TAXguide 09/18: simple assessments 1. Corporate interest restriction a new TAXguide 2. TAXline for May 2018 read it online 2

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1 TAX FACULTY WEEKLY NEWS UPDATE Newswire: 912 This is a summary of the key tax events for the week ended 20 May It has been compiled by Anita Monteith, Jane Moore and Ian Young. This newswire contains all the individual postings we have made to the Tax Faculty website over the past seven days. It includes both news items (ion.icaew.com/taxfaculty) and new discussions (ion.icaew.com/taxforum). CONTENTS TAXguide 09/18: simple assessments 1 Corporate interest restriction a new TAXguide 2 TAXline for May 2018 read it online 2 Availability of software for MTD for VAT and income tax 2 Off-payroll working in the private sector (IR35) consultation published 3 Research report on off-payroll working in the public sector 4 State Aid re-approval granted for EMI share schemes /18 exclusions from self assessment online filing 6 Company cars advisory fuel rates from 1 June Tax refunds on pension fund receipts 7 Review of the corporate intangible fixed assets regime 8 Double taxation relief for non UK residents with UK income 8 United Nations Tax Committee Ian Young attends May meeting in New York 9 TAXguide 09/18: simple assessments The Tax Faculty has published TAXguide 09/18 which explains what simple assessments are and how HMRC is using them. In 2016, HMRC was a given a power to issue simple assessments with the objective of removing taxpayers from income tax self assessment. This TAXguide covers: how HMRC uses this power now and its future plans; the accuracy of the assessments and how they can be challenged if incorrect; the interactions with self assessment and informal P800 tax calculations; and the responsibility of taxpayers to check the calculations; and penalties and payments. This TAXguide is Tax Faculty exclusive content, available only to faculty members and subscribers. For information on joining the Tax Faculty, which gives access to all our TAXguides, webinars, monthly journal TAXline and other exclusive material and services, go to Join the Tax Faculty 1

2 Corporate interest restriction a new TAXguide Tax Faculty has published TAXguide 8/18 The Corporate Interest Restriction: a practical guide written by Anton Hume and Andrew Stewart from BDO, explaining the new corporate interest deductions rules in Finance (No 2) Act The aim of the new rules, as per the HMRC guidance, is to restrict a group's deductions for interest expense and other financing costs to an amount which is commensurate with its activities taxed in the UK, taking account how much the group borrows from third parties. Groups with net interest expense (including certain lease expenses) in the UK below a 2m per annum de minimis threshold should not face a disallowance, however even here some care may be required to understand the reporting requirements and to determine whether any elections may be beneficial for future periods. This TAXguide is only available to Tax Faculty members and subscribers, so this is a good reason to join the Tax Faculty. For information on joining the Tax Faculty, which gives access to all our TAXguides, webinars, monthly journal TAXline and other exclusive material and services, go to Join the Tax Faculty TAXline for May 2018 read it online Tax Faculty members will by now have received the hard copy of the May issue of our monthly magazine, TAXline. Did you know you can also access TAXline on our website? We have always posted each issue of TAXline in pdf form. But if you haven t looked recently, you may not know that each issue is also now uploaded in user-friendly html format, so you can see at a glance what s in the magazine and access the content you want. Why not take a look and let us know what you think? In the May 2018 issue: Anita Monteith asks whether it's possible to tax robots; Carl Bayley reflects on his time as chair of the Tax Faculty; John Cassidy explains the latest sanctions for offshore non-compliance; Caroline Miskin gives an update on HMRC s online services for agents; Sarah Ghaffari takes a closer look at IR35 on its 18th anniversary; and We have news of the Tax Faculty s technical work and activities, deadlines and dates for your diary, and our popular Practical Points section. Our cover story How to tax a robot? is freely available. The rest of the content is exclusively available to for Tax Faculty members and subscribers. To access TAXline (including all previous issues) and find out more about the other benefits the faculty offers, see Join the Tax Faculty Availability of software for MTD for VAT and income tax Accountex, being held at Excel London this week, on Wednesday 23 and Thursday 24 May, will showcase software for the accounting industry. A key issue for members in practice and for businesses is how to choose appropriate MTD compliant software in the absence of published information. The MTD for VAT pilot started on 11 April 2018 but is currently by invitation only and is restricted to a small number of the simplest businesses. HMRC expects to open the pilot to more businesses over time and to start the public beta stage later in the summer. It is only at that point that HMRC will publish a list of software with MTD for VAT functionality. In the meantime agents and businesses 2

3 already using software should speak to their software supplier about the timetable for the release of products. We understand that HMRC is in discussions with more than 130 potential suppliers of MTD for VAT software, including some who expect to develop products that will facilitate the use of spreadsheets. The MTD for income tax pilot is slightly further advanced. The controlled go live stage of the pilot started in April 2017 and on 15 March 2018 the pilot moved to public beta. The pilot is now open to all taxpayers with one self-employment who have no other source of income and who have purchased MTD for income tax software. The next step is for the pilot to be extended to those with income from property. Two new providers of MTD for income tax software, Absolute and Forbes, have recently been added to the published list of MTD for income tax software, joining Iris and Rhino. We understand that HMRC is in discussions with approximately 20 potential suppliers of MTD for income tax software, including some who expect to develop products that will facilitate the use of spreadsheets. Don't forget to come and visit the Tax Faculty team on ICAEW's stand. Off-payroll working in the private sector (IR35) consultation published The long awaited consultation document looking at off-payroll working in the private sector was published on Friday 18 May Following the roll-out of the off-payroll rules in the public sector, which since April 2017 has placed responsibility for determining whether the contract relationship is more akin to employment or selfemployment, on the end client, the government is now turning its attention to the private sector. The consultation, announced at Autumn Budget 2017, sets out three possible options to deal with noncompliance in the private sector which is forecast to cost 1.2bn by 2022/23: Extending the public sector reform to the private sector: the consultation document states that this is the government's lead option to tackle the private sector although it does acknowledge a number of teething problems which would need to be addressed. For example, it has been widely reported that some public sector bodies have been making blanket decisions about the employment status of groups of individuals rather than looking at the facts of each individual case. We are also aware that the Check Employment Status Tool (CEST) fails to take into account mutuality of obligation which is essential to any engagement in the private sector. Securing the supply chain: this would require the end client to undertake a number of due diligence checks to ensure the business with which they engage is complying with various employment and tax laws. Our initial reaction is this would place a significant administrative burden on the engager. Checks suggested by the consultation are: making sure the labour supply chain is commercially sustainable so it can meet statutory tax obligations and make a profit; checking the history of the labour supply business - if a previous business failed because it did not pay its tax debts, what has changed to stop this happening again? adding a clause in the contract requiring labour suppliers to show evidence of the PAYE returns filed and payments they have made to HMRC; adding a clause in the contract requiring pre-authorisation of further subcontracting; adding a clause in the contract preventing the use of offshore intermediaries; where workers supplied by agencies are being treated as self-employed, deciding if the agency rules apply; ensuring the agency has complied with employment intermediary reporting requirements and has evidence of submitted reports to HMRC where they do not operate PAYE (this includes where they use an umbrella company). 3

4 Additional record keeping: under this option the end client would need to retain certain records and information about the business such as shift rotas and contracts, with a view to expediating the compliance process should HMRC open an enquiry. How to respond Please send any comments directly to sarah.ghaffari@icaew.com. In particular we would be keen to hear of any difficulties you or your clients have had in applying the new off-payroll rules in the public sector. You can also respond directly to the consultation by ing offpayrollworking.intheprivatesectorconsultation@hmrc.gsi.gov.uk by 10 August New ICAEW IR35 hub The Tax Faculty has recently launched a new hub on our website, which brings together practical guidance and commentary related to IR35 and the taxation of intermediaries in the UK business tax regime. Find it via the shortform Research report on off-payroll working in the public sector HMRC commissioned independent research to gather evidence on the experiences of public sector bodies in implementing the new rules for off-payroll working in the public sector. The results were published on 18 May, alongside a new consultation on off-payrolling rules for the private sector consultation covered in a separate news item. The research results are published in HMRC Research Report 487: Off-payroll Reform in the Public Sector. The research, undertaken by IFF Research and Frontier Economics, looked at the public administration and defence, education, and health and social work sectors, and considered implications for employment, costs incurred and process changes required. It consisted of a quantitative survey of 117 central bodies (covering 4,095 sites) and 100 individual sites in the public sector, all of which had recent engagement with off-payroll contractors, and qualitative follow-up interviews with 30 respondents whose responses indicated they had been affected by the reforms. Survey fieldwork took place between August and October Given that the off-payroll working reforms only came into effect in April 2017, the findings are focused on the bedding-in period immediately after the reform came into effect, and so reflect public bodies very early experiences. The key findings are summarised below: Workforce structures Survey results suggest that, so far, the reforms have had minimal impact on how public bodies recruit, with in-year changes primarily attributed to wider factors, such as natural fluctuations in the workforce and long-term financial and headcount constraints. One possible outcome of the reform could have been a fall in the number of off-payroll contractors engaged by public bodies and an increase in their employee headcount. However, whilst numbers of off-payroll workers declined, so did paid employee numbers. Filling vacancies The research looked at how the reforms affected public bodies ability to fill vacancies, given that some off-payroll contractors may be unwilling to work inside the off-payroll working rules if they perceive it to impact their take home pay. The majority of public bodies reported that their ability to fill contractor vacancies had not changed since April 2017, but a significant minority reported that it had been more difficult to fill contractor vacancies. Some felt that there were fewer suitable contractors available in the marketplace this seemed more pronounced among roles where there had been preexisting challenges with recruitment, for example, doctors and social workers. 4

5 Use of off-payroll contractors The most commonly mentioned roles that central bodies filled were in education, administration and medical roles. For sites, the most common roles were in education, facilities management, and information technology. Contractor rates The majority of public bodies reported that the reforms had no effect on the gross hourly rates paid to off-payroll contractors. A minority reported that the reforms had led to them increasing the gross hourly rates paid to off-payroll contractors to cover reductions in take-home pay after contractors were assessed to be within the off-payroll working rules; typically this was for roles where skills were in shorter supply (e.g. doctors and nurses). Complying with the reforms Just over half of bodies found the off-payroll working reforms easy to comply with; this was largely because they had suitable systems in place and because of the availability of HMRC s online assessment tool (Check Employment Status for Tax Service, also known as CEST), which enabled them to make quick and easy assessments. Conversely, just under half of the bodies found complying difficult, and most commonly attributed this to difficulties in using HMRC s online assessment tool CEST. Qualitative evidence suggested CEST s functionality had improved since being introduced and it was now fit for purpose. Some bodies also reported that they initially struggled with implementation owing to needing to understand the legislation in a relatively constrained time period and there was a perception that the guidance had repeatedly changed which made this task more difficult. Assessments The majority of public bodies conducted case by case assessments on contracts. Some public bodies that had high volumes of contractors working in the same role and under the same terms and conditions applied the same assessment result to all off-payroll contractors working under those same conditions; this approach is considered by HMRC to be compliant. Sources of advice and guidance The vast majority of respondents had used CEST since the reforms came into effect; it was the most commonly used source of information, advice or guidance among public bodies. Whilst some public bodies reported qualitatively that late availability of CEST was problematic at the time and initially encountered issues with inconclusive assessments and inconsistent outcomes, most agreed that it was now ensuring employment status decisions were more straightforward. Disputes A substantial minority of bodies reported having disputes with contractors or agencies; these were mainly where contractors were assessed to fall within the off-payroll working rules. Staff workloads Six in ten bodies reported that staff had spent more time on the administration of off-payroll contractors since the reforms; time was needed to understand the reforms, disseminate information to staff and implement systems to manage the changes. Conducting assessments required time and resource in the lead up to the reform, although this reduced once the initial block of assessments had been conducted. Set up costs and administrative costs On average, central bodies spent 7,550 setting up the systems and processes required to implement the reforms. Sites spent an average of 3,250. Around half of bodies experienced either no change or a decrease in relation to the ongoing administration costs of off-payroll contractors between Q4 2016/17 and Q1 2017/18 while around four in ten bodies reported an increase. In qualitative interviews, some public bodies said that they expected the administrative costs associated with the reforms to off-payroll working to decrease over time, having incurred costs in assessing existing offpayroll contractors and dealing with disputes. 5

6 State Aid re-approval granted for EMI share schemes In April, we received worrying news and published our news item Warning: grant of EMI share options after 6 April 2018 may not be eligible for tax relief. It appeared that state aid approval for the relief was about to time expire and the UK was waiting to hear back from the European Commission. In a press release published today, the European Commission has confirmed its approval for state aid to continue for the UK s Enterprise Management Initiative (EMI) scheme. The scheme reduces tax on employee share options for small and medium sized enterprises (SMEs). The Commission initially authorised the scheme in 2009, and in March 2018, the UK authorities notified their plans to prolong the scheme to the Commission. In granting state aid approval, the Commission's assessment states: The prolongation of the measure is necessary to help UK SMEs attract and retain talented and skilled personnel. It also found that the measure contains a number of safeguards, such as a cap on the value of the share options that can be subject to the tax advantage both at the employee and employer level, ensuring that potential distortions to competition are limited. On this basis, the Commission concluded that the measure is in line with EU State aid rules. Without prejudice to any provisions of the Withdrawal Agreement, which is under negotiation, this Commission decision only applies until the UK ceases to be a member state. 2017/18 exclusions from self assessment online filing As it does each year, HMRC has published a list of exclusions from online filing for 2017/18. Many, but not all, of the exclusions that applied for 2016/17 have been removed. Disappointingly, it has been necessary for HMRC to add 12 new exclusions (numbers 79 to 90). HMRC advises that paper returns be filed in the cases on this list and it will intervene manually to ensure that the calculation is correct. It is advisable to include a note referring to the relevant exclusion in the white space on the return. Where a self assessment return cannot be filed online for one of the reasons listed, provided that a paper return is delivered on or before 31 January following the end of the tax year to which the return relates, HMRC will accept that the taxpayer had a reasonable excuse for failing to file a paper return by the normal 31 October deadline. A reasonable excuse claim should accompany the paper return. 2016/17 was unusual in that HMRC changed the self assessment software mid-year. There is no suggestion that they will do so this year and therefore no reason to hold off from filing 2017/18 returns. Company cars advisory fuel rates from 1 June 2018 HMRC has published the advisory fuel rates that apply from 1 June These are the rates employers can use to reimburse employees who pay to put petrol in their company cars when using them for business. Some of the rates for LPG and diesel cars have gone up slightly. 6

7 Engine size Petrol Amount per mile LPG Amount per mile 1400cc or less 11p 7p 1401cc to 2000cc 14p 9p Over 2000cc 22p 14p Engine size 1600cc or less 1601cc to 2000cc Over 2000cc Diesel Amount per mile 10p 11p 13p Hybrid cars are treated as either petrol or diesel cars for this purpose. Advisory fuel rates are intended to reflect actual average fuel costs and are updated quarterly. They can be used by employers who: reimburse employees for business travel in their company cars, or require employees to repay the cost of fuel used for private travel. Using the rates means there is no charge to either income tax or NIC on the amounts paid to employees. The new rates apply to all journeys undertaken on or after 1 September 2017 until further notice. For one month from the date of change, employers may use either the previous or the current rates. Previous rates can be found at Advisory Fuel Rates from 1 September 2013 to 31 May 2018 Tax refunds on pension fund receipts There has been a small update by HMRC to the suite of forms required to reclaim tax overpaid on pension funds accessed flexibly or on death benefits. The change is simply to change the reference from universal credit to carer's allowance. The forms required for the tax reclaim can be filled in online or printed and then completed and posted. The forms are: Claim a tax refund if you've stopped work and flexibly accessed your pension P50Z Claim an Income Tax refund on a flexibly accessed pension death benefit payment P55DB Claim back a flexibly accessed pension overpayment P55 Claim an Income Tax refund on a flexibly accessed pension death benefit payment P55DB The income tax overpayments arise because the pension scheme has to operate PAYE on the pension distribution which will result in insufficient allowance and the use of higher and potentially additional tax rates. These forms are not for non UK residents who should use Non-residents - relief under double taxation agreements HS304 or they may need to complete a self assessment to obtain the tax refund. It is likely that HMRC will require a certificate of tax residence in the country where the individual lives. 7

8 Review of the corporate intangible fixed assets regime ICAEW submitted ICAEW Rep 53/18 Review of the Corporate Intangible Fixed Assets Regime on 11 May 2018 in response to the consultation launched by HM Treasury and HMRC on 19 February The Executive Summary in the ICAEW response is reproduced below: Intellectual property/intangible assets are driving the growth of individual countries and of the global economy. A recent report from the World Intellectual Property Organisation, a specialised agency of the UN, states that Intellectual Property and other intangibles add twice as much value to products as tangible capital. This is a topic that is incredibly important to the potential success of the UK economy and it is going to be equally important to ensure that the tax regime successfully matches the need to incentivise successful UK activity in this vital area while at the same time ensuring that any new regime is proportionate and cost effective. The current intangible fixed assets regime (IFA) was introduced in 2002 and has been amended on a couple of occasions since then, mainly to deal with perceived avoidance and to ensure fairness, but it has not been subject to any detailed review or amendment. The new, 2002, regime did not apply to intangible assets in existence as at 1 April 2002 which remained in the old capital gains tax regime. This has created, in effect, two parallel tax regimes for intangible assets: those existing pre April 2002 and those intangible assets brought into existence after that or intangible assets which have been transferred between third parties after 1 April In the latter case the acquiring party is treated as acquiring an intangible asset to be treated under the new regime. A further difference between the two parallel regimes was created in 2011 in respect of the degrouping charges which applies to both regimes but after 2011 any de-grouping charge applicable to pre April 2002 intangible assets would now, post 2011, be incorporated into the gain or loss on the share disposal. This means that if such a share gain is exempt because the substantial shareholding exemption applies then the de-grouping charge is also exempt from any charge to tax. A further change to the IFA regime is explained in chapter 3 of the consultation document under which there is a restriction to the tax relief for a number of elements of business goodwill so that there is no relief under the tax regime until purchased goodwill is actually disposed of. The financial reporting system does not recognise the value of internally generated intangible fixed assets unless they are sold to a third party, in which case the cost is recognised by that third party. Any overview of the contribution that the tax system can make to enhancing the impact intangible fixed assets can have on the UK economy needs to consider what, if anything, could ensure that the tax system makes an appropriate contribution to the influence of intangible fixed assets. Double taxation relief for non UK residents with UK income Updated guidance has been published Digest of Double Taxation Treaties for persons who are not tax resident in the UK but who have UK income. This guidance sets out the position under all the UK double tax agreements and how much tax is withheld at source from dividends, interest and royalties. The guidance does not explain the conditions for relief. The particular double taxation treaty will provide that more detailed information. 8

9 United Nations Tax Committee Ian Young attends May meeting in New York Ian Young, technical manager at ICAEW Tax Faculty with responsibility for international matters, attended the 16 th meeting of the UN Committee of Experts in International Collaboration on Tax Matters (Tax Committee). This meets for four days twice a year, in May in New York and in October in Geneva. The latest meeting took place from 14 to 17 May and the next, Geneva, meeting will be from 9 to 12 October Ian made a presentation on Tax Charters with a colleague from the International Chamber of Commerce. On the final day the UN Tax Committee launched its new Handbook on Extractive Industries Taxation. The Handbook highlights some of the issues developing countries should bear in mind when negotiating new contracts for the exploration and exploitation of natural and mineral resources within their territories. The Handbook was the work of a sub-committee of the UN Tax Committee and Chris Sanger, EY and Chair of the Tax Faculty Tax Policy and Reputation Committee, was a member of the sub-committee. The UN Tax Committee also launched a new, 2017, version of its Model Double Taxation Convention between Developed and Developing Countries. The introduction notes that: The United Nations Model Convention generally favours retention of greater so called source country taxing rights under a tax treaty the taxation rights of the host country of investment as compared to those of the residence country of the investor. This has long been regarded as an issue of special significance to developing countries, although it is a position that some developed countries also seek in their bilateral treaties. One of the most significant changes, and a difference with the OECD equivalent Model Tax Convention, is the introduction of Article 12A which allows source countries to tax fees for technical services carried out in their (source) country. 9

10 ICAEW Tax Faculty Chartered Accountants Hall T +44 (0) Moorgate Place E taxfac@icaew.com London EC2R 6EA icaew.com/taxfac Copyright ICAEW 2018 All rights reserved. If you want to reproduce or redistribute any of the material in this publication, you should first get ICAEW s permission in writing. ICAEW will not be liable for any reliance you place on the information in this material. You should seek independent advice. Laws and regulations referred to in this publication are stated as at the date of publication. Every effort has been made to make sure the information it contains is accurate at the time of creation. ICAEW cannot guarantee the completeness or accuracy of the information in this publication and shall not be responsible for errors or inaccuracies. Under no circumstances shall ICAEW be liable for any reliance by you on any information in this publication. About ICAEW ICAEW connects over 149,000 chartered accountants worldwide, providing this community of professionals with the power to build and sustain strong economies. Training, developing and supporting accountants throughout their career, we ensure that they have the expertise and values to meet the needs of tomorrow s businesses. Our profession is right at the heart of the decisions that will define the future, and we contribute by sharing our knowledge, insight and capabilities with others. That way, we can be sure that we are building robust, accountable and fair economies across the globe. ICAEW is a member of Chartered Accountants Worldwide (CAW), which brings together 11 chartered accountancy bodies, representing more than 1.6 million members and students globally. About the Tax Faculty Internationally recognised as a source of expertise, the Tax Faculty is a leading authority on taxation. It is responsible for making submissions to tax authorities on behalf of ICAEW and does this with support from more than 130 volunteers, many of whom are wellknown names in the tax world. 10