Tax First Keeping you up-to-date with tax Issue No. 61 September 2011

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1 Tax First Keeping you up-to-date with tax Issue No. 61

2 Tax First Welcome to the September issue of Tax First With the holidays now over and autumn upon us, the wheels of the tax industry begin to turn once again. With this in mind, our International Corporate Tax Association (ICTA) events programme begins again in earnest. This time around we ll be looking at topics as diverse as the Patent Box, corporate tax reform and the influence of the European Union on multinationals. You can register for any of the events on our website here. In this year s Budget, the Government announced plans to legislate against avoidance schemes that exploit the provisions of double taxation agreements (DTAs). In our banking and capital markets section we highlight HM Revenue & Customs (HMRC s) recent draft legislation, which will stop individuals, companies and other persons benefiting from the provisions of a DTA where the claim is part of an arrangement to reduce a liability to UK tax. In other news, we also look at French and German plans to revive the idea of a financial transaction tax in the light of the current European debt crisis. Auto-enrolment for pensions schemes will become compulsory on dates starting from October 2012, a move which may have a significant financial impact for your business, particularly if it currently runs a pension scheme and possibly even more so if your business doesn t currently run a pension scheme at all. In our people section we run you through the main aims of auto-enrolment and also focus on our own interactive tool aimed at helping you understand the full impact on your organisation. Following the First-Tier Tribunal s decision in the Reed Employment case, there s been much debate around the correct VAT liability of the introduction of temporary workers by recruitment agencies. In our indirect tax section we ask whether there s an opportunity for retrospective VAT recoveries following the decision. You can see more in our webinar, which can be viewed here. With best wishes. David Prosser Tax Partner M T W T F S S Click here to see details of calendar events PwC 2

3 Banking and capital markets HMRC publishes draft antiavoidance legislation aimed at treaty shopping In Budget 2011, the Government announced its plans to legislate in Finance Bill 2012 against avoidance schemes that exploit the provisions of double taxation agreements (DTAs). Capital loss and interest disallowed on Ramsay and para 13 grounds At the First-Tier Tribunal, the taxpayer won on the most aggressive arguments broadly that the transactions should not be ignored for tax purposes as self-cancelling but lost on two important points, so that it obtained none of the tax benefits the planning tried to create. HMRC has now published draft legislation to stop individuals, companies and other persons benefiting from the provisions of a DTA where the claim is part of an arrangement where the main purpose is to reduce a liability to UK tax. The draft includes measures dealing with tax avoidance by UK residents and by non-uk residents. The effect of both measures is that, where certain conditions are met, a provision of a DTA won t limit the right of the UK to tax income or gains. HMRC invites comments on the draft legislation by 22. A final version will be published in the autumn. You can read further detail on the draft legislation here. The taxpayer group in the Explainaway case had entered into a series of transactions, based on largely matching derivative contracts, to create a net allowable loss to offset a large gain on the third-party sale of a subsidiary. The loss on the sale of a special purpose vehicle (SPV), caused by a large loss on one of the derivatives, was held not to be allowable on the basis of CIR v Ramsay. And the interest on a loan used to capitalise the SPVs was held to be disallowable because of the unallowable purpose rule in para 13 Sch 9 Finance Act 1996 the first time this rule has had to be considered in litigation. Europe-wide financial transactions tax Franco-German proposal faces difficulties Under pressure to restore confidence in the Eurozone, the leaders of France and Germany have outlined plans for further economic integration but have shied away from financial measures seen by markets as necessary to stem the Euro debt crisis. In particular, President Nicolas Sarkozy and Chancellor Angela Merkel pledged to revive the idea of a financial transaction tax (FTT) a proposal that has been regularly mentioned in Brussels in recent months. Indeed, the European Commission s proposals for a new multi-annual financial framework (MFF) for future Budgets for , presented to the European Parliament on Wednesday 29 June 2011, included the introduction of such a tax. But the idea of an FTT has failed to get much traction among the member states. You can read more detail on the original proposals here. If you d like to know more on any of these topics, you can Justin Woodhouse or call him on PwC 3

4 People Getting ready for pensions auto-enrolment The auto-enrolment requirements that come into force in October 2012 bring with them a number of issues that you need to be aware of, particularly if you re an employer running an existing pension scheme. Complying with these requirements isn t a simple process. You ll need to address a raft of wide-ranging issues before the legislation comes into effect, so starting your preparations early will pay dividends in the long term. What impact might auto-enrolment have? Employers will need to provide certain minimum pension arrangements for their UK workers under auto-enrolment. This may include making adjustments to existing pension scheme provisions. Currently, for example, many employees don t take up the pension benefits that are available to them. Although eligible for pension benefits, employees fail to make an application to their employer s scheme. The auto-enrolment proposals aim to overcome this. Employees will be enrolled into their employer s pension scheme automatically, without the employee having to actively put in a request to join the scheme. If you re an employer, this could mean a large shift in the numbers joining your associated pension scheme and a significant jump in the employer contributions you d be required to pay. When do I need to implement the changes? The Pensions Regulator has published a Staging Date Timeline. The staging dates depend on the number of people in your PAYE scheme on 1 April To allow some flexibility, the Pensions Regulator will allow you to bring the staging date forward. Some points to consider: Do you want to start auto-enrolement on one date for the entire group, i.e. by bringing the start date forward? Are your systems and implementation processes likely to be ready in time? Have you thought about a cost-modelling exercise to work out the most effective implementation? PwC and PwC Legal LLP can carry out a detailed analysis to determine the most practical and efficient start date. Act now: failure to comply can lead to imprisonment for up to two years or a fine. Our modelling tool: helping you see the impact of auto-enrolment Understanding the true financial costs of auto-enrolment to your pension scheme can help you deal more effectively with the proposals. Our interactive auto-enrolment modelling tool allows you to model a wide range of possible scheme design options in a live environment, helping you to put together an appropriate plan to help your employees save for their retirement. The modelling tool helps you to: budget for the costs of auto-enrolment reduce costs by designing your pensions scheme effectively explore the value in offering tailored benefits to different groups of employees have a better understanding of what your pensions scheme will provide members identify a range of saving opportunities, and help your employees understand what their retirement savings will be. If you d like to find out more about autoenrolment, you can contact Peter Woods on PwC 4

5 Indirect tax HMRC publishes views on VAT and salary sacrifice HM Revenue & Customs (HMRC) has published its views on the UK implications of the European Court of Justice s decision in the AstraZeneca UK Ltd (C-40/09) case. HMRC s update in Revenue & Customs Brief 28/11 confirmed that salary sacrificed would be treated as consideration for VAT from 1 January Where the benefit is liable to VAT, input VAT would be recoverable under normal rules but output tax will be due on the amount of salary sacrificed. According to the brief, if the benefit is of higher value than the salary sacrificed, the higher amount will be subject to VAT. There are no direct tax consequences of the AstraZeneca decision and HMRC won t amend its employment tax guidance Each salary sacrifice arrangement is different and it shouldn t be assumed that VAT will simply lead to a 20% increase in the cost of a salary sacrifice arrangement or make it uneconomic. Schemes can be altered to preserve the benefits as much as possible and can still be an attractive offering for employers and employees alike. If you d like to discuss the brief with us or the effect it may have on your organisation, please speak to Mike Bailey on VAT and temporary workers Decision in the Reed Employment case The First-Tier Tribunal has given its decision in the Reed Employment case. This decision has generated debate about the correct VAT liability of the introduction of temporary workers by recruitment agencies, and whether an opportunity exists for retrospective VAT recoveries. If you re considering how this decision will affect your business, then our webinar can help you get to grips with the possible challenges. You can click here to see the webinar. In this webinar, we discuss the implications of the decision. We put the Tribunal decision into context, look at what was decided and consider how recruiters and users of temporary workers can work together to ensure that the correct amount of VAT is being accounted for. We also look at the practical steps that will be necessary to achieve this. You can read further detail on the case in our recent bulletin here. If you d like to find out more about the Reed Employment decision you can contact Stephen Morse on , or Catherine Mattingley on An opportunity to influence VAT exemption A consultation document by HMRC seeks the views of UK organisations on the introduction of VAT exemption for shared costs. It also addresses cross-border issues, compliance and process matters, and the possible impact of the exemption. Cost-sharing exemption would bring the UK into line with European Union law and this consultation document provides an opportunity to influence the exemption. HMRC has invited responses to the consultation document by 30. If you d like to discuss the consultation document with us or the effect it may have on your organisation, please contact David Phelps on PwC 5

6 Tax events Making sense of tax Our flagship tax event programme for September to December is out now Tax legislation is constantly evolving, so keeping yourself up-to-date with the most important changes can be difficult. If you re a tax professional in a UK or international company, our International Corporate Tax Association (ICTA) events programme will keep you up-to-date with all the current tax and legislative updates you need to be aware of. The programme is hosted by Justin O Hagan, Tax Partner, and run by specialists in our Tax practice, who ll give you our insight into the latest developments and changes. In our next programme we ll be highlighting the importance of the corporate tax (CT) reform process, proposals which continue to dominate the financial landscape. We ll also have sessions on the Patent Box and the research and development (R&D) tax credit and another that will look at the potential impact of CT reform for businesses in the financial services sector. By the time of our December session, we should have draft controlled foreign companies (CFC) legislation. We ll be bringing you our insight on the draft proposals as well as looking at the relevance of transfer pricing to the new CFC rules. There s a lot more to the tax agenda than just CT reform, though. We have sessions on changes to the taxation of leasing and we ll be examining the challenges the permanent establishment doctrine poses to financial services businesses. In our first seminar on 29 September, we ll consider the impact of the European Union on domestic tax law and the extent to which changes to European tax regimes are driven by the decisions made by the European Court of Justice. If you d like to register for the ICTA events you can visit our website here and complete the online registration form. 29 September ICTA event, The influence of the European Union on multinationals Sofitel St James, London 05 October ICTA event, After corporate tax reform: structuring for financial services PwC More London 21 October ICTA event, Patent box and changes to R&D incentives benefits to your business Sofitel St James, London PwC 6

7 Calendar September 1 New advisory fuel rates for company cars take effect 15 People event, Reward in the postdisguised remuneration world, The Landmark Hotel, London 16 Working with tax agents (dishonest conduct) 21 Gifts of pre-eminent objects and works of art to the nation 21, 22 Annual Tax Technical Conference 22 Controlled foreign companies (CFCs) Double taxation agreements and anti-avoidance October 1 New agency workers regulations come into effect New Flexible Apportionment Arrangement for groups to restructure without triggering required cash injection to their pension schemes 5 ICTA event, After corporate tax reform: structuring for financial services, PwC More London, London 6 New late filing penalties for construction industry scheme come into effect 29 ICTA event, The influence of the European Union for multinationals, Sofitel, St James, London 30 Relief for income tax losses Taxation of unauthorised unit trusts Introduction of VAT exemption for shared costs Definition of production for research and development deadline for comments on draft guidance Foreign branch exemption deadline for comments on draft guidance 11 Pensions auto-enrolment 21 ICTA event, Patent Box and changes to R&D incentives benefits to your business, Sofitel, St James, London 31 Using digital by default for HMRC s main direct business taxes The next step for VAT online If you d like to register for the ICTA events, you can click here. PwC firms provide industry-focused assurance, tax and advisory services to enhance value for their clients. More than 161,000 people in 154 countries in firms across the PwC network share their thinking, experience and solutions to develop fresh perspectives and practical advice. See for more information. 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 PricewaterhouseCoopers LLP (a limited liability partnership in the United Kingdom), which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. Design & Media The Studio (09/11) PwC 7