20 March 2017 Finance Bill 2017 Finance Bill 2017 Bill, consultations and guidance published on 20 March 2017 Finance Bill 2017, published as Finance (No.2) Bill 2016-17, could be considered to be the end of a cycle of the Government s plans for the UK tax system. The new rules governing corporate interest relief, the use of corporation tax losses and the reform of the substantial shareholding exemption complete a large part of the Business Tax Roadmap launched in 2016. The changes to the taxation of non-uk domiciled individuals substantially amend the non-dom regime, while the impact of the new Optional Remuneration Arrangement rules may be felt by all those employers offering flexible benefit schemes. Although these rules in particular are just around the corner, coming into force at the beginning of April 2017, they have been subject to ongoing changes over many months. A key action for taxpayers will be to consider the updated version of these rules to understand how the rules will apply in their own circumstances. Given the Bill is unlikely to receive Royal Assent before July 2017, there is still scope for changes to be made in Committee and Report stages (and even, before that, as we expect a further announcement on the non-dom rules in the next few days). However, as the rules will effectively be in force in a matter of weeks, taxpayers will need to work from this version of the Bill. In particular, taxpayers may need to consider the impact on any quarterly instalment payments they are due to make (and the possible associated interest cost), as well as how they will account for any changes at any reporting dates before the Bill is substantively enacted. We have highlighted some of the key areas in Finance Bill 2017, showing where further information or new provisions are contained in the version of the Bill published on 20 March 2017. We also look at the response documents and new consultations published alongside the Bill.
Business Tax Corporate interest deductions, updated version 26 January 2017, Budget updates 8 March 2017 Summary From 1 April 2017, the new rules in clause 31/schedule 10 will restrict each group s net corporation tax deductions for interest and other financial payments to 30% of earnings before interest, tax, depreciation and amortisation (EBITDA) that is taxable in the UK, subject to a modified debt cap based upon the worldwide group s net interest expense. An optional group ratio rule, based on the net-interest to EBITDA ratio for the worldwide group, may permit a greater amount to be deducted in some cases, again subject to a modified debt cap. All groups will be able to deduct up to 2mn of net interest expense per annum under the regime. The existing worldwide debt cap rules will be replaced by these rules. Changes in the Finance Bill The Bill includes the measures announced in the Budget to: Correct the rules which would have prevented groups, in particular domestic groups, from being able to fully carry forward disallowed interest for use in a future period due to the interaction of the modified debt cap and carry forward rules. However, the rules released do not fully address the issue of volatile earnings. In particular, where a group makes profits followed by a loss in a later year, it might have greater interest restrictions than if its profits had accrued evenly over the years or made a loss initially followed by profits in later years. This demonstrates that the complexity of the rules can lead to unexpected results and there is therefore a need to carefully consider the application of the rules to the specific facts Narrow the circumstances where third party debt can be deemed to be related party debt for the purposes of the group ratio rule by virtue of guarantees Amend the public benefit infrastructure exemption to allow this to be easier to apply in practice, including removing the need to compare the level of debt of qualifying group companies with non-qualifying group companies, allowing groups to elect to assess the qualifying criteria of several companies taken together, as well as clarifying the interactions with joint ventures, partnerships and transparent entities. Transitional rules will also apply in the first year to allow businesses time to restructure to qualify for the exemption, if necessary Include all debits and credits arising directly from dealing in financial instruments as part of a trade carried on by a banking company in the definition of tax-interest Provide that, where an insurer elects to use an amortised cost basis of calculation for the purposes of the rules, simplifying modifications will apply and enabling regulations will allow changes to be made to definitions. The language is not fully aligned with the underlying accounting and it may be that further changes, whether in primary or secondary legislation, will be needed. In addition, the Bill also includes changes to the January 2017 text to make amendments to the way the rules work, notably: Excluding gains and losses on derivatives hedging non-debt items from the definition of tax interest Including regulatory capital and other amounts recognised in equity or shareholders funds in the definition of adjusted net group-interest. Regulatory capital is also explicitly not treated as a results-dependent security or an equity note when considering adjustments to arrive at the group ratio percentage. Regulatory capital should therefore not reduce the group ratio unless held by a related party Allowing the nomination of a reporting company, that will be responsible for filing the interest restriction returns on behalf of the group, to continue to have effect for each period until revoked, rather than needing the nomination to be remade each period Extending the time in which an abbreviated interest restriction return can be replaced with a full return. Where an abbreviated return is filed, it is not possible to carry forward surplus interest allowance, which is only possible with a full interest restriction return. Previously it was only possible to submit a revised return up to three years after a period, which might have resulted in some of the capacity for the previous five years being unavailable The rules provide for alternative calculations to be used to arrive at the group EBITDA. Under the previous draft, a single election covered Finance Bill 2017 2
these such that it was necessary to adopt all or none of the alternative calculations. Whilst the rules do now separate out the alternative chargeable gains calculation, a single election still covers the remaining alternative calculations (in respect of capitalised interest, pension contributions, employee share acquisitions and changes in accounting policy). Groups will therefore still need to carefully assess the implications before making such an election. Corporation tax losses, updated version 26 January 2017, Budget updates 8 March 2017 Summary The rules in clauses 29 and 30, together with schedule 9, broadly restrict the offset of brought forward losses to 50% of profits arising on or after 1 April 2017, and enable carried forward losses incurred on or after 1 April 2017 to be offset against profits of any description (or group relieved). Changes in the Finance Bill The Bill includes a number of changes to bring in provisions for oil and gas companies and oil contractors, as promised in the Budget, together with changes relevant to insurance companies and numerous consequential amendments (including extending the provisions to cover losses being offset against profits taxable at the Northern Ireland rate). There were, however, very few amendments to the draft legislation published in January, though one noteworthy change relates to the change of company ownership rules. The draft legislation published in January had proposed extending the time period over which a major change in the nature or conduct of a trade can be considered, from three to five years from the ownership change. It also proposed a similar time period in new change of ownership rules dealing with post April 2017 trading losses. The Bill has amended both of these slightly so that, while consideration needs to be given to a 5 year period, this cannot start any further back than 3 years prior to the ownership change. Whilst this is a welcome change it is disappointing that the provisions continue to provide for such a long period, which will adversely impact many commercially driven company sales. A change we were hoping to see that does not appear in the Bill was an extension to the provisions that allow trade losses to transfer with an intragroup trade sale to include post April 2017 trade losses. There continues to be extensive engagement with HM Treasury and HMRC on the potentially significant impact of the loss reform proposals on the Solvency Capital Requirement (SCR) calculation for insurers, though there were no new announcements in this regard. In the most extreme case, the loss restriction could eliminate 50% of the loss absorbing capacity of deferred taxes previously anticipated. Substantial Shareholding Exemption Summary In order to improve the attractiveness of the UK as a holding company location, certain aspects of the SSE are being reformed with effect for disposals on or after 1 April 2017. These include the following: The removal of the investing company/group trading requirement The removal of the post-disposal investee company trading requirement for most unconnected party disposals A relaxation in the substantial shareholding holding period requirement from 12 months within the previous 2 years to 12 months within the previous 6 years, to allow greater time for fragmented disposals The introduction of a new full or partial exemption for investing companies directly or indirectly owned by Qualifying Institutional Investors (QIIs). This exemption does not include the investee company trading requirement and allows the substantial shareholding requirement to be satisfied if the cost of the investment is at least 20mn even if that is less than 10% of the ordinary shares in the investee company Changes in the Finance Bill Clauses 39 and 40 contain a number of changes, including: In relation to acquisitions from group companies, the substantial shareholding holding period can be deemed to be extended by the holding period of previous owners, regardless of their residence. This removes a Finance Bill 2017 3
disincentive to non-uk groups setting up a UK holding platform in that they might otherwise have had to wait 12 months before they made a disposal. Listed companies now no longer prevent the QII exemption from applying if they are either QIIs in their own right or Real Estate Investment Trusts (REITs) that have an institutional investor as a participator or are controlled by the Crown. The legislation has made clear that partners in a partnership are treated as owning a proportion of the share capital of a company owned by a partnership when establishing whether an investing company is owned by QIIs. The draft legislation provided for a 50mn alternative substantial shareholding threshold for the QII exemption. This has now been reduced to 20mn. Whilst the consultation document highlighted issues arising with partnerships, the Government has chosen not to clarify the impact of partnerships except in relation to the QII exemption. The introduction of the QII exemption itself is welcome but it is disappointing that, despite representations, there has been no change to the 80% ownership threshold that confers full exemption for disposals under the QII exemption, as this may adversely impact mixed funds. Anti-hybrid rules Previous announcements: Technical note 5 December 2016 Summary: The UK s new anti-hybrid rules were introduced in Finance Bill 2016 and came into force on 1 January 2017 to broadly counteract tax advantages arising from the involvement of hybrid entities or instruments or where there is a company with a permanent establishment which generates a similar advantage. Changes in the Finance Bill Following discussions with stakeholders, two measures were announced at Autumn Statement 2016 and these have now been included in the Bill as clause 35 with retroactive effect from 1 January 2017: Removal of the requirement to make a formal claim to extend the time period during which temporary mismatches relating to hybrid financial instruments or hybrid transfers can be ignored. This is intended to reduce the compliance burden for groups, as it is envisaged that a large volume of financial instruments will fall within the scope of the hybrid mismatch rules. The requirement to make a formal claim for other scenarios falling within the scope of the rules will remain. Preventing a deduction for amortisation from being within the scope of the rules for the purposes of the provisions counteracting deductions without inclusion of the relevant income. However, amortisation will remain a relevant deduction when considering the counteractions relating to double deductions for the same expense. Patent Box cost-sharing Previous announcements: Technical note 5 December 2016 Summary Amendments to the patent box regime were introduced in Finance Act 2016 to reflect the OECD s modified nexus recommendations and these took effect (subject to transitional provisions) on 1 July 2016. Rules have now been developed to deal with cost-sharing arrangements (CSAs) with effect for accounting periods beginning on or after 1 April 2017. Changes in the Finance Bill The rules in clause 34 use the existing definition of a cost-sharing arrangement for patent box purposes and are intended to ensure that companies undertaking R&D under CSAs are neither advantaged nor disadvantaged under the modified nexus rules. The rules deal with buy-in payments and receipts when entering into a cost-share as well as balancing (true-up) payments made or received during the course of the cost-share. The rules also extend the grandfathering rules for existing IP, which allow companies to delay application of the modified nexus rules until 1 July 2021. Where a company already has grandfathered IP which it contributes into a CSA, that IP should not lose its grandfathered status as a result. Where a company enters into a CSA before 1 April 2017 in relation to another party s IP that would have been grandfathered under the normal grandfathering rules, that IP can also be grandfathered. Finance Bill 2017 4
Other changes included in Finance Bill 2017 Northern Ireland Corporation Tax (clause 36/schedule12) The definitions of Northern Ireland company and Northern Ireland firm have been expanded in the Northern Ireland corporation tax regime rules, currently due to be introduced with effect from 1 April 2018 with a tax rate of 12.5%. Changes include giving an option for an SME with a trading presence in Northern Ireland, but which is not a Northern Ireland employer in the period, to elect to be a Northern Ireland company (or a Northern Ireland firm in the case of a partnership).the election cannot be made if the SME is a disqualified close company in respect of the period. If the election is made the SME will then apply the Northern Ireland rate of corporation tax to its Northern Ireland trading profits. There is also an anti-abuse provision to ensure that the regime is used only where there is genuine economic activity in Northern Ireland. Museums and galleries relief (clause 32/schedule 11) The new tax relief will allow qualifying companies engaged in the production of exhibitions to claim an additional tax deduction based on qualifying expenditure, or, where that additional deduction results in a loss, to surrender those losses for a payable tax credit (up to a maximum credit). Where live performances are only incidental to the exhibition, an exhibition may still qualify for the relief on the production costs, however the live performance costs would not be eligible for the additional relief. The Government will review the relief in 2020 and set out plans beyond 2022. Treatment of grassroots sport (clause 33) The measure provides companies with a deduction for all contributions to grassroots sports through qualifying sport bodies and deductions of up to 2,500 in total annually for direct contributions to grassroots sports. Petroleum Revenue Tax (PRT) administrative savings (clause 63) The Bill removes the conditions for opting fields out of PRT so that opting out can be achieved by an election. Measures substantively unchanged from draft clauses Taxing profits from trading in and developing land in the UK (clause 53) The Finance Bill takes forward unchanged the proposal to tax all profits arising on or after 8 March 2017, regardless of the date the contract was entered into. Tax treatment of appropriations to trading stock (clause 38) The new rules mean that the market value election for appropriations of assets to trading stock may not be made where an allowable loss would arise. There are equivalent rules for assets which are now within the Annual Tax on Enveloped Dwellings (ATED), but the election (and therefore the restriction on when it can be made) is only applicable to the non-ated related loss. First-year allowances for electric charging points (clause 52) This allowance is already in effect and applies from 23 November 2016. Authorised Contractual Schemes (clauses 54-56) The new provisions relating to co-ownership authorised contractual schemes (CoACS) simplify the process for calculating any capital allowances which may be claimed by investors in CoACS, introduce new requirements for information which the operator of a CoACS must provide to investors and to HMRC and provide for new rules to clarify what is to be treated as an investor's income when a CoACS has invested in an offshore fund. Draft regulations containing the detailed requirements of the last two measures have also been published. Consultation and discussion documents New consultation on non-resident companies chargeable to income tax and non-resident capital gains tax (NRCGT) As announced at Autumn Statement 2016, this consultation explores the case for moving non-resident companies from the income tax regime to corporation tax regime. Responses are sought by 9 June 2017. The Government has now confirmed that the focus of the consultation concerns income arising from UK real estate. It does not propose bringing residual income arising from a trade carried on in the UK otherwise than through a permanent establishment within the corporation tax code, although this will be kept under review. There are no plans to alter the withholding regime or the rate of withholding tax, which the Government proposes remains at the higher income tax rate of 20%. This is on the basis that it considers that the UK s treaty network generally provides for an effective rate lower than the headline withholding rate. Finance Bill 2017 5
As expected, there is no mention of the gains of non-residents becoming subject to corporation tax, save for those already within the scope of NRCGT. Double Taxation Treaty Passport scheme In publishing the responses to the consultation of 26 May 2016, the Government has advised that: The scheme is to be made available to all UK borrowers that have an obligation to deduct withholding tax, including UK partnerships, individuals and charities. luding partnerships) can be lenders within the scheme where all of the constituent beneficial owners of the income are entitled to the same treaty benefits under the same treaty. Sovereign wealth funds and pension funds that are utilising withholding tax treaty rates will be admitted into the scheme as lenders. will be updated and published on 6 April 2017. New Oil and Gas proposals The Government has published a discussion paper entitled Tax issues for late-life oil and gas assets. The paper considers the tax issues associated with the transfer of such assets to new investors and whether any changes to the tax rules could better facilitate these transfers and support the Government s aim of Maximising Economic Recovery. Specifically the discussion paper considers three main areas: The possibility of introducing a transferable tax history whereby part of a company s corporate tax history could be transferred between buyer and seller The PRT issues arising where all or part of the decommissioning liability is retained by the seller, cognisant of the clarification that was issued in the HMRC Technical Note in Budget 2016 in relation to ring fence corporation tax The provision of greater certainty on the treatment of losses on a transfer of trade Responses are sought by 30 June 2017. The Government has also issued the terms of reference that will apply to the established panel of upstream oil and gas experts, created so as to enable a detailed debate on the issues identified. The findings of the expert panel meetings shall not be binding on the Government but any proposals from the panel will be considered alongside the other responses to the discussion paper. The Government will present its findings at the Autumn Budget 2017. New consultation on withholding tax exemption for debt traded on a multilateral trading facility UK businesses are required to withhold income tax on payments of annual interest but exemptions exist in a number of situations, notably the Quoted Eurobond Exemption (QEE). The Government proposes to introduce a further exemption for debt traded on Multilateral Trading Facilities (MTFs), in order to develop new wholesale MTFs to enhance the UK s reputation as a jurisdiction in which to issue and trade debt. The consultation document published on 20 March proposes extending the QEE to include debt traded on wholesale UK MTFs, with effect from April 2018. The proposal is intended to be revenue neutral as the Government expects the debt covered by this new exemption to have largely otherwise been introduced on foreign exchanges already benefitting from the QEE. However it will test this understanding as part of the consultation, on which comments are sought by 12 June 2017. Personal Tax Reform of domicile rules, updated version 26 January 2017 Summary: Significant changes to the taxation of non-uk domiciled individuals were announced in the Summer Budget 2015. Key changes, with effect from 6 April 2017, include the following: Non-UK domiciled individuals who have been resident in the UK for 15 out of the last 20 years and those born in the UK with a UK domicile of origin and resident in the UK will be deemed domiciled in the UK for all taxes. There will be special rules for foreign income and gains arising in offshore trusts established by non-uk domiciled individuals prior to becoming deemed domiciled in the UK. Individuals becoming deemed domiciled on 6 April 2017 will qualify for rebasing for capital gains tax in respect of assets held personally as at 5 April 2017. The assets must have been foreign assets in the period from 16 March Finance Bill 2017 6
2016 until disposal or from the date acquired, if later. Individuals will be able to separate out amounts held in mixed funds under special rules applying for a two year period beginning on 6 April 2017. Changes in the Finance Bill There are significant changes in the Bill published on 20 March from the draft legislation published in December 2016 and January 2017 in respect of the taxation of income and capital gains as they are matched to benefits paid out of trusts. Capital gains and foreign income will not be subject to UK tax where there are no payments out of certain qualifying trusts known as protected settlements. Further detailed provisions have been published setting out the circumstances in which additions of property to a settlement by a deemed domiciled individual might taint that settlement such that capital gains and foreign income may be taxable on the settlor as it arises. In particular, these provisions provide additional clarity in respect of loans to the trust from the settlor or a related settlement. However, many of the previously published detailed rules attributing such income and gains to settlors and beneficiaries who receive payments and benefits out of such settlements are not included in the Bill published on 20 March. We understand that HMRC intends to make a further announcement in respect of protected settlements in the next few days. In view of the fact that these provisions will be effective in a little over two weeks, affected individuals will be disappointed that there is not more clarity at this stage. There appear to have been no amendments to the mixed fund cleansing rules at this stage to reflect the announcement made at the Spring Budget that the cleansing would be extended to income and gains arising before 2007/08. Valuation of benefits rules Previous announcements: Consultation paper 5 December 2016 Summary As part of the discussion surrounding the proposed changes to the taxation of non-doms, HMRC proposed the introduction of valuation provisions intended to give more certainty to individuals receiving benefits from offshore trusts and other offshore structures. Changes in the Finance Bill Provisions are now included in the Bill which will apply to anyone receiving such a benefit, regardless of their domicile position. The legislation applies for the purpose of matching both income and capital gains tax to benefits received and applies to three particular types of benefit: Loans: the benefit of receiving a loan will be the value of the interest which would have been payable if interest were charged at the official interest rate, less any interest actually paid during the tax year. Moveable property: where moveable property is made available, the benefit will be effectively equal to the value of the property multiplied by the official interest rate for the period it is available. The recipient will be able to deduct any payments made for the use of the property as well as any payments for repairs, maintenance, insurance and storage. Land: where land is made available the benefit will effectively be equivalent to a market rent assuming a lease in which the landlord retains responsibility for repairs and insurance. The recipient will be able to deduct any amounts paid for the use of the land, as well as any amounts paid for repairs, insurance or maintenance. Inheritance tax (IHT) on UK residential property Summary The rules broadly provide that, where UK residential property is held via an interest in a non- UK close company or partnership, that interest will no longer be excluded property and will be subject to UK IHT. Similar rules apply to interests in loans made where the loan is used to finance the acquisition of residential property. Changes in the Finance Bill Previously, where trustees disposed of an interest in a close company or partnership within these rules, there would have been an immediate IHT charge up to a maximum of 6% of the value of the interest. This provision has been removed and there should now be no exit charge in such circumstances. Finance Bill 2017 7
However, the proceeds of any disposal or of the repayment of any loan will remain outside the excluded property rules for two years after the disposal or repayment. This is the same as the proposal for interests owned by individuals. Business investment relief (BIR) Proposed amendments to extend the scope of Business Investment Relief are largely unchanged. Changes include: A new hybrid company category will be introduced to the qualifying investment definitions. This will allow investment into companies which are both carrying on a trade and holding investments as a stakeholder company. The time limit for investing in a company before it starts to trade will be increased from two years to five. The relief will be extended to allow the acquisition of existing shares (previously shares had to be issued ). The grace period for removing or reinvesting funds will be extended from two to five years in some circumstances and the extraction of value rules will be changed to ensure that only benefits received which are directly or indirectly attributable to the investment will lead to funds being treated as a remittance currently there can be a concern when unrelated benefits are received from associated companies. Life insurance policies part surrenders and part assignments Summary Following a review of the rules designed to tax part surrenders of life insurance policies, the Government has introduced provisions to allow affected parties to make an application for disproportionate gains to be recalculated on a just and reasonable basis. Changes in the Finance Bill The Bill extends the period during which an application may be made from two years after the end of the tax year to four years. It also provides factors which an HMRC officer may wish to consider in deciding whether the gain is disproportionate for example, the economic gain and the premiums paid. Finally, there is a provision requiring individuals to repay amounts of tax reimbursements already received from trustees, in circumstances where the tax due is reduced. Tax treatment of foreign pensions Previous announcements: Budget 2016, Draft Finance Bill clauses Summary: As announced on 8 March 2017, changes are introduced to the taxation of Qualifying Recognised Overseas Pension Schemes (QROPS). There are additional changes to the taxation of non- UK pension schemes, which are included in the Bill. Changes in the Finance Bill The Bill introduces a 25% tax charge on pension transfers made to QROPS requested on or after 9 March 2017 unless specific exemptions apply. Where the transfer is exempt, the charge may still apply if, within that tax year or the following five tax years, an individual changes their residence so that the exemptions no longer apply. Conversely, a charge may be refunded if one of the exemptions starts to apply within five tax years of the transfer. There are also some further provisions relating to QROPs reporting requirements for scheme administrators. Further provisions are introduced which alter the taxation of non-uk pension schemes: Payments from non-uk pension schemes to UK residents will, in most cases, be subject to UK tax in full with effect from 6 April 2017. The remittance basis will continue to be available for payments of foreign pension income to an individual who is not UK domiciled and not deemed domiciled. The scope of UK tax charges in respect of payments, benefits or transfers out of overseas pension schemes which have benefitted from UK tax relief will be extended to ten complete UK tax years of non-residence. This new ten tax year rule will only apply to funds that receive UK tax relief from 6 April 2017 onwards, with the current five tax year rule continuing to apply to existing UK tax relieved funds. Other changes included in Finance Bill 2017 Dividend allowance reduction Provisions are included to reduce the dividend allowance from 5,000 to 2,000 with effect from 6 April 2018. Finance Bill 2017 8
The taxation of carry Provisions have been introduced to reduce the risk of double taxation in respect of carry. Where amounts of carry are taxed on an individual as investment manager, such amounts will not also be taxed under provisions designed to tax participators in offshore companies and the settlors and beneficiaries of offshore trusts on the gains of those entities. Reduction in the money purchase annual allowance The Bill implements a reduction in the money purchase annual allowance (MPAA) from 10,000 to 4,000 from 6 April 2017. The MPAA limits the amount that an individual can save under certain pension schemes without incurring a reversal of tax relief but it only applies to individuals who have already accessed pension benefits in the form of a flexible lump sum or income drawdown. Amendments to Social Investment Tax Relief Additional measures increase the limit to levels of funding which can be raised over a three year rolling period. The provisions also exclude certain trading activities considered to be lower risk. Antiavoidance provisions are also included, based on similar provisions in the Enterprise Investment Scheme. Tax-advantaged venture capital schemes Technical changes have been made to certain requirements of these schemes. The changes are designed to provide additional clarity and some additional flexibility. A summary of responses to a consultation on options to streamline and prioritise the advance assurance service has been published. HMRC will carry out more work before it considers making any changes to the service. Trading and property income allowances Measures are included to introduce a 1,000 tax free allowance each for trading income and property income, where an individual s total income from each does not exceed that level, subject to a number of conditions. Partial relief is available in some circumstances where the income exceeds 1,000. Measures substantively unchanged from draft Finance Bill clauses Deduction of income tax at source from savings income The requirement to deduct income tax from yearly interest will no longer apply to interest distributions made by open ended investment companies, authorised unit trusts and investment trusts companies as well as interest in respect of peer to peer lending. Personal portfolio bonds Provisions are included to allow the extension of permitted investment by statutory instrument. Abolition of employee shareholder status reliefs Provisions to remove the income tax and capital gains tax reliefs for employee shareholdings acquired after 1 December 2016 (there is an extended deadline where advice was received by 1:30 on 23 November 2016). Employment Taxes Optional remuneration arrangements (salary sacrifice) Summary: The new rules limit the tax and national insurance contributions (NIC) advantages where benefits in kind are provided by way of optional remuneration arrangements, more commonly referred to as salary sacrifice schemes. The changes come into effect from 6 April 2017, however there are a number of transitional provisions. In addition to the revised legislation, HMRC has also published its long awaited guidance. Changes in the Finance Bill: The Bill includes a large number of amendments to the draft clauses in an attempt to clarify the draft legislation. Contributions by employees towards the cost of the benefit provided are now recognised in the legislation. These are taken into account after ascertaining the higher of the amount foregone and the cash equivalent of the benefit. The rules around variation of pre-6 April 2017 arrangements are, however, now more tightly drafted. This means that if any terms are varied on or after 6 April 2017 with regard to a particular benefit, then transitional protection will be lost. Some further extended transitional provision is given for changes to school fee arrangements in limited circumstances for those employed by independent schools. Despite representations, It does not exclude group income protection policies and excepted group life cover. Finance Bill 2017 9
Tax treatment of termination payments Summary The new rules align the employer NICs treatment of termination payments with income tax and retain the current 30,000 income tax exemption. Employees will continue to benefit from an unlimited NICs exemption for termination payments, however, all paymenets in lieu onf notice (PILONs) will be taxable and subject to income tax and NICs on the amount of basic pay that would have been received if the notice period had been worked in full. The intention is also to remove the current exemption for foreign service relief. Changes in the Finance Bill The Bill includes an updated formula to calculate post-employment notice pay. The changes also extend what is disregarded from basic pay including employment related securities and securities options. The measures are expected to come into effect from 2018-19. It does not include measures to remove the exemption for foreign service relief which are expected to be included in Finance Bill 2017-18. Tackling disguised remuneration avoidance schemes Summary The new rules amend the existing Part 7A ITEPA 2003 disguised remuneration rules which are targeted at scenarios where employment income is provided through third parties. New charges and exclusions are effective from 6 April 2017 and relief from double taxation is intended to be generally effective from 9 December 2010. Changes in the Finance Bill The Bill includes the measures to introduce new provisions to counter the avoidance of tax and NICs by the self-employed introducing a charge on trading profits disguised as other receipts. These provisions include loans including those made in a currency other than sterling. The provisions to restrict income tax and corporation tax reliefs for contributions to a disguised remuneration tax avoidance scheme unless an associated charge to PAYE and NICs is paid, are unchanged from the draft legislation. The Bill does not include the proposed close companies gateway which has been deferred as announced in the Spring Budget. Measures substantively unchanged from draft Finance Bill clauses Off-payroll working in the public sector Subject to some minor amendments made to the draft clauses, these changes come into effect from 6 April 2017. Ultra-low emission vehicles The company car tax percentage for a car (with a CO2 emissions figure of less than 75) is unchanged. Assets made available to employees without transfer Rules calculate the taxable value of an asset provided to an employee which is available for their private use and which are not covered by specific charging provisions elsewhere in ITEPA 2003. Taxable benefits: time limit for making good A date of 6 July is introduced for making good on benefits-in-kind which are not accounted for in real time through Pay As You Earn (PAYE). PAYE settlement agreements Clause 15 is intended to pave the way for automated agreements with HMRC. Consultations and discussion documents Taxation of employee expenses call for evidence As highlighted at Autumn Statement 2016, the Government has issued a call for evidence to better understand the use of income tax relief for employees business expenses, including those that are not reimbursed by their employer. The Government s aims are to ensure that the rules are effective, and to understand more about why the claims for non-reimbursed expenses have increased. Indirect Taxes and Stamp Taxes Fulfilment house due diligence scheme Previous announcements: Consultation 16 March 2016, Draft Finance Bill clauses Summary: Under the scheme, an overseas trader who operates through a fulfilment house/online marketplace is liable to be registered and account for UK VAT. Where businesses fail to do so, HMRC has powers in place to hold the online marketplace jointly and severally liable for any UK VAT due. Linked to this, any fulfilment house/online marketplace that offers goods to UK consumers Finance Bill 2017 10
(which are fulfilled from a UK warehouse) must register with HMRC for the Fulfilment House Due Diligence Scheme. Changes in the Finance Bill The Bill (clauses 108-119) confirms that fulfilment businesses in the UK will have to register with HMRC from 2018, keep certain records and carry out due diligence checks on their overseas customers. The Bill also provides HMRC with powers to publish the register of fulfilment businesses to allow other businesses to check whether they are dealing with compliant businesses. If an offence is committed under the scheme, penalties range from imprisonment and/or fines to the forfeiture of goods. As a result, it will be more important than ever for online marketplaces to make sure that the appropriate processes are in place to evidence that due diligence has been undertaken and that registration with HMRC is completed as required. Measures not in the Finance Bill: The Bill does not contain details about the specific records and due diligence checks that fulfilment businesses will be expected to complete in respect of their overseas customers. Secondary legislation will be published announcing these specific requirements. HMRC has also published a call for evidence seeking views on an alternative method of VAT collection for overseas businesses selling goods online to UK customers. Usually VAT is collected and paid by the taxpayer on the basis of transactions performed during the reporting period. The split payment mechanism changes this approach so that the purchaser pays the net price to the supplier, and any VAT due is paid direct to HMRC or an appointed third party. HMRC is looking for evidence from stakeholders on the technical feasibility of extracting VAT in real time using payment technology and depositing it with HMRC. The deadline for comments is 30 June 2017. Tackling VAT fraud Previous announcements: Consultation September 2016, Draft Finance Bill clauses. Summary: A new penalty is to be introduced for participating in VAT fraud. A 30% penalty will apply for the purpose of tackling VAT fraud where businesses and company officers knew or should have known that their transactions were connected with VAT fraud. In particular, this change will align the levying of the penalty with the tax decision. Changes in the Finance Bill: The new penalty contained in clause 129 will have effect following Royal Assent to Finance Bill 2017 and highlights the importance for businesses and company officers of implementing processes which evidence a strong tax risk framework given the knowledge principle. Consultation on VAT fraud in the construction sector As announced on 8 March 2017, a consultation on combatting perceived fraud on the provision of labour in the construction sector has been published. The consultation requests stakeholder views on the introduction of a mandatory reverse charge requiring the recipient to self-assess the VAT due and whether this should apply on supplies to final consumers; the tightening of the rules around gross payment status within the Construction Industry Scheme (CIS); any other potential options, whether for VAT or CIS, which might offer a potential solution to fraud in the sector. The consultation provides a welcome opportunity for businesses in the sector to address concerns over the criteria for when a reverse charge might be required and provides time to consider any accounting system modifications that these proposals may require. Response are sought by 9 June 2017. Other indirect tax measures included in Finance Bill 2017 As previously announced, clauses were also published on the following indirect tax measures, amongst others: Disclosure of VAT avoidance schemes The measure moves the primary responsibility for disclosing schemes from users to promoters of arrangements. It also extends the scope of the disclosure regime to include Insurance Premium Tax, all Excise Duties, the Soft Drinks Industry Levy, Landfill Tax, Aggregates Levy, Climate Change Levy and Customs Duties. The draft Indirect Tax (Disclosure of Avoidance Schemes) Regulations, containing details of what information should be disclosed to HMRC and some definitions of terms have also been published. Finance Bill 2017 11
Soft drinks industry levy The levy will apply to soft drinks manufacturers with effect from April 2018. Insurance Premium Tax (IPT) The increase in the standard rate of IPT from 10%-12% will take effect from 1 June 2017. Remote gaming duty (RGD) Remote gaming freeplays have been brought into line with the treatment of free bets under general betting duty rules. HMRC has changed its original proposals so that re-wagering requirements for freeplays do not give rise to excessive RGD liabilities. Minimum excise duty A new minimum excise duty will apply for cigarettes sold in the UK. Landfill Tax Changes are to be made as to what constitutes a taxable disposal for Landfill Tax purposes Customs enforcement powers These are extended to enable an HMRC officer to inspect, examine and take account of goods held on premises. Tax Administration Partial closure notices Summary The new rules in clause 123/Schedule 26 will allow HMRC and taxpayers to bring finality to discrete matters in large, high risk and complex cases, which have been the subject of HMRC enquiry, by means of a partial closure notice. Changes in the Finance Bill A number of refinements have been introduced, including: Consequential changes limiting the powers of HMRC to give transfer pricing notices and counteraction notices where the matters in question have been the subject of a Partial Closure Notice. Consequential changes limiting the powers of HMRC to give notices in respect of certain capital gains anti-avoidance legislation where the matters in question have been the subject of a Partial Closure Notice. Alignment of the due date for income tax selfassessment repayments triggered by Partial Closure Notices so that the same due date applies where the repayment arises from taxpayer amendments to their self-assessment during an HMRC enquiry as to a repayment arising from HMRC amendments. In each case such repayments will be due 30 days after the Final Closure Notice in respect of the enquiry is issued. Penalties for errors in taxpayers documents Summary The new rules clarify what constitutes the taking of reasonable care for the purpose of the existing penalty regime in Schedule 24 FA 2007 in relation to inaccuracies arising in a person s tax return from the defeat of tax avoidance arrangements. Changes in the Finance Bill Amendments in clause 124 mean that the new limitation on what constitutes taking reasonable care will not apply in the case of arrangements if they accord with established practice at the time they were entered into and HMRC indicated its acceptance of that practice at that time. This is a welcome clarification. The amendments also provide that advice from a person who has facilitated the arrangements for consideration is not automatically disqualified in considering whether reasonable care has been taken in situations where an avoidance-related rule applies to the arrangements but they are not subject to DOTAS, the VAT disclosure rules, the GAAR or counteraction following the issue by HMRC of Follower Notices. This exclusion provides that advice is not disqualified where the person giving the advice had appropriate expertise and the advice took account of the taxpayer s individual circumstances. This change has narrowed the scope of advice which is disqualified and is likely to remove the need for taxpayers to take a second opinion in relation to many significant commercial transactions, as might otherwise have been the case. Making Tax Digital, Summary The Bill introduces new digital recordkeeping and reporting requirements for businesses within the charge to income tax. Finance Bill 2017 12
Changes in the Finance Bill Clause 120 gives authority for the Commissioners to make regulations about the new digital requirements which cannot have effect before the tax year commencing 6 April 2018. For businesses with gross income (turnover) below the VAT registration threshold, the income tax regulations will not have effect before the tax year commencing 6 April 2019. Clause 122 enables the Commissioners to make regulations requiring businesses to keep digital records and report digitally for VAT purposes (in addition to existing powers to regulate to require returns to be rendered digitally). These requirements are expected to come into force from 6 April 2019 onwards. Measures not in the Finance Bill: The Government had promised to publish draft regulations for the new requirements at the same time as Finance Bill 2017. It will now provide a working draft of the regulations before the committee stage debate. In addition, a full version of the draft regulations will be published in summer 2017 for technical consultation. Other changes and new measures included in Finance Bill 2017 New penalty for enablers of tax avoidance arrangements Clause 125 and schedule 27 introduce a new penalty for any person who enables the use of abusive tax avoidance arrangements, which are later defeated. The term enablers is intended to cover those who design, market or otherwise facilitate tax avoidance this can include enabling participants and financial enablers. Arrangements will be treated as abusive if they meet a double reasonableness test. Measures substantively unchanged from draft Finance Bill clauses Requirement to correct Clause 128/schedule 29 introduce a requirement to correct for taxpayers who have undeclared past UK tax liabilities in respect of their offshore interests. Failure to carry out the necessary correction on or by 30 September 2018 in relation to their offshore matters will render taxpayers liable to a new penalty as a result of their failure to correct. Data from Money Service Businesses Clause 132 introduces Money Service Businesses as a new category of data-holder from whom HMRC may require bulk data. Consultation and discussion documents Tackling the hidden economy In its response to the consultation on appropriate sanctions, the Government will consider the design of a stronger failure to notify hidden economy penalty which will be delivered as part of the longer term HMRC Penalties Review. In respect of the principle of conditionality, the concept of making access to licences or services needed to trade conditional upon tax registration, the Government will work on further policy proposals. Partnerships The response to the August 2016 consultation into certain aspects of partnership taxation has also been released. The consultation did not consider the underlying principles of how a partnership s taxable profits are determined, but instead focused on identifying the taxable partners and reducing the scope for non-compliant taxpayers to avoid or delay paying tax. Among the proposals the Government intends to take forward is the proposal that the profit allocation set out in the partnership return will be used as the basis for the allocation of taxable profits. However, where there is a dispute, the Government intends to legislate to protect partners from being taxed on incorrect profit shares. This is different from the approach consulted upon. Furthermore, any retrospective variations to a partnership s profit sharing arrangements after the period end will not be accepted, although at this stage it is unclear how flexible allocation arrangements may be impacted. It is proposed that unless the ultimate recipients of partnership profits are notified to HMRC, a partnership will need to compute taxable profit under four different bases (ie, as if the partner was a UK and non-uk resident individual and a UK and non-uk resident company). However, the suggestion of a payment on account being required where the reporting requirements were not complied with (so as to ensure full collection of tax) is not being pursued. The Government will also legislate to ensure the beneficiary of a nominee or a bare trust arrangement is treated as a partner and named on the partnership return. Legislation is expected in the next Finance Bill, applying to accounting periods starting on or after 5 April 2018. Finance Bill 2017 13