SPRING BUDGET 2017 PREDICTIONS

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Lewis Harper
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1 SPRING BUDGET 2017 PREDICTIONS

2 SPRING BUDGET 2017 PREDICTIONS What we are confident will be announced Personal taxation Valuation of benefits in kind - Following the announcement in Autumn Statement 2016, the Government will consider how benefits in kind are valued for tax purposes, publishing a consultation on employer-provided living accommodation and a call for evidence on the valuation of all other benefits in kind at Budget Employee business expenses - As announced in Autumn Statement 2016, the Government will publish a call for evidence at Budget 2017 on the use of the income tax relief for employees business expenses, including those that are not reimbursed by their employer. Corporate taxation Non-resident companies - Based on an announcement in Autumn Statement 2016, we expect a consultation will be opened on the case and options for bringing into the UK corporation tax regime all non-resident companies receiving taxable income from the UK. Transfer pricing Following an HMRC consultation, we expect announcements concerning the potential introduction of a system of secondary tax adjustments to apply to the UK s transfer pricing regime to reflect the effect of primary transfer pricing adjustments that are reflected for tax purposes but are not accounted for. Stamp taxes Stamp duty land tax administration - Now that the HMRC consultation has finished, we expect changes to be announced for the filing and payment process for SDLT, including reductions in the length of the filing and payment windows. VAT and indirect taxation Strengthening the disclosure of tax avoidance schemes - The draft Finance Bill 2017 set out new legislation, with effect from 1 September 2017, in relation to Disclosure of tax avoidance schemes - VAT and other indirect taxes, moving responsibility for disclosing VAT avoidance schemes from scheme users (taxpayers) to scheme promoters and providing for penalties for non-disclosure. We expect the Government to publish further supplementary legislation, including: links to the generic hallmarks in the direct taxes DOTAS regime, which cover confidentiality, premium fee arrangements and standardised tax products; retention of a number of hallmarks from the existing VADR disclosure regime, including: sharing of a tax advantage; prepayments between connected parties; funding by loan, share subscription or subscription in securities; off-shore loops; and property transactions between connected persons; removal of the turnover limits in the existing regime from the new scheme - the new VAT disclosure regime will apply to all VAT avoidance schemes, including, in principle, schemes carried out by VAT non-taxable persons. VAT grouping eligibility provisions - Following recent EU court decisions and a recent HMRC consultation, membership of a VAT group could be extended to persons other than bodies corporate, such as individuals and general partnerships. VAT recovery by holding companies - Following recent EU and UK court decisions, significant policy changes are expected relating to VAT recovery by holding companies, both as entities in their own right, and as members of a VAT group. Among the expected changes are: removal of the requirement that acquisition costs incurred by the holding company must be components of the price of taxable supplies to subsidiaries, recouped over a period of five to ten years; acknowledgement that a holding company acquiring an interest/shareholding in another business may in fact result in direct, continuous and necessary extension of the taxable economic activity of the holding company; and acknowledgement that where taxable supplies are made to a subsidiary, dividends received from that subsidiary should not restrict VAT recovery. Simplification of VAT - As announced at Autumn Statement 2016, the Office of Tax Simplification (OTS) has been conducting a simplification review into the VAT system. A progress report coupled with a call for evidence has now been published. This addresses eight key areas: identifying the implications of a high registration threshold; complexities caused by multiple VAT rates; partial exemption, option to tax and capital goods scheme; special accounting schemes; VAT administration, penalty and appeals processes; 2

3 proposals to introduce a formal ruling system; VAT and Making Tax Digital (MTD); and other complex and sector-specific areas for investigation. We expect the Chancellor of the Exchequer to respond to this report in his Budget Statement. Withdrawal of VAT extra statutory concessions - In line with the House of Lords decision in Wilkinson, HMRC will withdraw the following concessions with effect from April 2018: Zero-rating of central processor previously in Notice 701/7, this concession allows the VAT zero-rating of a central processor if it is sold as part of a computer system designed as a complete package to aid a disabled person to overcome communication problems through the installation of software. HMRC now considers that the items it was intended to cover fall within existing legislation. Composite rate of VAT for computer systems previously in Notice 701/7, this was intended to be used only in conjunction with the above zero-rating of central processor concession. Affiliation fees for commercial sports clubs within Notice 701/45, this concession allows profit-making commercial sports clubs to treat recharges of affiliation fees to their members as though they were disbursements. However, as such recharges are not legally disbursements the concession goes beyond HMRC s discretion. Its withdrawal means the onward charge of affiliation fees will be liable to VAT unless the conditions for disbursement treatment are met. Tax avoidance and evasion The hidden economy - Following previous consultation, we expect further details to be announced on measures designed to tackle the hidden economy, including making access to business services or licences dependent on tax registration and setting out new sanctions to tackle repeated non-compliance. What we might reasonably expect to be announced Personal taxation Non-domiciled individuals - There are a number of areas of uncertainty in the legislation on changes to the tax regime for non-domiciled individuals published in draft Finance Bill The final period of consultation on the draft legislation closed on 23 February 2017 and we expect that some of the concerns raised by respondents will be addressed in the publication of revised legislation and announcements at the Budget, including issues concerning: UK residential property and collateral given for loans; interest free loans and tainting (the introduction of a 12 month transitional period and clarification on the requirement to pay interest at a commercial rate for 2016/17); the absence of a two year tail for disposals by trusts of UK residential property; and the disregard in respect of capital payments to non-residents. Making Tax Digital Based on the various documents, including draft legislation, published on 31 January 2017 following six consultations on particular aspects of proposals for making tax digital, further announcements are expected, including confirmation of the lower threshold exempting small businesses from the proposed digital reporting obligations and confirmation of which businesses will be able to claim a one year period of grace from such reporting. Further primary legislation and updates to the draft legislation published on 31 January 2017 will then be published in Finance Bill 2017, together with the draft secondary legislation required to implement these reforms for income tax purposes. Gift aid donor benefit rules - Amendments are expected to the gift aid donor benefit rules following the recent HM Treasury/HMRC consultation. Pensions tax allowances - Following the recent HM Treasury consultation, it is expected that a decision on the proposed reduction, to 4,000, of the money purchase annual allowance for pension contributions by individuals who have already accessed their pension savings under flexible pensions access rules will be announced, with any change taking effect from April Salary sacrifice - Proposed legislation was included in draft Finance Bill 2017 to counteract what the Government perceives as an uneven playing field between employees and employers who use salary sacrifice arrangements and benefit from the tax and national insurance advantages, and those who don t. The proposed legislation allows for salary sacrifice arrangements to continue for some prescribed employee benefits and introduces a transitional regime for certain existing grandfathered arrangements in existence at the time to new rules take effect. We expect that concerns raised by respondents to the consultation on the draft legislation may lead to changes to enable grandfathering to operate in a meaningful way. 3

4 Developments in business models impact on employment status With the Department for Business, Energy and Industrial Strategy having recently published its review on employment status and the forthcoming Taylor Review of modern employment practices underway, the emergence of the so-called gig economy and recent employment tribunal cases will not have gone unnoticed by HMRC. Whilst the tax and employment law issues may be different, the employment law status of an individual may have an indicative impact for tax purposes. It is therefore reasonable to expect the Government to be considering some form of further review looking at the distinction between employed and self-employed income for tax purposes. VAT and indirect taxation Intra-Community VAT grouping - Following its recent consultation on VAT grouping, HMRC has recognised that the CJEU judgment in Skandia means that transactions between a VAT-grouped branch and its head office in another country constitute a taxable transaction for VAT purposes. A number of member states, including the UK, do not adopt this establishment only approach and do not always treat a branch as separated from its head office if it belongs to a VAT group. As the European VAT Committee has endorsed the CJEU s judgement and stated that it should be strictly interpreted, the Government may decide to announce that VAT grouping should only be afforded to entities (including branches) situated in the UK. Private use of leased cars - an announcement is expected, confirming that the derogation authorising the UK to apply a 50 per cent input tax restriction on charges incurred for the hire or lease of a car has been extended to 31 December The extension of the derogation restricting input tax recovery also removes the need for the hirer/lessee to keep records of the private mileage travelled in business cars, and to account for VAT on any employee contribution or salary sacrifice for the private use of each car. However, we expect the Treatment of Transactions Order (SI1993/630) to be rescinded, meaning that where VAT on a leased vehicle has been recovered in full, any contributions by an employee, including salary sacrifices, will be liable to VAT. This measure will primarily impact NHS bodies as, under the Contracted-Out Services provisions, NHS bodies have been afforded full VAT recovery on leased cars but, under the Treatment of Transactions Order, have not been required to account for output tax on employee contributions or salary sacrifice for the private use. Removal of Low Value Consignment Relief (LVCR) The Government may announce the removal of LVCR for the import of small consignments from suppliers in all third countries (it has not applied to goods imported from the Channel Islands since April 2012), with VAT on imports of small consignments being, in the main and whilst the UK remains a member of the European Union, collected through the proposed extension of the mini one stop shop (MOSS). Charities in receipt of subsidies and grants - Formal consultation may be announced on the right to input VAT recovery by charities in receipt of subsidies and grants. Tax avoidance and evasion Anti-avoidance - As has been common in recent years, it is reasonable to expect that targeted anti-avoidance measures and other changes may be announced in response to tax avoidance schemes disclosed to HMRC under the disclosure of tax avoidance schemes (DOTAS) rules. What could at a stretch be announced Personal taxation Pensions tax relief - Tax relief on pensions could be reduced by restricting tax relief to the basic rate of income tax. This might encourage the use of the lifetime ISA which attracts a government bonus of 25 per cent - but it only permits an annual investment of 4,000 and is only available to those aged between 18 and 40. Entrepreneurs relief - Further amendments could be made to entrepreneurs relief, possibly relaxing the 5 per cent holding requirement for long term employees. Tax devolution - Further devolution of tax raising powers could be announced, including, for example, the potential devolution of national insurance thresholds for Scottish taxpayers to the Scottish Government to allow for alignment with Scottish rate of income tax bands. Corporate taxation Capital allowances - Further changes to capital allowances rates and/or the annual investment allowance may be announced to encourage capital investment. Funding - The government may take initial steps to consider applying tax relief for the costs of raising equity finance on the basis of an imputed interest charge. The aim of such steps, which are likely to involve a full consultation process, would be to level the tax playing field between debt and equity funding. 4

5 Stamp taxes Stamp duty - It is possible that the Government could announce the scrapping of stamp duty on share transfers. VAT and indirect taxation Tour operators margin scheme (TOMS) - The Government could announce the inclusion of wholesale supplies (services supplied by an intermediary to another business for onward sale) within TOMS as current practice to exclude such supplies from TOMS is at odds with EU VAT law and has been criticised by the tribunals. VAT reduced rates - EU VAT legislation allows member states to apply a reduced rate of VAT to, among others, repairs and renovations of social and private housing; restaurant and catering services; hotel accommodation; and admission to fairs, amusement parks, theatres, shows and other cultural events the UK doesn t as yet, despite intense lobbying. Energy-saving materials - although dropped from Finance Act 2016, it is possible we could see the resurrection of the proposal to apply VAT at the standard rate to the installation of solar panels, wind turbines and water turbines. As a result of EU infraction proceedings against the UK, this measure was originally intended to have effect on supplies made on or after 1 August 2016 as such supplies were considered by the EU as serving to generate electricity, rather than as a social policy afforded reduced-rating under the European VAT Directive. However, during the debate on Finance Bill 2016, when challenged to confirm categorically that VAT on such supplies would not be increased to 20 per cent, the Government could only state that following the decision by the European Court, we have consulted interested parties on the issue and, given the complexities involved, we are still considering the responses. Investment management and related services - Resulting from EU case law, the Government may wish to legislate to establish clear criteria for determining whether there are separate VAT-able and exempt supplies of investment management and related services, particularly with regard to discretionary investment management and portfolio management arrangements. Narrowing the extent of VAT exempt insurance intermediary services - On the basis that current UK legislation is generally acknowledged to be too broad an interpretation of EU law and that the EU court has stated the defining features of being an insurance broker or agent for VAT exemption purposes, the Government may announce that UK legislation will be brought into line with these principles. Tax avoidance and evasion Tackling offshore tax evasion: a requirement to notify HMRC of offshore structures A consultation on high level design principles for proposed legislation requiring intermediaries to notify HMRC of the creation or promotion of certain complex offshore financial arrangements ran from 5 December 2016 to 27 February It is probable that the next steps will only be announced once HMRC has had time to consider the consultation responses. However, it is possible that certain initial announcements could be made in the Budget. The proposals would require intermediaries to provide a list of clients using such structures and for their clients, in turn, to notify HMRC of their involvement via a notification number on their personal tax account. 5

6 rsmuk.com The UK group of companies and LLPs trading as RSM is a member of the RSM network. RSM is the trading name used by the members of the RSM network. Each member of the RSM network is an independent accounting and consulting firm each of which practises in its own right. The RSM network is not itself a separate legal entity of any description in any jurisdiction. The RSM network is administered by RSM International Limited, a company registered in England and Wales (company number ) whose registered office is at 50 Cannon Street, London EC4N 6JJ. The brand and trademark RSM and other intellectual property rights used by members of the network are owned by RSM International Association, an association governed by article 60 et seq of the Civil Code of Switzerland whose seat is in Zug. RSM Corporate Finance LLP, RSM Restructuring Advisory LLP, RSM Risk Assurance Services LLP, RSM Tax and Advisory Services LLP, RSM UK Audit LLP, RSM UK Consulting LLP, RSM Employer Services Limited, RSM Northern Ireland (UK) Limited and RSM UK Tax and Accounting Limited are not authorised under the Financial Services and Markets Act 2000 but we are able in certain circumstances to offer a limited range of investment services because we are members of the Institute of Chartered Accountants in England and Wales. We can provide these investment services if they are an incidental part of the professional services we have been engaged to provide. RSM Legal LLP is authorised and regulated by the Solicitors Regulation Authority, reference number , to undertake reserved and non-reserved legal activities. It is not authorised under the Financial Services and Markets Act 2000 but is able in certain circumstances to offer a limited range of investment services because it is authorised and regulated by the Solicitors Regulation Authority and may provide investment services if they are an incidental part of the professional services that it has been engaged to provide. Baker Tilly Creditor Services LLP is authorised and regulated by the Financial Conduct Authority for credit-related regulated activities. RSM & Co (UK) Limited is authorised and regulated by the Financial Conduct Authority to conduct a range of investment business activities. Whilst every effort has been made to ensure accuracy, information contained in this communication may not be comprehensive and recipients should not act upon it without seeking professional advice RSM UK Group LLP, all rights reserved. 4205

AUTUMN STATEMENT 2016 PREDICTIONS

AUTUMN STATEMENT 2016 PREDICTIONS AUTUMN STATEMENT 2016 PREDICTIONS Budget 2016 may have been only eight months ago, but the world now looks a very different place. When the Chancellor gets to his feet