PM-Tax. 15 People 16. News and Views from the Pinsent Masons Tax team Special edition for High Net Worth Advisers. In this Issue

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1 PM-Tax Wednesday 1 March 2017 News and Views from the Pinsent Masons Tax team Special edition for High Net Worth Advisers In this Issue Articles High net worth individuals HMRC s golden goose? by Paul Noble Changes affecting non-doms by Catherine Robins Finance Act provisions relating to offshore evasion by Paul Noble and Jason Collins IR35 and employment status disputes by John Hardman The power of persuasion by Paul Noble What more is there to tell: HMRC s consultation on registering offshore structures by Jason Collins Events 15 People 16 Pinsent Masons LLP 2017

2 PM-Tax Comment Articles High Net Worth Individuals HMRC s Golden Goose? by Paul Noble This article was first published in HMRC Enquiries Investigations and Powers published by Globe Law and Business. On 1 November 2016, the National Audit Office (NAO) published a report on HMRC s approach to collecting tax from high net worth individuals. In this article, Paul Noble examines the themes emerging from the report and what this is likely to mean for the future. The British press often seem to paint the picture that the really wealthy can get away without paying their fair share of tax either through exploiting loopholes, using clever advisers or through HMRC finding their affairs too difficult to deal with. The man in the street has little choice in paying tax and small business has a disproportionate amount of HMRC resource focused on it. Is this a fair assessment? From reading the recent NAO report I would suggest not, in fact HMRC s return from reviewing the tax affairs of the wealthiest taxpayers seems to be improving with great pace. What did the NAO report focus on? In compiling their report the NAO examined the issues HMRC face in dealing with the tax affairs of high net worth individuals. These are defined as the 6,500 wealthiest individuals in the country, each with net wealth of at least 20 million. In outline, the report examined the following issues: What are the tax risks posed by high net worth individuals? How HMRC organises their work in dealing with high net worth individuals; How HMRC identifies high net worth individuals and how it enquires into their affairs; and How HMRC measures the impact of its work in this area. Why focus on the wealthy? HMRC believes that there are extremely good reasons why they should look at the affairs of the wealthiest taxpayers and these include the following: The fact that significant amounts of tax are collected from them a figure of 4.3 billion in 2014/15; Their affairs are often complex and include issues of technical interpretation; They have more opportunity and reason to engage in tax planning, and To send out a message that no-one in the taxpaying population is beyond scrutiny. HMRC believes that the possibility of all taxpayers facing challenge is important in maintaining the integrity of the tax system. Where does HMRC perceive risks lie? Against the overall figure of 4.3 billion collected in 2014/15 HMRC estimates that it was investigating risks from high net worth individuals at the start of 2015/16 of 1.9 billion. The particular risks posed and identified by HMRC primarily relate to tax avoidance and the interpretation of complex tax issues. Within these areas HMRC perceives that its biggest challenges arise from marketed avoidance schemes, the calculation and reporting of capital gains, the correct reporting of income that arises overseas and the application of the rules around residence and domicile. The NAO commented on the efforts HMRC was making in order to understand where the greatest tax risks lie but also noted that the approach could be further supplemented by gauging both the scale and nature of the most significant risks to tax collection not already addressed. Organisational change To meet the challenges in dealing with high net worth individuals, HMRC has re-organised the way it deals with their affairs. The foundation stone of this was the establishment of a specialist unit back in 2009 to solely deal with the wealthiest of taxpayers. Prior to this, HMRC s resources were scattered both geographically and across the department; as a consequence a co-ordinated drive and the ability to learn from a joined up approach was often missed. Not only has HMRC concentrated its resources in one unit but it has also appointed dedicated customer relationship managers (with teams behind them) to deal with specific taxpayers and build professional working-relationships with the relevant advisers involved. These changes were in part prompted by an OECD report published in 2009 that suggested that tax authorities around the world should adopt models that concentrated their efforts in dealing with high net worth individuals. Interestingly the UK is among only half of the G20 countries to have set up specialist units and is way ahead of many jurisdictions in appointing relationship managers. Added to the above, in 2016, HMRC made further organisational changes to align its compliance work which 2

3 >continued from previous page PM-Tax Articles High Net Worth Individuals HMRC s Golden Goose? (continued) it hopes will allow it to understand even better the links between personal wealth of individuals and the other entities they could be connected with, such as companies and trusts. Identifying high net worth individuals It was noted in the report that identifying who actually constitutes a high net worth and therefore the risks associated with them is not particularly straightforward as in the main the UK raises tax on income rather than wealth. As a consequence of this, in most cases, information about wealth is not directly reported. HMRC has a stated aim in dealing with the affairs of high net worth individuals of trying to resolve issues with taxpayers before a tax return is submitted. However, where HMRC does not agree with a position that is taken it opens an enquiry. The NAO report noted that around a third of high net worth taxpayers were, at the time of reporting, under enquiry, with an average of four issues being considered for each taxpayer. It was also noted that because of the complex nature of some of these issues they can take some time to resolve with 6,000 issues under enquiry having been so for over 18 months and some 4,000 issues having been open for in excess of three years. The report also noted that HMRC prioritises the recovery of tax in cases where it identifies fraud but uses civil powers such as the CDF process to resolve the majority of cases. Over the last five years HMRC has investigated and closed 72 cases of suspected fraud involving high net worth individuals. Of these cases 70 were dealt with on a civil basis and a mere two were referred for criminal investigation. Of these two, only one was subsequently prosecuted by the Crown Prosecution Service. This lack of prosecution has been the subject of severe criticism in the press in recent times. As a result HMRC is placing further emphasis on criminal investigation work with the number of such investigations having increased to ten at October 2016 and with a stated aim to increase the number of prosecutions of wealthy individuals and corporates to 100 each year from Measuring yield The report noted that HMRC recorded a yield of 416 million in 2015/16 as a result of the work of the high net worth unit, which is a substantial increase from the figure of 200 million reported in 2011/12 and much higher than the targeted figure for 2015/16 of 260 million. It was also noted that HMRC has developed and refined its approach over time and become much more focused on areas it perceives as being at risk and is working to understand better the behaviours and key events that may feature during someone s lifetime. Overall the NAO understood that assessing the correct amount of tax owed by high net worth individuals is a challenge for all tax authorities. They also recognise the fact that the steps taken to specialise and streamline the approach are sensible, taking on board the OECD recommendations and increasing the yields derived from work in this area. It was also recognised that there is still much work to be done and that HMRC could supplement its focus on individuals with a better understanding of economic analysis, for example, picking up on changes in asset values and other outside factors and how this influences behaviour amongst high net worth individuals. Will the golden goose keep on laying? In conclusion the report recognises the positive steps that HMRC has taken but also points to the fact that additional steps could be taken to improve performance even further. As with much in tax these days nothing will stay still for very long. The government are under public scrutiny in clamping down on tax avoidance and evasion, leading to increased scrutiny on the performance of HMRC, which is in turn tasked with policing an environment where behaviours and risks continually evolve. In many ways, HMRC s flexibility to change and recognise where it should deploy its resources is to be congratulated. Perhaps in making this observation it should be noted that from 2016/17 HMRC has re-categorised its definition of high net worth reducing this to a net asset figure of 10 million. Undoubtedly HMRC would argue that pulling more taxpayers into the net of the high net worth unit should be seen as vindication of the progress made since The next NAO report should make further interesting reading! Paul Noble is a Tax Director who specialises in contentious tax and private client matters. He is a former Tax Inspector and a Chartered Tax Adviser and has over 20 years of experience in advising on tax investigations involving both private clients and corporates. Paul has wide-ranging experience of contentious tax matters including cases of tax fraud, tax avoidance, disclosure of tax irregularities and is adept at pro-actively resolving tax disputes and advising on HMRC powers. E: paul.noble@pinsentmasons.com T: +44 (0)

4 PM-Tax Articles Changes affecting non-doms by Catherine Robins Important changes to the UK s domicile rules are due to come into force in April. The changes will mean that many long term UK residents who currently benefit from non-domiciled treatment will become UK domiciled. UK property held through a corporate structure will also be brought within the IhT net and the changes here are wider than expected. Anyone who may be affected needs to take advice urgently. Changes to the deemed domicile rule and to the inheritance tax treatment of residential property held through a company were announced in the 2015 summer budget. It seems like a long time since the consultations on the deemed domicile rules, but the introduction of these changes was held up so that they could be introduced at the same time as the inheritance tax changes, where the consultation process was slower. All the changes are finally due to come into force in April. The draft legislation to be included in the Finance Bill 2017 has now been published and we have now seen exactly what is proposed in relation to residential properties held through an offshore company. The proposals here in relation to loans and collateral are wider than had been expected. IHT and properties held through a corporate structure Under current rules, if a non-domiciled individual (non-dom) owns a UK residential property directly, that property will be potentially subject to UK inheritance tax when he or she dies. However, if the property is instead owned through an offshore company, the shares in the company will not be within the scope of UK inheritance tax. From April 2017 the value of shares in an offshore company will be brought within the scope of UK inheritance tax (IhT) to the extent that their value is directly or indirectly attributable to UK residential property. Interest in partnerships which hold UK residential property will be caught in a similar way. Unexpectedly, the new rules will also bring within the IhT net loans made by a non-dom to enable an individual, trustees or a partnership to acquire, maintain or improve a UK residential property or to invest in a close company or partnership which acquires, maintains or improves a UK residential property. They will also bring assets used as collateral for such a loan within the potential ambit of UK IhT. This is to prevent individuals from borrowing in order to reduce the value of residential property. The collateral provisions could result in assets with a value that is much greater than the amount of any loan which could be deducted from the value of the estate, being within the scope of IhT. The proposals also mean that a non-uk domiciled individual with no other connection to the UK could potentially be subject to UK IhT on death because he or she has lent money to a family member to buy a UK home. There are also concerns that the changes could bring in an element of double taxation in some situations such as where offshore trusts make loans to a settlor to buy a UK property. The provisions will apply to existing arrangements as well as those entered into after the rules come into force, provided the event which triggers an IhT charge, such as a death, occurs after 5 April Residential properties held through companies and other structures are already subject to the annual tax on enveloped dwellings (ATED) and to higher rates of stamp duty land tax when purchased. Many non-doms with UK property interests held through offshore structures were waiting to see the detail of the changes before deciding whether to unwind structures or otherwise restructure their investments. Some will have previously taken the view that the ATED charges were outweighed by the IhT benefits of a corporate structure. Now that the IhT benefit has been removed, continuing with a corporate structure will look unattractive for many. However, care needs to be taken, as dismantling structures can result in capital gains tax and stamp duty land tax charges and the government has ruled out any kind of relief from tax charges arising from restructuring. The ongoing ATED costs will need to be weighed against these potential tax liabilities. Any non-dom holding UK property through an offshore structure or lending money or providing collateral to be used in relation to UK property needs to take advice. 4

5 >continued from previous page PM-Tax Articles Changes affecting non-doms (continued) Deemed domicile From April, the basic rule will be that individuals who are not domiciled in the UK will be deemed to be UK domiciled for income tax and capital gains tax purposes if they are either: resident in the UK for 15 of the past 20 tax years, or if they are born in the UK with a UK domicile of origin and return to the UK having obtained a domicile of choice elsewhere. The existing IhT deeming provisions, (which currently deem a UK domicile where you are UK resident for 17 out of 20 years) will be aligned with the new 15 out of 20 year rule. However, unlike for income tax and CGT, where returning individuals will be subject to tax as soon as they come back, individuals will only be subject to UK IhT on their worldwide assets if they have been resident in the UK in one of the two tax years immediately prior to the year under consideration. Therefore anyone expecting to only return to the UK for a short period will not need to take any action in respect of IhT providing they leave the UK again within two years. Trusts Non-doms who become deemed domicile under the new rules will still be able to obtain favourable tax treatment for non-uk assets held in trust, provided the trust was settled before they became deemed domiciled. The government has climbed down in relation to the harsh stance it took originally in relation to such trusts. The original consultation proposed that benefits received by non-uk domiciled individuals from an offshore trust would be taxed at a flat rate whilst those with a UK domicile would only be taxed on benefits received which had been matched to available income and capital gains within the offshore trust structure. Fortunately the government recognised the potential punitive effect on non-doms and has now abandoned the flat rate benefits charge. Income tax Where a settlor retains an interest in a trust, the trust income is treated as arising directly to the settlor for income tax purposes. Under the current rules, UK income in such trusts is therefore taxed as it arises but non-uk income can be taxed on the remittance basis. Under the new rules deemed domiciled settlors will be subject to tax on non-uk income as it arises, subject to certain exceptions. Where a trust was settled at a time the settlor was either non-uk domiciled or deemed domiciled, then the foreign source income will not be taxed on the settlor as it arises but will be taxed on him if he/she or a close family member receives a benefit, unless the family member pays tax on it. Close family members are a spouse/ civil partner, cohabitee or minor children/stepchildren. Note that adult children and minor or adult grandchildren are not treated as close family members for these purposes. Non doms who will become deemed domicile in April should consider setting up trusts for offshore assets if they have not already done so, or adding property before April to existing trusts. Trusts settled by individuals who were born in the UK with a UK domicile of origin will be treated as relevant property trusts if and when the settlor returns to the UK and for the time the settlor is resident in the UK, even if they are settled at a time when the settlor is non UK resident and has a non UK domicile of choice. Capital gains A settlor who retains an interest in a trust, and who is deemed domiciled at the time of settling the trust, will be taxed on capital gains as they arise. Where a settlor is not deemed UK domiciled when settling the trust and no additions to the trust are made after he/she becomes deemed domiciled, the settlor will not be taxed on capital gains as they arise. However, CGT will be charged in respect of capital payments from the trust, using the current matching rules which match capital payments made to beneficiaries against any untaxed gains in the trust. UK resident beneficiaries who are deemed domiciled in the UK and who receive a benefit from a trust or an underlying entity will be subject to CGT, regardless of where the benefit is received. Payments to non-resident beneficiaries after 5 April 2017 will remain not subject to UK tax but they will not wash out gains within the trust. This means that trust gains occurring from 6 April 2017 will only be available to be matched against payments to UK resident beneficiaries. Trustees will need to consider whether gains could be realised before 6 April which could be matched to payments before that date to non-residents. They may also want to think about making distributions to non-resident close family members before these become subject to tax. Rebasing of assets Individuals who become deemed domiciled in April 2017 will be able to rebase directly held foreign assets to their market value on 5 April 2017 to ensure that they do not have to pay capital gains tax on the element of the gain in value which accrued whilst they were non-domiciled. Rebasing will apply on an asset-by-asset basis and individuals can choose to rebase only those assets that are standing at a gain. Those individuals who become deemed domiciled after April 2017 will not be able to rebase their foreign assets. 5

6 >continued from previous page PM-Tax Articles Changes affecting non-doms (continued) For rebasing to be available: the asset must have been located outside the UK from 16 March 2016 (or, if later, the date the asset was acquired) to 5 April 2017; the asset must have been held directly by the individual on 5 April 2017 (ie the asset cannot be held within a company or a trust); the individual must have paid the remittance basis charge in any tax year before the 2017/18 tax year; the individual must remain deemed domiciled (under the new rule) at all times until the disposal; and an election must be made within four years of the disposal taking place. It may be beneficial for anyone who will become deemed domicile in April 2017 to keep assets standing at a gain on 5 April 2017 to benefit from rebasing. Anyone who has not paid the remittance basis charge in previous years should consider whether it is worth paying it this tax year to benefit from rebasing. Cleansing of mixed funds A number of non-uk domiciled individuals hold mixed funds outside the UK, i.e. a fund containing a mixture of income, capital gains and capital. When funds are brought to the UK from a mixed fund, they are deemed to be remitted in the order which gives rise to the highest possible tax liability. This could have the result that individuals who become deemed domiciled in the UK from April 2017 run the risk of never being able to remit the clean capital element to the UK. There will therefore be a temporary window of two years from April 2017 (increased from the 12 months originally proposed) for those individuals to rearrange their mixed funds and separate out the various elements so that they can remit them in the most tax efficient manner. However, it should be noted that this only applies to cash. Catherine Robins is a Partner in our tax team. Although originally a corporate tax specialist, Catherine now provides technical assistance to clients and members of our contentious tax and non-contentious tax teams in all areas of tax. She is the editor of PM-Tax. E: catherine.robins@pinsentmasons.com T: +44 (0)

7 PM-Tax Articles Finance Act provisions relating to offshore evasion by Paul Noble and Jason Collins This is based on an article published in British Tax Review 2016, Issue 5. Last year s Finance Act introduced a number of new HMRC powers in relation to offshore tax evasion. Paul Noble and Jason Collins consider the new powers. Introduction In 2013 HMRC published a document entitled No safe havens in which they outlined their offshore evasion strategy for 2013 and beyond. This document set out the progress already made in targeting offshore tax evasion and outlined HMRC s future strategic approach in tackling it. The objectives of the strategy were to ensure that: there are no jurisdictions where UK taxpayers feel safe to hide their income and assets from HMRC; would-be offshore evaders realise that the balance of risk is against them; offshore evaders voluntarily pay the tax due; those who do not come forward are detected and face vigorously enforced sanctions; and there will be no place for facilitators of offshore evasion. The action that HMRC resolved to take was grouped into three broad categories, as follows: reducing the opportunities to evade tax offshore; increasing the likelihood of offshore evaders, and those who make evasion possible, being caught, and strengthening the severity of punishments for those that are caught. Even with this commitment HMRC have received severe criticism for what has been perceived as a light touch approach to dealing with offshore evasion. Amongst other things, HMRC was criticised for: the Liechtenstein Disclosure Facility (LDF) which was seen by many as an amnesty with modest penalties; a lack of action to deter those that facilitated evasion; and their reluctance to criminally prosecute those that had benefited from using offshore jurisdictions to evade tax overall the criticism was based around HMRC s approach being seen as more carrot than stick. The landscape behind tackling offshore evasion is increasingly evolving, especially with the move towards automatic data exchange under the Common Reporting Standard and the earlier than planned closure of the LDF at the end of With this in mind, the Finance Act 2016 (FA 2016) introduced a number of measures that would give HMRC more bite in its bid to tackle offshore tax evasion. Section 162 FA 2016: civil penalties for enablers of offshore tax evasion Section 162 and Schedule 20 FA 2016 introduce new civil penalties for deliberate enablers of offshore tax evasion and non-compliance involving income tax, capital gains tax or inheritance tax, and a new power for HMRC to publish information about such enablers. Offshore non-compliance is carried out if the taxpayer is convicted of a relevant offence or is charged a relevant penalty. A relevant penalty arises where the taxpayer has been charged a penalty for careless or deliberate conduct. The non-compliance must involve liabilities that arise offshore, or income or gains that arise in the UK but are transferred offshore and not disclosed to HMRC, or relate to an asset which has been moved in order to avoid Common Reporting Standard reporting. Enabling includes encouraging, assisting or otherwise facilitating the other person to carry out the non-compliance. The introduction of these measures follows a consultation in When the draft legislation was first published there was some concern that, although the penalty had been identified in the consultation as applying to enablers of offshore evasion, it quickly became clear that evasion was also to include careless mistakes. Although HMRC explained that it only intended to use the new powers in cases where an enabler s behaviour had been deliberate, for many this was not a sufficient safeguard. In response to these concerns, a revised Schedule 20 paragraph 1 sub-paragraph (5) FA 2016 confirms that the enabler has to know that their conduct enabled or was likely to enable a careless mistake. The penalties that an enabler can be charged will be the greater of the potential loss of revenue and 3,000. An enabler who offers disclosure or assistance to HMRC will qualify for a reduced penalty. The minimum levels to which the penalty may be reduced are set at the higher of 10% of the potential lost revenue or 1,000 for unprompted disclosure or assistance and 30% or 3,000 for prompted disclosure or assistance. 7

8 >continued from previous page PM-Tax Articles Finance Act provisions relating to offshore evasion (continued) In addition, in cases where penalties are incurred and the potential lost revenue exceeds 25,000, HMRC will have the ability to publicly name an enabler, unless an unprompted disclosure has been made. Section 163 FA 2016: increased penalties for offshore matters and offshore transfers The provisions in section 163 and Schedule 21 FA 2016 increase the minimum penalties chargeable for cases of deliberate inaccuracies in a tax return, failure to notify a liability to tax and failure to deliver a return. In addition, the discounts available for prompted and unprompted disclosures are decreased. There is an onus on the taxpayer to provide additional information to HMRC beyond that which is required to fully disclose the inaccuracy, in order to receive the maximum discount. This information includes disclosure of any person who assisted the taxpayer. The penalties apply to liabilities to income tax, capital gains tax or inheritance tax that arise offshore, or income or gains that arise in the UK, but are transferred offshore and not disclosed to HMRC. Penalties for genuine mistakes and careless errors are not affected. Section 164 FA 2016: offshore tax errors etc: publishing details of deliberate tax defaulters Section 164 FA 2016 strengthens the naming provisions introduced by section 94 of the Finance Act 2009 (FA 2009) under which HMRC already has the power to publish details of deliberate tax defaulters where the potential loss of revenue is more than 25,000. Section 94 FA 2009 is now amended to enable HMRC to publish details of an individual who controls a company or a partnership, or the trustee of a settlement, where the following are in point: the entity concerned has been found liable to a penalty for deliberate inaccuracy or deliberate failure to notify; the individual obtains a tax advantage; and the failure or inaccuracy involves an offshore matter or transfer. The provisions contain a protection whereby details will not be published if the penalty has been reduced by the maximum allowed for making a disclosure or providing assistance. Section 165 FA 2016: asset-based penalties for offshore inaccuracies and failures Section 165 and Schedule 22 FA 2016 introduce an additional asset-based penalty which can be imposed only if all of the following conditions are met: a taxpayer is liable to a penalty for failure to notify chargeability, failure to file a return or there are inaccuracies in a return; the failure or inaccuracy was deliberate; the potential lost revenue in terms of income tax, capital gains tax or inheritance tax is more than 25,000; and the failure or inaccuracy involves an offshore matter or transfer. The amount of the penalty that can be charged is the lower of 10 per cent of the value of the asset and 10 times the potential lost revenue. HMRC is required to reduce the standard amount of the penalty where the taxpayer: makes a disclosure of the inaccuracy or failure; provides HMRC with a reasonable valuation of the asset; and provides HMRC with information or access to records that HMRC requires for the purpose of valuing the asset. Whilst, HMRC is clearly still trying to encourage taxpayers to disclose matters voluntarily, section 165 FA 2016 is a further example of HMRC s crackdown on offshore non-compliance. Penalties for tax offences are usually based on a percentage of the tax, so linking a penalty to the value of an asset could produce significantly higher penalties. The asset-based penalty is chargeable in addition to any other penalty which may be chargeable in the circumstances. Section 166 FA 2016: offences relating to offshore income, assets and activities One of the major criticisms of HMRC s recent offshore strategy has been the perception of leniency and the fact that there have been very few criminal prosecutions arising out of it. This criticism is a little unfair because it is not always the case that a criminal prosecution is not considered at all by HMRC, but it is a reflection of the practical difficulties of securing evidence to meet the criminal standard of proof to show intent to evade tax. On this basis, section 166 FA 2016 introduces new criminal offences that will apply to income tax and capital gains tax. Operating by way of an amendment to the Taxes Management Act 1970, where certain conditions are satisfied the following will be classified as criminal offences: failure to notify chargeability; failure to deliver a return; and delivery of an inaccurate return. For the new criminal offences to apply, the tax in question must exceed 25,000 and relate to offshore income, assets or activities. The tax threshold is on a per tax year basis and the offence does not require HMRC to prove intent not to declare the relevant taxable offshore income or gains. Exclusions have been introduced for trustees of settlements, executors or administrators of deceased persons. Furthermore, the offences will not apply in relation to offshore income, assets or activities arising in countries which are signatories to the Common Reporting Standard. It is a defence if the taxpayer can show that they had a reasonable excuse for failing to notify or file a return or took reasonable care to get the return right. The offences can result in an unlimited fine, or a prison sentence of up to six months. 8

9 >continued from previous page PM-Tax Articles Finance Act provisions relating to offshore evasion (continued) Conclusion Undoubtedly, HMRC is firm in its commitment to reduce offshore tax evasion. Using the threat of significant financial penalties, criminal prosecution and reputational damage, these new measures are designed to deter evasion and non-compliance by both the evaders themselves and those allowing the evasion/ non-compliance to take place. Jason Collins leads our Litigation, Regulatory and Tax team. He specialises in representing corporate and individual clients who are the subject of a tax audit and resolves complex disputes with HMRC in all aspects of direct tax and VAT. Jason is also a leading expert on Country-by-Country reporting, FATCA and the OECD s Common Reporting Standard, advising companies, financial institutions and individuals across the world on the application of automatic exchange of information, with a particular focus on trusts, investment companies and funds. E: jason.collins@pinsentmasons.com T: +44 (0) Paul Noble is a Tax Director who specialises in contentious tax and private client matters. He is a former Tax Inspector and a Chartered Tax Adviser and has over 20 years of experience in advising on tax investigations involving both private clients and corporates. Paul has wide-ranging experience of contentious tax matters including cases of tax fraud, tax avoidance, disclosure of tax irregularities and is adept at pro-actively resolving tax disputes and advising on HMRC powers. E: paul.noble@pinsentmasons.com T: +44 (0)

10 PM-Tax Articles IR35 and employment status disputes by John Hardman John Hardman looks at HMRC s focus on challenging self employment and personal service company arrangements. We are seeing an increasing focus by HMRC on employment status issues, such as whether individuals purporting to be self employed are in reality employees and whether the IR35 intermediaries rules are being properly applied in relation to those operating through personal service companies (PSCs). The government has two main concerns around false self employment : loss of national insurance contributions and income tax; and the fact that staff are denied workers rights such as holiday pay and the right to the national minimum wage. It is at the lower end of the earnings range in the so-called gig economy, involving taxi drivers, delivery drivers, plumbers and the like, that the main concerns arise around engagers preventing their staff from having workers rights. Most activity here has therefore focused around employment law and we have seen cases brought by Uber drivers, and Pimlico plumbers. These decisions do not give the individuals rights as employees only as workers. It does not therefore follow that they would be liable for tax as employees, but it is likely that HMRC will look closely at the arrangements. Worker status is an intermediate status between employees and the genuinely self-employed who are running their own business. Workers have certain minimum rights, in particular the right to the national minimum wage and paid holiday leave under the Working Time Regulations. They do not, however, have the same redundancy or unfair dismissal rights as employees. However, at the lower earnings range, tax loss is also a factor. Structuring arrangements so that you can argue your workforce are self employed saves the cost of employer s NICs, but it also passes the obligation to declare income for tax purposes from the business to the individual, making it easier for tax to be evaded. At the higher earnings range, where individuals are often choosing to adopt the arrangements, rather than being effectively forced into it, the main concern is the loss of national insurance contributions, but there are also income tax advantages for those operating through corporate structures, such as the ability to pay out earnings by way of dividend, if the IR35 rules do not apply. What action is HMRC taking? In October 2016, HMRC established a new Employment Status and Intermediaries Team to focus specifically on this area. Self-employment is not currently defined by UK law. Different employment status tests are used for the purposes of tax, employment law and pensions auto-enrolment. However, changes in the way people now work with more focus on technology and sometimes less need to be physically present, mean that old case law and principles do not always fit modern working practices. We are already seeing an increase in the number of employment status challenges and a tougher approach to the IR35 intermediaries rules. The challenges are a concern both to the business engaging the individual and also to the individual him or herself. A particular area of difficulty is around directors, as even if engaged through a PSC, as a director you are an office holder and so amounts paid in respect of your services as director are subject to PAYE. It is the end user that would become liable for PAYE and NIC with HMRC seeking a recovery of tax interest and penalty for up to 6 years. Changes for the public sector From April 2017, new rules will apply to off-payroll contractors in the public sector where the contract is made through a PSC. They will catch cases where the individual would have been regarded as an employee or office-holder of the public sector body had the contract been made directly with the individual. Under the current system, where a contractor is engaged through a PSC, it is the PSC which is obliged to apply the IR35 intermediaries legislation and account for tax and NICs where required. The client currently has no obligation to look into the tax status of the PSC and no employer s NIC liability. The government is concerned that many PSCs are not applying IR35 correctly and so, where the engager is in the public sector, the new measures will make the public sector body or the provider of the worker (agency or umbrella company) responsible for getting the tax right. 10

11 >continued from previous page PM-Tax Articles IR35 and employment status disputes (continued) The public sector bodies affected are those to whom Freedom of Information applications can be made a broad definition which encompasses a wide range of quangos and education providers as well as governmental bodies. Any business providing workers to public sector bodies and the worker is in turn providing their services though a PSC should take care as come 6 April 2017 they may find they have an obligation to deduct PAYE and NIC. There are many businesses, particularly in the IT industry that provide workers to Government departments in this way. Imposing this regime only on public sector contractors is likely to distort the market, with anecdotal evidence suggesting that it is already making it more difficult for government to secure the services of contractors who can work in the private as well as the public sector, as the new rules will make the contractor worse off if their client is in the public sector. It may therefore be only a matter of time before the regime is also applied to the private sector. Future changes? The employment versus self employment issue is clearly on the government s agenda. In October 2016 the Prime Minister appointed Matthew Taylor of the Royal Society for the encouragement of Arts, Manufactures and Commerce (RSA) to lead an independent review into modern employment practices. He has been asked to consider the effectiveness of the regulatory framework surrounding employment in relation to new, more flexible ways of working; and whether the growth of the gig economy and other non-traditional forms of employment undermine policies such as the National Living Wage, automatic enrolment, parental leave, sickness and holiday pay. In addition, the Institute for Fiscal Studies (IFS) recently launched a report arguing that differences in the way the tax system treats the self-employed, owner-managers and employees are costly, inefficient and unfair. According to the IFS, although employees still make up 85% of the workforce, over the last 8 years 39% of the growth in the workforce has come from the self employed and company owner-managers. It calculates that the self-employed get a tax advantage equal to an average of 1,240 per person per year as a result of lower NICs relative to employees. The IFS points out that company owner-managers can get even lower tax rates by taking income out of a company in the form of dividends, which suffer less tax than salaries. It looks likely that we will see changes over the next few years in the way the self employed and those using PSCs are taxed. What should you do now? The government has introduced a raft of new rules over recent years targeting onshore and offshore intermediaries and managed service companies. At the same time HMRC is taking a tougher stance in relation to existing rules such as IR35 and employment status. As there are now so many different rules it is easy for businesses and individuals to fall foul of them. Any individual operating under a PSC or under arrangements where it is argued that they are self employed, needs to check that their structure is still effective and be prepared for HMRC to challenge it. Businesses need to review any structures where they have self employed consultants or individuals operating through PSCs. Businesses sometimes believe that if a PSC is involved they are shielded from potential PAYE liabilities. However, there are situations where businesses can become liable, such as if the individual is a director or if there is an offshore intermediary and no UK intermediary in the contractual chain. John Hardman is a Tax Manager in our Tax Investigations team where he assists both corporate and private clients with tax enquiries, including fraud and avoidance matters. John has extensive experience in employment taxes and undertook investigations for HMRC before leaving the department. John assists private clients in regularising onshore and offshore tax matters and assists corporate clients under PAYE/NIC investigation by HMRC. John also advises on exchange of information, the use of HMRC s information powers and negotiating with HMRC to settle tax avoidance schemes. E: john.hardman@pinsentmasons.com T: +44 (0)

12 PM-Tax Articles The Power of Persuasion by Paul Noble This article was first published in HMRC Enquires Investigations and Powers published by Globe Law and Business. HMRC is committed to changing the behaviours of taxpayers and advisers in its bid to reduce tax avoidance. Deterrence is a key theme in the measures that have been announced to tackle tax avoidance in the past few years, perhaps with the recognition that it is far more cost-effective to dissuade would-be tax avoiders in the first place rather than enter prolonged enquiries and litigation some years later. In this article, Paul Noble considers recent announcements that are intended to persuade changes in behaviour. What will be in Finance Bill 2017? HMRC have already committed to challenging the role that professional advisers play in driving, what HMRC considers to be unacceptable behaviour. The Finance Bill 2017 will continue the drive to get tough on tax avoidance, bringing in measures that not only apply to those that use arrangements that can be classified as avoidance but also enacting a penalty regime for those that enable tax avoidance arrangements that are later defeated. In the 2016 Budget, the government signalled its intention to explore options to introduce a financial deterrent for those that enable or facilitate tax avoidance. Following a consultation last autumn, HMRC issued a response to the consultation and draft Finance Bill clauses have been published. The government s objective is to provide a deterrent and promote behavioural changes and for this reason, the definition of those that enable tax avoidance is not merely limited to those that who design, promote an market arrangements but can also catch anyone in the supply chain who benefits from the end user implementing avoidance arrangements. At the time of the consultation there was concern that what was being proposed could be drafted too widely and could catch wider tax planning and those advisers that are merely on the periphery, such as an adviser giving a second opinion. Although we will have to look at the detail, it appears that many of the concerns raised have been listened to. The measure will be prospective i.e. the new rules will only apply to steps taken by enablers after the Finance Bill is passed into law. What will this new regime look like? Key elements of the new regime will include: a definition of enabler which will draw a distinction between those that design, market or otherwise facilitate an arrangement and those that who are asked to give an opinion on it. This is designed to ensure that those that unwittingly fall into the enabler definition are excluded from it; a narrowing of the type arrangements caught so that it will only apply to those which are deemed to be abusive. This uses the GAAR double reasonableness concept and means arrangements the entering into or carrying out of which cannot reasonably be regarded as a reasonable course of action in relation to the tax provisions, having regard to all the circumstances. The original proposal was criticised as being excessively wide as it included anything which fell foul of a targeted anti-avoidance rule; penalties will be based on the amount of relevant consideration received or receivable in relation to the arrangements. There had been concern voiced at the time of consultation at the proposal that penalties would be based on the tax intended to be saved by the arrangement and it was generally felt that such an approach would be inequitable. The government s and HMRC s hope is that with deterrents in place the days of marketing and implementing mass-marketed tax avoidance arrangements are well and truly at an end and that those that are or could be involved with advising on such measures are dissuaded from doing so. The framework to turn hopes into reality is certainly coming into place. Clarifying the penalty regime The Finance Bill 2017 also introduces legislation that clarifies what taking reasonable care means in the context of the existing penalty regime in Schedule 24 FA 2007, when it relates to inaccuracies arising in a tax return from the defeat of tax avoidance arrangements. The new legislation will mean a presumption of carelessness (allowing penalties to be charged) unless it can be proved that reasonable care has been taken in cases of defeated tax avoidance. This will mean that relying on generic advice and anything that is not tailored to the particular circumstances will amount to carelessness so that a penalty will follow. 12

13 >continued from previous page PM-Tax Articles The Power of Persuasion (continued) The application of penalties in avoidance cases has become somewhat of a grey area in recent years and at least this change will provide some clarification moving forward. Making sure that the threat of penalties remains a matter of debate should also go some way to reinforcing the deterrent threat that HMRC is so keen to promote. Further statutory persuasion In addition to the changes now proposed and outlined above, Finance Act 2016 also introduced the Serial Tax Avoidance regime with a stated aim of this being to deter people from using tax avoidance schemes. The key features of this regime involve a system of warnings and escalating sanctions. The warnings will apply to schemes that are defeated after 5 April 2017, whenever entered into or schemes entered into and defeated, on or after 15 September 2016, whereas the new sanctions will apply to schemes entered into after 15 September 2016 and used during a warning period. The schemes or arrangements that are included in the serial tax avoiders legislation are those that are disclosed or disclosable under the DOTAS or VADR provisions, tax arrangements for which HMRC has issued a follower notice or tax arrangements where HMRC has given notice of a final decision to counteract under GAAR. For the purposes of these rules a tax avoidance scheme is defeated when the counteraction becomes final. Such counteraction could result in HMRC requiring adjustments to be made to tax returns or claims, making adjustments to tax returns or claims or the giving of one or more tax assessments, decision notices or determinations for the additional tax liability. Going forward, if HMRC defeats a scheme under the new regime, a warning notice will be issued and such warning notice will remain in place for a period of five years, and will be extended following any further defeats in the warning period. During the warning period the recipients will be required to send HMRC details of any avoidance scheme used that year, which is disclosed under DOTAS or VADR and outlining why they think that the scheme(s) achieve the intended tax advantage and how much tax would be payable had the scheme not been used. The consequences of using further schemes after someone has entered their first warning period are that a new warning notice will be issued which will extend the existing warning period by up to five years and if HMRC defeats a tax avoidance scheme after a warning period has ended then a new notice will be issued that will start a new five year warning period. There are consequences of using further schemes during a warning period (the sanctions) and these are as follows: a penalty of initially 20% of the understated tax, rising to a maximum of 60% for further defeats of schemes; being named as a serial avoider after the third defeat, and denial of access to direct tax reliefs after three defeated schemes that misuse reliefs. Non statutory deterrence The increased pressure on advisers will not only arise from legislative changes. In November last year, seven professional bodies including the CIOT, ICAEW and STEP updated their issued guidance on the standards expected of tax advisers and agents. The updated guidance has been endorsed by HMRC and sets out clear professional standards in relation to the facilitation and promotion of tax avoidance. With this update the professional bodies have strengthened the existing fundamental principles of behaviour expected of members by the addition of five new standards for tax planning that members must observe. These include a standard which makes clear that members must not create, encourage or promote tax planning arrangements or structures that (i) set out to achieve results that are contrary to the clear intention of Parliament in enacting relevant legislation, and/or (ii) are highly artificial or highly contrived and seek to exploit shortcomings within the relevant legislation. Such behaviours would lay a member of one of the bodies open to disciplinary action. This update responds to the government s challenge to the professional bodies made in March 2015, to take a greater lead in setting and enforcing clear professional standards around the facilitation and promotion of tax avoidance. Therefore, advisers will run the risk of a double-edged sword of both penalties and disciplinary action when creating, encouraging or promoting tax avoidance in the future and the deterrent will have worked if it makes advisers change behaviour. Will persuasion work? Persuasion is defined as an attempt to change a person s beliefs, attitudes, intentions, motivations or behaviours. Some may even call these mind games but however you think of persuasion it is certainly being brought to the front of the mind in HMRC s fight against tax avoidance and both the government and HMRC will continue to use it, amongst other measures, in order to end the days of mass-marketed tax avoidance. Paul Noble is a Tax Director who specialises in contentious tax and private client matters. He is a former Tax Inspector and a Chartered Tax Adviser and has over 20 years of experience in advising on tax investigations involving both private clients and corporates. Paul has wide-ranging experience of contentious tax matters including cases of tax fraud, tax avoidance, disclosure of tax irregularities and is adept at pro-actively resolving tax disputes and advising on HMRC powers. E: paul.noble@pinsentmasons.com T: +44 (0)

14 What more is there to tell: HMRC s consultation on registering offshore structures by Jason Collins This article was first published in the Association of Foreign Banks Quarterly Update, February 2017 PM-Tax Comment Articles Jason Collins considers an HMRC consultation document which proposes introducing an obligation for advisers and intermediaries establishing offshore structures to notify HMRC. Those familiar with UK CDOT (Crown Dependencies and Overseas Territories) reporting and the Common Reporting Standard will know that HMRC has started to receive unprecedented amounts of information about financial accounts and investments held by UK tax residents outside the UK including bank and investment accounts held directly with financial institutions and offshore funds, companies and trusts in which a person might have an interest. Not satisfied with this, HMRC has been consulting on requiring intermediaries to register offshore structures with HMRC and provide a list of clients using the structure (the consultation closed on 27 February). If the intermediary does not register, the obligation will fall on each client. The idea is based on the successful Disclosure of Tax Avoidance Scheme rules, introduced in 2004, which give HMRC early information about tax avoidance schemes. That DOTAS information is used to refine HMRC s operational response. HMRC thinks that by having similar rules in place for offshore structures, it will have better visibility over when structures might be being used for tax evasion. However, HMRC is not yet sure what would trigger the requirement to register and has been consulting on what would be good hallmarks. It gave examples of structures it has seen used to evade tax and asked for feedback. Some of the examples show some confusion in their thinking. One example depicts an offshore company services provider incorporating a company for a customer and concocting fictitious invoices to the customer s UK business in order to illegally suppress taxable profits in the UK. The obvious point to make is that a requirement to register isn t really going to stop the provider and customer acting illegally. However, it is possible to see the force of making providers register information as on the whole they will want to be compliant. This point goes to the heart of the issue with a measure like this. Compliant businesses and people will comply. Those who aren t, won t. If the measure is to proceed, it needs to be targeted, proportionate and simple perhaps the obligation could be that if a provider is involved in establishing or running a trust, company, foundation, fund interest, investment account or bank account for a UK tax resident, an obligation to notify would arise. Basic information and any inter-connectivity between, say, a company and a trust could be provided. But I fear that HMRC won t go for a simple approach. It will try to catch all manner of suspected but unascertained ills. Compliant businesses will spend a fortune implementing systems whilst the non-compliant will simply not comply, especially those outside the UK. And this presents another hurdle. Over the last few years we have seen HMRC impose obligations and penalties which in practice will catch many companies and individuals outside the UK - the latest example being civil penalties for knowing enablers of offshore non-compliance, which came into effect on 1 January. All these measures look great on paper but they will be toothless if those outside the jurisdiction can cock a snoop to the obligation because HMRC will struggle to enforce against them. Whilst there is now greater cooperation over the enforceability of tax debts, cross-border cooperation and enforcement of civil penalties that do not arise in relation to tax owed by the party subject to the penalty is a grey area. HMRC may want to consider driving the agenda on this if it wants all these new measures to succeed. Jason Collins leads our Litigation, Regulatory and Tax team. He specialises in representing corporate and individual clients who are the subject of a tax audit and resolves complex disputes with HMRC in all aspects of direct tax and VAT. Jason is also a leading expert on Country-by-Country reporting, FATCA and the OECD s Common Reporting Standard, advising companies, financial institutions and individuals across the world on the application of automatic exchange of information, with a particular focus on trusts, investment companies and funds. E: jason.collins@pinsentmasons.com T: +44 (0)

15 PM-Tax Events Events Accountants Roundtable 28 March 2017 Pinsent Masons invites you to a roundtable seminar to discuss the changing face of tax disputes and investigations with some of our leading tax investigations experts. The landscape of tax disputes and investigations seems to be forever changing. Increasing pressure on the UK Government to combat tax evasion and avoidance has seen an unprecedented series of already announced and pending legislative changes targeting, amongst others, those with offshore connections, users of tax avoidance schemes, employers and professional advisers. The changes tighten an already complex framework and evolve ever more stringent reporting requirements and greater penalties. Professional advisers have much to consider in advising their clients. At the seminar we will consider the following: HMRC s Offshore Evasion strategy past, present and future Tax residence where we are now Professional Negligence an update Topical employer compliance issues. Date: Tuesday 28 March 2017 Time: 4.30pm Registration; 5.00pm Seminar; 6.30pm Drinks and canapés Venue: Pinsent Masons, 30 Crown Place, London EC2A 4ES If you are interested in attending please contact sarah.arato@pinsentmasons.com 15

16 PM-Tax People People Our team out and about Jason Collins spoke about effective methods of resolving disputes with HMRC at Informa s Tax Planning for Entertainers and Sports Stars 2017 conference in London. Jason also spoke about the new offence of failure to prevent the facilitation of tax evasion and also about public registers of beneficial owners at Informa s 3rd Annual AML, Financial Crime & Sanctions Forum from 31 January to 2 February. Paul Noble spoke to the CIOT North East England branch, giving an update on the changing landscape of tax disputes and investigations in October Fiona Fernie and Alan Sheeley from our Civil Fraud and Asset Recovery Team spoke at a Global Tax Enforcement Conference in the Isle of Man on 9 February on the new offence of failure to prevent the facilitation of tax evasion and registers of beneficial ownership. Fiona spoke on BREXIT the post referendum landscape for internationally mobile HNWI s at The London Wealth Forum and Safe Havens Conference in October. Members of our team will also be speaking on HMRC Powers, Penalties and Investigations on 18 April 2017 at the East Midlands ATT branch meeting in Leicester. Heather Self is speaking on 2 March in Manchester on the topic of Accelerated Payment Notices (APNs) and Follower Notices at a conference organised by Duff & Phelps. Tell us what you think We welcome comments on the newsletter, and suggestions for future content. Please send any comments, queries or suggestions to: catherine.robins@pinsentmasons.com We tweet regularly on tax developments. Follow us Pinsent Masons LLP is a limited liability partnership, registered in England and Wales (registered number: OC333653) authorised and regulated by the Solicitors Regulation Authority and the appropriate jurisdictions in which it operates. The word partner, used in relation to the LLP, refers to a member or an employee or consultant of the LLP, or any firm or equivalent standing. A list of the members of the LLP, and of those non-members who are designated as partners, is available for inspection at our registered office: 30 Crown Place, London, EC2A 4ES, United Kingdom. Pinsent Masons For a full list of the jurisdictions where we operate, see