What a difference a year
makes. Diverted profits tax was such a well kept secret within the Treasury that its announcement in the Autumn Statement 2014 made everyone sit up and take note. ‘Google tax’ had arrived. Those of you listening carefully to the Chancellor during the Autumn Statement 2015, however, will have heard the unmistakeable sound of a barrel being scraped clean. Accelerating £110m of SDLT payments by cutting the payment window to 14 days? And £930m of CGT by bringing forward the payment point for CGT on residential properties? Desperate times, desperate measures.
So what’s in this Autumn Statement for multinationals? Fortunately, there are not a lot of surprises this time around, once you look past a Conservative government introducing a tax on jobs by another name (the apprenticeship levy).
Over the summer, HMRC ran a consultation on Improving large business tax compliance. Under the slightly ominous sounding heading ‘Tools to encourage voluntary compliance and special measures to tackle the highest risk businesses’, we are told that the government will, as trailed, legislate to introduce a requirement for large businesses to publish their tax strategies as they relate to or affect UK taxation; a special measures regime to tackle businesses that persistently engage in aggressive tax planning (note ‘planning’ not ‘avoidance’!); and a framework for cooperative compliance.
The first point to note is that this is in addition to the OECD’s recommendations on country by country reporting. This is about forcing main board directors publicly to take ownership of their group’s UK tax strategy and clearly the devil will be in the detail. Will groups, for example, be required to disclose any target effective tax rate? Could they potentially be forced to disclose market sensitive information, such as a projected decrease in the effective tax rate which may be due to the anticipated sale of a highly taxed business division?
We also await a revised draft of the code of practice on taxation for large businesses. Based on the original draft, we can certainly expect that it will require groups to avoid structuring their transactions in such a way that their tax treatment does not follow the economics – unless it becomes clear that Parliament intended it not to and that it will continue to stretch the concept of what is ‘voluntary’. A group which does not sign the code is likely to be viewed by HMRC as high risk rather than low risk, with the additional compliance burden that brings with it. Further, there are assurances that this is different to the code of practice on the taxation for banks, because HMRC does not intend to name signatories to, or publish information on compliance with, the code; but these ring somewhat hollow given that this is exactly where the banking code started out. Experience shows that multinationals should expect the goalposts here to shift over time too.
We now know that the new penalty regime for the GAAR will be set at 60% of the tax due as a result of its application. Potentially more troubling, given that the second ‘A’ in GAAR stands for ‘abuse’ not ‘avoidance’, is the note that ‘the government will also make small changes to the way the GAAR works to improve its ability to tackle marketed avoidance schemes’. The independent GAAR report led by Graham Aaronson QC concluded, and the government of the time accepted, that a ‘broad spectrum’ general anti-avoidance rule would not be beneficial for the UK tax system. As a result, various safeguards – including both the double reasonableness test and the establishment of the GAAR Advisory Panel – were built into the GAAR to ensure that it was a weapon of last resort for tackling only abusive arrangements which would otherwise have achieved their intended tax effect. It will be necessary to watch developments here closely to see whether the legislative changes proposed are merely to ensure that certain abusive arrangements, which clearly ought to be caught by the GAAR, really are within its scope; or whether this is the first evidence of ‘mission creep’.
Mission creep, coupled with a new penalty regime which runs the risk of incentivising HMRC to bring a GAAR challenge not as a matter of last resort but as an alternative to defeating an arrangement using the relevant statutory provisions, would be a very worrying development. As things stand, the GAAR ought not to be something that most, if any, multinationals need concern themselves with, but this is the first inkling that that may not remain the case for long. Repeated changes could see the GAAR morph into a general anti-avoidance rule of exactly the sort that the GAAR report warned against.
Finally, we have confirmation that Finance Bill 2016 will contain the drafting to implement the OECD’s recommendations for dealing with hybrid mismatch arrangements with effect from 1 January 2017. We can expect the UK’s existing anti-arbitrage regime, with its main purpose base erosion test, to be replaced with (I hope) or supplemented by (always a risk) a set of mechanical rules with no purpose or motive test. It is to be hoped – for the sake of both banks being forced down the single point of entry route by their regulators, and of insurers who look set to follow – that the UK will take up the option to incorporate special provisions for intra-group regulatory capital instruments into the new rules.
So, overall, it has been a relatively light Autumn Statement from the perspective of the multinational. No doubt this is a relief to tax departments still struggling to come to terms with the prodigious output from the OECD’s BEPS project!
