practice matters THE SPRING UPDATE FOR FINANCE TEAMS IN LAW FIRMS 2018

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1 practice matters THE SPRING UPDATE FOR FINANCE TEAMS IN LAW FIRMS 2018

section section international market insight your professional services team

tax reliefs New style employer compliance checks Qualified Business Income

restructuring) US operations section section tax update employer essentials

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2 section section international market insight your professional services team Professional practices and their partners Gender Pay Reporting Scottish income tax reliefs New style employer compliance checks Qualified Business Income Deduction Brexit VAT treatment of property searches Should employers be concerned? Partner expense claims procedural reminder Electronic data Structuring (or restructuring) US operations section section tax update employer essentials section Spring Statement CONTENTS New foreign tax credit basket Please navigate by clicking on the article you would like to view directly on the contents page and/or use the buttons on the left hand side panel. The button in the upper corner will bring up the menu to switch between articles. Contact Information and Events

INTRODUCTION We are pleased to share our latest issue of Practice Matters, a series of regular updates for finance and management teams in law firms and a summary of the key areas that we have been

3 INTRODUCTION We are pleased to share our latest issue of Practice Matters, a series of regular updates for finance and management teams in law firms and a summary of the key areas that we have been discussing with our clients over the last few months. This edition includes the usual updates on the UK and global tax landscape with a focus on Scottish income tax relief and VAT treatment of property searches. We have also included commentary on various employer and employee updates including the new style employer compliance checks and a procedural reminder for partner tax returns following a recent successful court of appeal claim. In a time of market uncertainty, it is important that firms remain agile to change. Brexit remains at the top of the agenda for many firms and less than a year to go we outline the five critical concerns that firms are thinking about ahead of the final deal. We hope the topics covered are of interest. Please contact us if you would like to explore any of the features in this edition further. NEIL WILLIAMS Tax Partner Professional Services Group

4 SECTION 1 TAX UPDATE

section 01 Tax Update SPRING STATEMENT The Chancellor s new Budget cycle regime started in earnest on 13 March with a brief Spring Statement focusing mainly on the updated economic forecasts of the

5 section 01 Tax Update SPRING STATEMENT The Chancellor s new Budget cycle regime started in earnest on 13 March with a brief Spring Statement focusing mainly on the updated economic forecasts of the Office of Budget Responsibility. As promised, the Chancellor did not announce any entirely new tax proposals. He did give some updates on previous announcements and ongoing consultations. The highlights of these were: Entrepreneurs Relief from capital gains tax - a technical consultation on potential changes to ensure that it does not discourage entrepreneurs from seeking external finance for their companies Business Rates - an update on the recent consultation confirming that the next revaluation will take place in 2021, with revaluations on a three-year cycle thereafter Online tax issues a consultation on whether a split payment mechanism could reduce VAT fraud and a related consultation on the role of online platforms in ensuring tax compliance by their users Self-funded work-related training a consultation on extending tax relief for employees and the self-employed to cover upskilling and retraining costs.

section 01 Tax Update SCOTTISH INCOME TAX RELIEF AND VAT TREATMENT OF PROPERTY SEARCHES SCOTTISH INCOME TAX RELIEFS Scottish residents will be subject to different income tax rates to the rest of the

Following these changes in income tax rates for Scottish residents announced in the Scottish Government s budget, HMRC have confirmed the treatment of marriage allowance, Gift Aid, pensions relief at

VAT TREATMENT OF PROPERTY SEARCHES A recent decision from the First Tier Tax Tribunal considered the VAT treatment of property searches and if they qualified as a disbursement.

6 section 01 Tax Update SCOTTISH INCOME TAX RELIEF AND VAT TREATMENT OF PROPERTY SEARCHES SCOTTISH INCOME TAX RELIEFS Scottish residents will be subject to different income tax rates to the rest of the UK from 6 April The basic rate band is now split in three (19%/20%/21%) and taxpayers with more than 24,000 will pay an additional 1% tax above UK rates. Following these changes in income tax rates for Scottish residents announced in the Scottish Government s budget, HMRC have confirmed the treatment of marriage allowance, Gift Aid, pensions relief at source, social security pension lump sum and finance cost relief. VAT TREATMENT OF PROPERTY SEARCHES A recent decision from the First Tier Tax Tribunal considered the VAT treatment of property searches and if they qualified as a disbursement. The case involved Brabners LLP. or post-box for search results they are engaged because they know what searches to obtain, know how to get them quickly and conveniently and know what to do with them. The Tribunal decided in this case that VAT was due on the recharge of the property searches to the client because the firm was using that information as part and parcel of its overall service. The payment was part of the overall consideration which the client paid for the service supplied by the firm. The decision is in line with HMRC s policy in this area that if the solicitor does more than just pass the search on, then it cannot be a disbursement and becomes part of the solicitor s supply to the client. The Tribunal also went on to say that even if the solicitor did not produce a report as a result of receiving the search it was still part of the supply made by the solicitor and not a disbursement. The reasoning for this part of the decision is not clear. The Tribunal said that the client expects the solicitor to do all that is necessary for the transaction (unless the client tells them otherwise) which includes making all relevant searches and enquiries, and to draw anything relevant in them to the client s attention. The Tribunal said that the solicitors are not simply a conduit

section 01 Tax Update PARTNER EXPENSE CLAIMS PROCEDURAL REMINDER A Court of Appeal case concluded in January 2018.

7 section 01 Tax Update PARTNER EXPENSE CLAIMS PROCEDURAL REMINDER A Court of Appeal case concluded in January The judgement found against the taxpayer Mr Vaines following two judgements in his favour by the First-tier Tribunal and the Upper Tribunal. Mr Vaines (a solicitor) was a member of a trading LLP. He sought to claim, in his personal tax return, an expense incurred in relation to a previous LLP membership against his profit allocation from his current firm. His argument was that he was effectively defending a bankruptcy claim that would have prevented him from practising, so it was incurred for the benefit of his personal trade. The key rationale to the judgement in HMRC s favour was that the LLP comprised a single trade carried on collectively by its members, as opposed to comprising a collection of individual (personal) trades and that the payment was not made wholly & exclusively for the purpose of the trade. We consider that it is an uncontroversial decision, but for professional firms it is a procedural reminder of what is best practice. The mechanism for claiming a deduction for expenses, personally incurred by the partners, is that the expense needs to be in the accounts of the partnership or by concession included in the partnership tax return. Relief for any such expenses cannot be claimed separately on the partner s own tax return.

8 SECTION 2 EMPLOYER ESSENTIALS

section 02 Employer Essentials NEW STYLE EMPLOYER COMPLIANCE CHECKS HMRC has introduced a new methodology around Employer Compliance checks, which is based on the employer completing a detailed

9 section 02 Employer Essentials NEW STYLE EMPLOYER COMPLIANCE CHECKS HMRC has introduced a new methodology around Employer Compliance checks, which is based on the employer completing a detailed questionnaire and providing HMRC with a package of the firm s policies and documents alongside with electronic data. This is followed by a telephone interview upon which the issues are agreed. SHOULD EMPLOYERS BE CONCERNED? The risk of HMRC going off on a fishing trip is a concern for many employers and in our early experience, the aim should be the provision of highly relevant data in order to satisfy HMRC with a response that will prevent any follow up investigations which is a skill in itself. It is therefore vital that every document provided is relevant and applicable to HMRC s request, as although HMRC have the powers to review any document it is imperative that the only documents provided are those that are relevant to HMRC requirements. ELECTRONIC DATA HMRC have confirmed that businesses may be asked if they would like to provide electronic data on a voluntary basis, although HMRC could seek a notice to enforce the provision of data. It should be borne in mind that any data provided should be relevant to the needs required and reviewed carefully before sending. In the same way as providing too many policy documents can be unhelpful, so too can providing more data than is necessary or is required. Businesses that plan and manage the process typically achieve a swifter review process, with reduced need for lengthy correspondence and, on occasion, the unexpected surprise of a refund!

10 SECTION 3 INTERNATIONAL

section 03 International US TAX REFORM AND PARTNERSHIPS PROFESSIONAL PRACTICES AND THEIR PARTNERS The December 2017 US tax reform legislation includes several provisions that will affect professional

11 section 03 International US TAX REFORM AND PARTNERSHIPS PROFESSIONAL PRACTICES AND THEIR PARTNERS The December 2017 US tax reform legislation includes several provisions that will affect professional services firms and their partners. In this article, we consider the most important of these provisions and look specifically at their impact on international professional practices. QUALIFIED BUSINESS INCOME DEDUCTION The Republican Party s blueprint for tax reform, released back in 2015, was clear that reducing business taxes was key to their tax reform agenda. At the time it was unclear whether this reduction would apply only to US corporations, at the time paying tax at a remarkably high 35%, or whether pass through businesses such as partnerships and LLCs would also benefit. The final tax reform bill did indeed include a significant reduction in the headline US corporation tax rate, from 35% to 21%, but it also included a significant tax break for members of certain pass through entities in the form of the Qualified Business Income ( QBI ) deduction. Members of pass through entities such as partnerships (including Limited Partnership and LLPs) LLCS and S-corporations, and sole proprietorships are now able to deduct the lesser of their QBI or 20% of their income. A taxpayer who receives only QBI is therefore able to reduce their top tax rate by 20%, from 37% (the new top rate, post tax reform) to 29.6%. QBI is essentially any US source trading income other than income from a specified service. The specified service exception applies to any business involving performance of services in the fields of: law, health, accounting, performing arts, consulting, athletics and financial services. However, partners in business in these fields are still able to claim the QBI deduction if their income is below certain thresholds: $315,000 for joint filers and $207,500 for single filers. The deduction is also limited to a percentage of wages paid to US resident employees. The exception for income from specified services means that most partners in professional practice firms will not be able to claim the QBI deduction. Interestingly, engineers and architects are not subject to the specified service limitation so partners in these fields may be able to benefit. STRUCTURING (OR RESTRUCTURING) US OPERATIONS The reduction in the headline US corporation tax rate from 35% to 21% has markedly changed the approach to entity selection for business expanding into the US. In the US, the use of pass through entities such as partnerships or LLCs has historically been commonplace. The majority of small businesses in the US are established as pass through entities to avoid the additional layer of corporation tax at 35%. This may change now that the corporation tax rate has come down, although the majority of small businesses will still be better off as pass through entities. Traditionally, professional practice businesses have structured themselves as partnerships, both in the US and elsewhere. There are often regulatory as well as tax reasons why professional firms are structured in this way. However, firms that are not restricted in terms of their choice of entity may now consider using a corporation for their US operations, particularly where the QBI deduction is not available and there is significant reinvestment of profits. NEW FOREIGN TAX CREDIT BASKET As part of the corporate tax reforms aimed at US multinationals, two new foreign tax credit baskets have been created (the foreign tax credit rules in the US segregate income and gains into different categories, known as baskets ). One of the new baskets is for foreign branch income. On the face of it, one would think this is a highly technical change which will impact only large multi-national corporations. However, this reform, like many of the other corporate reforms, applies equally to individuals.

12 SECTION 4 MARKET INSIGHT

section 04 Market Insight GENDER PAY REPORTING AND BREXIT GENDER PAY REPORTING During our seasonal review, the deadline for gender pay reporting passed.

13 section 04 Market Insight GENDER PAY REPORTING AND BREXIT GENDER PAY REPORTING During our seasonal review, the deadline for gender pay reporting passed. Recent press articles have suggested that employers may have sought to bury bad data in a spike of reports on or around the deadline and that partnerships are not showing the full extent of their pay gaps by omitting partners pay data. The calculations prescribed in the regulations are expressed not to include partner income but campaigners have argued that this is distorting the true picture and some partnerships are now voluntarily publishing data on their own websites including partners earnings. The huge amount of press interest around gender pay issues certainly shows no sign of slowing and employers who deliberately flout the rules clearly run the risk of both negative publicity and a backlash from employees. There is also a longer term risk from taking a light touch approach to this year s calculations when there will more pressure to ensure that the regulations are being applied rigidly in the future. This may create an impression that a company s gender pay gap has grown in the future which is the impression that employers would be most keen to avoid. BDO saw an increasing number of enquiries as employers seek assurance and verification of their internal figures put to the Board for sign-off prior to their publication. BREXIT LESS THAN A YEAR TO GO. WHAT ARE FIRMS THINKING ABOUT? The transition agreement is still With one year to go until Brexit, the UK dependent on the resolution of the and EU Commission have announced an Northern Ireland customs border issue outline agreement for a transition period and if this is not resolved the transitional between 29 March 2019 and 31 December agreement could still be dropped leading This will give the government and to a hard Brexit on 29 March the civil service the time to work through all the detailed changes and the new trade There is a long way to go and there still deal with their colleagues in Brussels, so remains a high level of uncertainty. On we will not see the real impact of Brexit the back of this, we are seeing a lot of for another two and a half years. time and energy being focussed on what firms will need to change and to support The outline transition agreement has your thinking we have noted below five clarified a number of things in relation to key things people are thinking about freedom of movement, with EU citizens Brexit in Professional Services firms: retaining full freedom of movement throughout the transition period. Further details can be found here: Freedom of movement of people tax/employer-essentials/brexit-transitionfreedom-of-movement Freedom of establishment alternative structuring models Repatriation of profits Legal regulation Procurement

14 SECTION 5 YOUR PROFESSIONAL SERVICES TEAM

section 05 Your professional services team CONTACT INFORMATION & EVENTS PROFESSIONAL SERVICES GROUP BDO has a dedicated team of legal sector specialists across audit, tax and advisory and are

15 section 05 Your professional services team CONTACT INFORMATION & EVENTS PROFESSIONAL SERVICES GROUP BDO has a dedicated team of legal sector specialists across audit, tax and advisory and are committed to delivering exceptional client service and advice to UK and international law firms. The contact details for the senior members of the teams are listed below: NICK CARTER-PEGG HEAD OF PROFESSIONAL SERVICES nick.carter-pegg@bdo.co.uk DATES FOR YOUR DIARY TAX WEBINAR SERIES FOR PROFESSIONAL SERVICES FIRMS Australian Taxes Update: 13 June 2018 Employment Taxes Update: 23 August 2018 Singapore Update: 2 October 2018 VAT Update: 6 December 2018 TAX TEAM ANNA JARROLD COLIN IVES NEIL WILLIAMS ED NEVENS HEAD OF PROFESSIONAL SERVICES - TAX PARTNER PARTNER PARTNER + 44 (0) colin.ives@bdo.co.uk + 44 (0) neil.a.williams@bdo.co.uk + 44 (0) ed.nevens@bdo.co.uk TIM NEATHERCOAT TONY PERKINS MATTHEW WHITE ANDREW RADFORD PARTNER PARTNER PARTNER PARTNER + 44 (0) tim.neathercoat@bdo.co.uk + 44 (0) tony.perkins@bdo.co.uk + 44 (0) matthew.white@bdo.co.uk + 44 (0) andrew.radford@bdo.co.uk + 44 (0) anna.jarrold@bdo.co.uk AUDIT TEAM To register your place for these webinars please visit our dedicated Professional Services Tax Webinar Page

16 This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO LLP to discuss these matters in the context of your particular circumstances. BDO LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it. BDO LLP, a UK limited liability partnership registered in England and Wales under number OC305127, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. A list of members names is open to inspection at our registered office, 55 Baker Street, London W1U 7EU. BDO LLP is authorised and regulated by the Financial Conduct Authority to conduct investment business. BDO is the brand name of the BDO network and for each of the BDO Member Firms. BDO Northern Ireland, a partnership formed in and under the laws of Northern Ireland, is licensed to operate within the international BDO network of independent member firms. May BDO LLP. All rights reserved. HB

BUSINESS IN THE UK A ROUTE MAP

1 BUSINESS IN THE UK A ROUTE MAP 18 chapter 02 Anyone wishing to set up business operations in the UK for the first time has a number of options for structuring those operations. There are a number of