  • Clarify what constitutes reasonable care
  • 2015 document 'Penalties - A discussion Document' referenced. Not to raise revenues. Proportionate to failure. Applied fairly so compliant customers are in a better position than the non-compliant. Provide a credible threat. Consistent and Standardised.
  • Accountancy Bodies and banks already have Rules and codes of practices. But it's the whole supply chain that presents the risks.
  • Who is an enabler? Includes anyone in the supply chain who benefits from an end user implementing tax avoidance arrangements. Company formation agents, banks, IFA's, Accountants, Lawyers, any other introducer including a user that gets a cash incentive for bringing in another user. Wider definition than in DOTAS and POTAS.
  • Not just avoidance. 2015 document 'Tackling offshore tax evasion: Civil sanctions from enablers of offshore evasion' referenced. Defines enablers. Acting as a middle man. Providing planning and bespoke advice. Delivery of infrastructure. Maintenance of infrastructure. Financial Assistance. Non-reporting.
  • Options for penalties - Favoured option is 100% of the tax avoided. Publish the names of enablers. Trigger is the defeat of the arrangement. No connection to penalties imposed upon users. May be necessary to consider a cap to the total penalties.
  • Both users and enablers of defeated arrangements may provide relevant information to identify other enablers and to ensure that any penalty on them is appropriately mitigated.
  • Appeals will be possible. Need to exclude the unwitting parties.
  • What constitutes reasonable care? Currently burden of proof lies with HMRC, could change that so burden of proof with taxpayer. Preferred option is to create prescriptive list of examples.  Arrangements having QC opinions does not mean reasonable care has been taken. Neither would bespoke advice if not provided by a financially disinterested party.
  • What is defeated tax avoidance? Propose to follow the same definition as set out in Finance Bill 2016. There is a final determination of a tribunal or court that the arrangements do not achieve their purported tax advantage. Caught By GAAR. A Follower Notice has been issued. Notifiable under DOTAS. Subject of a TAAR or an unallowable purpose test contained in a specific piece of legislation or regime.
  • Further ways to discourage avoidance. 'Real time' interventions. The Avoidance Lifecycle - Marketing - Firm Offer - Implementation - Self assessment - Enquiry - Settlement or Litigation. Require promoters to provide lists of all those to whom arrangements are marketed. Disclose introducer fees to clients. Provide clients with HMRC information. Notify HMRC re other parties involved in marketing. Penalties for not advising users that HMRC is challenging arrangement. Real time reporting on users to HMRC digitally. Users to certify in their self assessment they understand risks. SA return warning re arrangements not disclosed under DOTAS. Require promoters of Non-notified arrangements subject to a DOATS enquiry to provide full client lists.

If you are concerned about how this consultation may affect you or your clients then please do not hesitate to get in touch by calling 0203 039 3993.

HMRC Consultation: Tackling Disguised Remuneration

16 August 2016

On 16 March 2016 HMRC published a technical note on Tackling disguised remuneration avoidance schemes, we wrote about this in our article Loans and Disguised Remuneration. This has now been followed up by a consultation document published on 10th August.

We will be responding to this consultation document shortly but in the meantime here is a summary of the timeline and key points, we would strongly encourage all interested parties to formally respond.

Timeline

10 August 2016 - Consultation Document Published
5 October 2016 - Consultation closes
Finance Bill 2017 - Further consultation on draft legislation
Finance Act 2017 - Final legislation

Key Points

  • Will work for Tax and National Insurance (NIC) in the same way.
  • Making Changes to current rules in Part 7A ITEPA 2003 to put beyond doubt that it applies to all forms of Disguised Remuneration (DR) schemes.
  • Arrangements that result in an employee being indebted to a third party will be treated as if the third party made the loan in the first place. Unless third party becomes the employer.
  • New gateway introduced to catch arrangements with close companies that claim payments are not made in connection with employment.
  • If loans to participator rules also catch than rules will make clear which applies to avoid double taxation.
  • The writing off, or release, of a DR loan, including a transfer, results in a tax and NIC charge. Unless post death.
  • Tax relief will be fully denied for employers contributions to DR schemes on or after 6 April 2017.
  • HMRC will pursue the liability from the employer in the first instance, but will transfer the liability to the employee where it cannot reasonably be recovered from the employer. This only applies to Part 7A charges. Three common scenarios this will apply to, Non-UK employer, employer does not have sufficient assets to make the payment, employer dissolved.
  • The Loan Charge - to apply to all outstanding balances at 5 April 2019 that would be caught by Part 7A had they been made at that date. Loans made before 6 April 1999 are not caught.
  • Where a loan has been replaced only the most recent loan is considered so if a pre 1999 loan has been replaced post 1999 it's replacement will be caught.
  • The outstanding balances will be calculated by taking the 'relevant principal' and deducting the 'repayment amounts'.
  • The existing exclusions in Part 7A will also apply to the loan charge.
  • The government has made it clear it will not accept attempts to circumnavigate these changes and the loan charge.
  • 'Relevant Principle' is the initial sum lent under the agreement plus any further amounts added, this could be interest that has been added to the principal.
  • ‘Repayment amount' is only defined from budget day, only repayments of money will be counted. Any amounts written off or released will only be repayment amounts if they have been subjected to tax and NIC.
  • TAAR Included - repayments disallowed where there is a connection with a further avoidance arrangement. This includes circumstances where the money repayment is returned to the individual without an employment income charge.
  • A loan that is transferred from the employer to a third party is called a 'Quasi Loan', the loan charge applies in the same way to both loans and Quasi Loans.
  • Postponement for 'Approved Fixed Term Loans' - provided there is a realistic expectation that the loan will be repaid by its due date. If not repaid the loan charge will apply at the later due date for repayment.
  • Postponement will apply where the loan is a qualifying loan and either (1) the payments condition is met, or (2) the commercial terms condition is met, AND HMRC approve an application for deferment, there will be no right of appeal against HMRC's decision.
  • A qualifying loan is one made before the introduction of Part 7A with a repayment period of less than 10 years where there has been no replacement or variation.
  • The 'qualifying payments’ condition is that there has been a repayment of capital at least once every 53 weeks.
  • The 'commercial terms' condition considers loans that are close to but do not quite meet the requirements of Part 7A, HMRC will consider whether capital  repayments have been made, whether the loan is secured against an asset, whether interest payments have been made, the regularity of repayments (either capital or interest) and the interest rate applied. The terms of the loan will actually need to have been met.
  • Postponement for Accelerated Payments (AP) - A claim will be available to individuals who have paid an AP, but only if the AP was payable by the same person liable to the loan charge, and only where the loan balance is equal to or less than the loan charge. If the AP is later repaid, the loan charge will be payable within 30 days unless the outstanding loan balance is repaid.
  • Interaction with settlements - Generally, where a DR loan hasn't been included in a settlement, and tax hasn't been paid on it, the loan charge will apply. However, if a settlement agreement implicitly covered an earlier year on one or more loans from a DR scheme then the loan charge will not apply.
  • Double taxation - there may be other times a loan charge applies where amounts have already been subjected to tax, there are provisions to protect against this.
  • Interaction with beneficial loans - A benefit in kind arises on loans until a Part 7A charge arises, this will also be the case with the loan charge.
  • NIC - if a Part 7A charge has already been paid on the basis of only tax being due, the NIC will now not be due.
  • AP's - any AP's paid can be used to settle the loan charge, however if that is the case the AP will not be repaid later if the dispute is settled in favour of the scheme user.
  • Similar avoidance schemes - Self employed arrangements that depress the taxable earnings and then return the depressed earnings via a loan or other non taxable amounts will also be legislated for in FB17.
  • The government proposes for self employed arrangements a broad rule without any 'main purpose' tax avoidance test to tackle the continued use of contrived arrangements. The purpose of these proposals is to enable contrived steps to be ignored for tax purposes.
  • A broad set of rules is proposed now but needs to be tightened so as not to catch commercial transactions before being legislated for in FB17.
  • Historic use of self employed arrangements will be tackled by a similar charge to Part 7A but under Part 2 of ITTOIA 2005, imposing a loan charge on any loan balances outstanding at 6 April 2019 in a similar way to that outlined above.

If you are concerned about how this conssultation may affect you then please do not hesitate to get in touch by calling 0203 039 3993.

HMRC Consultation: Partnership taxation: proposals to clarify tax treatment

10 August 2016

Yesterday HMRC published a consultation document entitled 'Partnership taxation: proposals to clarify tax treatment'. The consultation is open for 12 weeks until 1 November.

The consultation is a response to an OTS report, HMRC now feel that the current rules are not always clear when considering how modern partnership operate.

Who is the partner chargeable to tax? In certain cases the partners of an LLP registered at companies house are not the same as the partners reported to HMRC on the partnership tax return, this is as some partners claim to be acting as 'nominees' for others. The proposals clarify that a partner can not act as nominee or agent for another person.

Business structures that include partnerships as partners. Currently the reporting requirements can mean another partnership is shown on the partnership return as a partner and it is not immediately obvious who is taxable on that partnership profit share. The proposals are that the partnership partner should be 'look through' and each partner in it should be treated as a partner in the first partnership.

The investment management industry accounts for 1% of UK GDP, however these can often be structured as partnerships and this can cause administrative problems. The proposal is to improve administration for 'investment income only partnership' and is seeking views as part of the consultation.

Similarly where trading and property income is involved especially with foreign investors/partners it can sometime be difficult for the nominated partner to establish all the necessary details of the partners or establish their UTR's, the government seeks views on how to protect the exchequer, and proposes a possible payment on account towards the tax liability of anyone who cant be identified.

Profit Sharing arrangement - this is usually determined by a written profit sharing agreement, however it is not a legal requirement that this is in writing. The proposal is that the profit sharing ratios should be set by the partnership agreement, unless notified to HMRC by the nominated partner in writing or electronically.

Allocation of tax adjusted profit to partners - the government sees a risk here that the profit allocated per the accounts is not always the same as the allocation of the adjusted profit for tax purposes. Legislation is proposed to bring the two into alignment.

Non-chargeable persons - The current rules do not cover the situation where a partner is not within the charge to income or corporation tax, the government intends to clarify this.

If you are concerned about how this consultation may affect you or your clients then please do not hesitate to get in touch by calling 0203 039 3993.

Intermediary Reporting Requirements

03 August 2016

HMRC has recently updated its guidance Employment Intermediaries: Reporting Requirements

Broadly where an employment intermediary has a contract with a third party to supply workers it must submit a report to HMRC at least once a quarter detailing any workers whose payments have been made outside of the PAYE system, such as payments made to a self employed worker.

2015-16 was the first year of the reporting requirements and they were introduced with a soft touch - ie no penalties would be charged for late filing during the first year. So the first report for which a penalty could be incurred is for the quarter ended 5th July 2016 which is due for submission by 5th August 2016.

The penalties depend upon the number of failures in the previous 12 months:

  • £250 for the 1st offence
  • £500 for the 2nd offence
  • £1,000 for the 3rd and later offences

Where there is continued failure to send reports, or in certain cases where reports are frequently sent in late daily penalties of up to £600 may be imposed.

Many businesses are not even aware that the reporting requirements apply to them, HMRC has been working hard to educate affected businesses and accountants but there are many who are going to unwittingly fall foul of the penalties.

If you are concerned about how this may affect you or your clients then please do not hesitate to get in touch by calling 0203 039 3993.

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