Hot Topics in Tax AFM Tax Training 10 June 2014

Size: px

Start display at page:

Download "Hot Topics in Tax AFM Tax Training 10 June 2014"

Ralf Goodwin
5 years ago
Views:

1 AFM Tax Training

2 Agenda Value Added Tax Update Mutuality and with-profits funds: a way forward Loan relationships consultation Portfolio dividends and EU discrimination New Life Tax Regime Scottish Income Tax 2

3 VAT Update 3

4 VAT Update VAT treatment of Special Investment Funds (SIF)! In March 2013 CJEU (ECJ) delivered judgment in Wheels Common Investment Fund Trustees and Others (C-424/11)! Court decided that Defined Benefit (DB) employee pension schemes do not have the necessary characteristics of special investment funds! Held that beneficiaries of DB schemes do not bear the investment risk! Therefore management charges to DB schemes do not qualify for Vat exemption applicable to management of SIF. 4

5 VAT Update VAT treatment of Special Investment Funds (SIF)! However, in March 2014 CJEU delivered judgment in ATP Pensions Service (C-464/12).! Court decided that Defined Contribution (CF) employee pension schemes do have the necessary characteristics of SIF.! Beneficiaries of DC schemes bear the investment risk of the fund irrespective of the fact that the employer may pay part or all of the contributions into the fund.! Funds are paid into a mutual investment pool and the risk is spread between the beneficiaries.! Management charges to DC schemes qualify for VAT exemption applicable to management of SIF. 5

6 VAT Update VAT treatment of Special Investment Funds (SIF)! Where do life companies stand following ATP in respect of the pension products they sell.! Does life company pension business have the characteristics of a SIF. Do policyholders bear the investment risk of withprofit funds.! Revenue & Customs Brief 22/14 issued in May noted the ATP decision and that it would consider claims in respect of overpaid output tax.! What about non-pension investment and savings life business. Could the VAT treatment of SIF apply to these products? 6

7 Mutuality and with-profits funds: a way forward FCA P/S 14/5 PRA S/S 1/14 7

8 Mutuality and with-profits funds: a way forward COBS 20 Conduct of Business Sourcebook with-profits funds concern that rules too prescriptive requirement for run-off plans prevent mutuals in particular expanding non-profit business Project Chrysalis FSA consultation with with-profits mutuals CP 11/5 Protecting with profits mutuals CP 12/38 Mutuality and with-profits funds: a way forward - proposal for a mutual members fund 8

9 Mutuality and with-profits funds: a way forward PRA S/S 1/14 (6 pages) Concerned with waiver process (and interaction with Solvency II) Mostly in FRC s court with PRA dialogue FRC P/S 14/5 (34 pages + 2 Appendices) General principle to allow a (single) common fund to be split into: a with-profits fund; and a mutual members fund In effect apply for a waiver from COBS 20 for the mutual members fund need to show treat with-profits policyholders fairly may enhance members rights generally other approaches may be acceptable 9

10 Mutuality and with-profits funds: a way forward taxation In FRC P/S 14/5 We are not able to comment on the impact of these changes for tax purposes. (response to ) Tax overview In the mutual this may give apportionment questions: is the commercial allocation to BLAGAB different for separate funds also, is there a box transfer on setting up the new mutual member fund Generally, changes shouldn t affect mutuality May need to consider tax treatment of any distributions to mutual members qua members rather than policyholders (pension, life) 10

11 Loan relationships consultation Where are we? 11

12 Loan Relationships Consultation Recap! Budget 2013 announced Consultation to Modernise the CT rules governing the Taxation of Corporate Debt & Derivative Contracts.! Formal consultation issued in June 2013 and responses made by businesses, rep bodies, advisers. Summary of responses made by HMRC in December 2013.! Limited amount of legislation regarding Bond Rules and Degrouping has been included in Finance Bill 2014.! Technical note issued by HMRC on 8 April

13 Loan Relationships Future Considerations Category A items! Basing taxable amount on amounts recognised in the profit and loss account! New regime wide anti-avoidance rule! LRs held by limited partnerships with corporate members! Corporate rescues! Updating Corporate Streaming and Bond Fund rules! Clarifying the treatment of undated instruments! Late interest rules! Updating the Disregard Regulations and Change of Accounting Practice Regulations 13

14 Loan relationships Follow the profit & loss account! Current regime takes into account amounts recognised in various parts of the financial statements.! Proposal will be that only bring into tax amounts recognised in the profit & loss account! For amounts recognised in Other Comprehensive Income (OCI) that are subsequently recycled to P&L, this will represent a timing difference.! HMRC accept that need to address the volatility that may arise in life companies e.g. decoupling of movements in asset movements from linked liabilities. 14

15 Loan relationships Corporate Streaming! Initial HMRC view was abolition of Corporate Streaming.! Preference now is to refine the corporate streaming rules rather than abolish them.! This is due to the difficulties that abolition would create for insurance companies with tax exempt business (e.g. pension funds) where the rules help maintain parity of treatment with direct investment of the underlying assets. Bond Rules! HMRC and industry continue to work on potential changes to the Qualifying Investment test where the test may have been inadvertently triggered. 15

16 Loan relationships Tax treatment of undated instruments! Such instruments with a repayment requirement only on liquidation will not, for tax purposes, constitute debt.! Accordingly coupons on such debt instruments will be treated as distributions. Late paid interest rules! Concern was expressed by the insurance industry regarding the proposal to change the rule whereby interest paid in respect of loans from connected parties could be deferred for more than a year.! HMRC s understanding was that being used by some insurers to maximise the availability of group loss relief! HMRC and the Insurance Industry continue to liaise on this issue. 16

17 Portfolio foreign dividends EU litigation Current state of play 17

18 Portfolio foreign dividends The story so far Once upon a time (not so long ago), as any fule kno: UK dividends weren t taxable; non-uk dividends were. Any fule was however wrong that approach was against EU discrimination rules, and eventually the Courts caught up with the idea that it was discriminatory (EU rules: freedom of establishment and free movement of capital) But: the Courts were mostly concerned with subsidiaries Portfolio dividends trailed in many lengths behind 18

19 Portfolio foreign dividends Prudential Assurance Limited (and Another) v CRC (the CFC and dividends GLO) High Court judgment 24 October 2013 Addresses (finally at last) portfolio dividends Main issue: how should the admitted invalidity in UK taxation of non- UK portfolio dividends be remedied? Answer unlike the eventual legislative solution is not to exempt non-uk portfolio dividends Instead give a deemed foreign tax credit Plus: compound interest on overpaid tax refunded! 19

20 Portfolio foreign dividends Foreign tax credits Position under UK law (pre 2009) Double tax relief available for withholding tax etc, but not for underlying tax Position under High Court judgment Lots of double tax relief available withholding tax etc clearly as under the existing law deemed credit at overseas tax rate underlying tax (as per non-portfolio dividends) All three? 20

21 Portfolio foreign dividends Possible current position Position under High Court Double tax relief available withholding tax etc clearly plus either - deemed credit at overseas tax rate, or - actual (provable) underlying tax Capped at effective UK rate Grossing up? 21

22 Portfolio foreign dividends A quick example Exempt ULT No gross up Foreign company profit before tax Foreign tax (30%) (30) (30) (30) Dividend Withholding tax 10% (7) (7) (7) Received UK tax position Dividend (pre WHT) Underlying tax 30 N/a Taxable UK tax at 20% Foreign tax - WHT ULT/deemed tax DTR (20) (14) Net UK tax

23 Portfolio foreign dividends Position for mutuals Taxable BLAGAB business Foreign dividends taxable 20% likely effect (including WHT) eliminate tax with DTR what evidence required implications where E offset clearly still a discrimination Pensions, GRB etc UK and foreign dividends both taxable so no discrimination (some impacts for proprietary companies) 23

24 Portfolio foreign dividends Where next Appealed to Court of Appeal May have decision later this year unlikely to say no remedy may uphold High Court may go for exemption may consider offset of expenses etc may restrict remedy procedural points And then Major revision to High Court may go to Supreme Court Broadly agrees with High Court could be end of the road i.e. decision may be (or become) FINAL 24

25 Portfolio foreign dividends Year end 2014 What is affected Dividends in open years 2009 and prior Valid claims for earlier years What is outcome If Court position moves between now and signing 2014 accounts does the effect need to be quantified provided? disclosed? 25

26 New life tax regime 18 months after now read on 26

27 New Life Tax Regime Summary of Changes Previous Regime - Based on FSA Returns - BLAGAB I apportioned - Life Protection taxed as BLAGAB - 4 tax categories BLAGAB, GRB, PHI and Exempt New regime - Based on Financial Statements - BLAGAB I commercial basis - Life Protection taxed as Non BLAGAB - 3 tax categories BLAGAB, Non BLAGAB and Exempt 27

28 Mutual Outline CT Computation BLAGAB Property Income x BLAGAB Loan Relationship Income and Gains x BLAGAB Chargeable Gains x BLAGAB I x Less: BLAGAB Management Expenses ( E ) (x) BLAGAB I-E x Corporation Tax at 20% x Note If BLAGAB I is greater than E XSI position If BLAGAB E is greater than I XSE position No Corporation Tax on dividend income, Non BLAGAB or Exempt profit, income or gains 28

29 New Life Tax Regime Background! Regime now in its second year with its implications played out in anger in the CT accounting provisions appearing in the 2013 financial statements.! Computations now in the process of being finalised/submitted.! Time well spent in preparation work of agreeing the commercial allocation of investment return with HMRC 29

30 New Life Tax Regime working well for mutuals?! Simpler regime, I and E on more consistent basis! Non BLAGAB Mutual Business, computation not required! Commercial allocation means that tax regime more aligned to the business.! Better understood by the Actuaries, more consistent with product pricing. More aligned to SII Actuarial models! Corporation tax charge for Mutuals driven by BLAGAB Loan relationship investment return, BLAGAB CGT, BLAGAB property income 30

31 New Life Tax Regime Considerations! Future sales of BLAGAB business may be limited! BLAGAB business often backed by equities, only realised CGT impact in I-E computations. Even then there may be remaining CGT losses! Impact of the run off DAE from pre 2013 life protection business! Combination of these 3 factors may lead to XSE for forseeable future 31

32 New Life Tax Regime On the Other Hand! Volatility of underlying assets, large swings in equity and bond markets backing BLAGAB products.! CGT Commercial Allocation to BLAGAB may be higher than under the previous regime! Lower BLAGAB maintenance costs (plus for some companies an absence of life protection DAE run off) could lead to XSI. 32

33 New Life Tax Regime Case Study! significant XSE, CGT losses used up! January CGT loss for the month, marginally XSE for the month! February CGT small net loss to date, LRs move YTD marginally XSI! March CGT gains impact on I-E plus LRs result in XSI.! April LR gains for the month and YTD utilise 1/3 of XSE brought forward! May 2014 normal month XSI uses a bit more of the XSE 33

34 New Life Tax Regime Concerns! Volatility is challenging for forecasting, Payments on Account (POA), recognition of Deferred Tax Assets for both Financial Statements and SII purposes.! Transfer of Business Legislation currently not fit for purpose.! Working group set up between HMRC and the Industry to improve the position.! AFM representation on Working Group, first meeting 12 June

35 Scottish income tax 35

36 Scottish Income Tax When and who Enacted Scotland Act 2012; amends Scotland Act 1998 (and ITA 2007 ) Comes into force Subject to Treasury expected 6 April 2016 Who Scottish taxpayers (individuals) UK resident close(r) connection with Scotland (e.g. home, days spent) Companies won t affect policyholder tax rates etc (yet) PAYE/PRAS 36

37 Scottish Income Tax What and how Application UK tax rates (basic, higher, additional) are reduced by ten percentage points Then, those rates increased by Scottish income tax rate (if any) Only applies to non-savings income pensions income (and salaries) = non-savings chargeable event gains = savings Operation Scottish taxpayers denoted by different PAYE tax codes Pension relief likely to be at UK rates until

38 Scottish Income Tax Examples Tax rate UK Less Core SITR Final Basic rate non-savings 20 (10) Higher rate non-savings 40 (10) Additional rate non-savings 45 (10) Starting rate for savings 10 Basic rate savings 20 Higher rate savings 40 Additional rate savings 45 Dividend ordinary 10 Dividend upper 32.5 Dividend additional

39 Scottish Income Tax What next Independence referendum If Yes then independent Scotland from 2016 (?) If No then Devo Max??? 39

40 Thank you for listening... We have been: Graham Wilson, LV= Philip Lewis, PwC Who we shall be tomorrow, however This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it PricewaterhouseCoopers LLP. All rights reserved. In this document, "PwC" refers to the UK member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see for further details.

AFM TAX TRAINING DAY. Hosted by Deloitte 16 June 2015

AFM TAX TRAINING DAY. Hosted by Deloitte 16 June 2015 AFM TAX TRAINING DAY Hosted by Deloitte 16 June 2015 Corporation Tax 2015 Update Adjusted BLAGAB management expenses Step 4 Jon Garrett 16 June 2015 The new life tax regime - mutuals An example computation