The agenda for September 2013

The GAAR goes live

A GAAR health check is likely to become a routine feature of much corporate activity, writes David Harkness

Without much fanfare, the GAAR came into effect for tax arrangements entered into on or after 17 July (the date FA 2013 received Royal Assent).

With August a holiday month, September will be the first time many of us have to grapple with the new world of the GAAR. A GAAR health check is likely to become a routine feature of much corporate activity and – with novel features like the double reasonableness test – until experienced is gained, it will not always be easy to conclude that the GAAR will definitely not apply.

Laudable aims of the original GAAR proposal were that judges would rein in the excesses of purposive interpretation and separately there would be a bonfire of the targeted anti-avoidance rules (TAARs). Recent tax cases show there is no trend yet of judges retreating to a more literal interpretation (in fact, things seem to be going the other way). And those hoping for warmth from burning TAARs are likely to be disappointed in the short term – the recent loan relationships and partnerships consultation documents suggest the TAAR count is likely to get bigger, not smaller.

As a final point, when looking at the GAAR, beware of assuming that a transaction signed before 17 July will necessarily escape the GAAR (despite generous transitional rules). If any step is taken on or after 17 July and that step is an abusive arrangement in its own right, the GAAR can apply to that step. With the very wide definition of arrangements (including non-legally binding acts, understandings, etc) steps not hardwired before commencement will need to be analysed.

A mixed bag for SMEs

A doubtful decision on private residence relief, and three ongoing consultations, two of which propose welcome changes, writes David Whiscombe

The latest of HMRC’s disclosure opportunities, the property sales campaign, closed on 6 September. This is aimed at sellers of residential property that have failed to declare CGT liabilities. Some spice may be added to its closing days by the recent decision in Moore [2013] UKFTT 433 (TC). That case concerned PPR relief on a property which had been occupied as a home for a period of seven months before sale. Somewhat surprisingly, relief was denied, essentially on the grounds that such a period was too short to give the degree of permanence required to constitute the property a residence. If that decision is correct (which is doubtful), many gains previously considered exempt may be at risk of challenge and it may be appropriate to consider ‘protective’ disclosures under the property sales campaign.

Consultations closing in the next few weeks which may affect SMEs include a proposal to simplify collection of class 2 NIC by abolishing the weekly or monthly contribution (the late lamented ‘stamp’) and bringing class 2 NIC into the self-assessment cycle (see the consultation document). On a similar theme of simplification, there is a proposal to review the operation of the VAT retail export scheme (see below), with a view principally to replace the current arrangements – which are heavily manual and paper-based – with a more streamlined system better aligned with HMRC’s digitalisation agenda. Both proposed changes seem to be entirely positive for the SME community.

Rather less positive is the fact that following on from the changes to s 455 wrought by FA 2013, further reform is proposed in a consultation which closes on 2 October. The current repayable tax at 25% does not, in HMRC’s view, operate as an adequate discouragement to the removal of funds from a close company by way of loan, rather than as dividend or remuneration. A number of options for change are put forward; these range from retaining the basics of the current system but increasing the rate of tax, perhaps to 40%, through to replacing the current repayable charge with an annual non-repayable charge computed by reference to the amount of loan outstanding at a charging date. The consultation document recognises that some of the options would render unnecessary the changes introduced only six months ago to counter bed-and-breakfasting of participator loans – hardly a model of consistent and joined-up thinking from those responsible for tax policy.

Transfer of assets abroad

Practitioners with views on the proposed anti-avoidance provisions should submit their responses soon, writes Sarah Cormack

HMRC published a summary of responses and a further consultation titled Reform of an anti-avoidance provision: Transfer of Assets Abroad on 18 July 2013, with draft guidance relating to these provisions being published on 2 August. The deadline for responses is 10 October 2013.

The existing legislation (ITA 2007 ss 714–751) was subject to an initial consultation in 2012 (followed by draft legislation in December of that year), which dealt with amendments required to ensure compatibility with EU law, as well as three other proposed clarifications, two of which were legislated for in the Finance Act 2013. Most significantly, these amendments extended the existing exemption from the provisions for transfers with no tax avoidance motive. Consequently, there is now an exemption for ‘genuine’ economic activities, where freedoms under the EU Treaty or EEA Agreement are engaged. The two additional clarifications in the legislation seek to ensure on the one hand no double taxation of the same income; while, on the other hand, putting it beyond doubt that treaty relief cannot be claimed to secure what HMRC referred to as ‘double non-taxation’.

The third proposed clarification, relating to the ‘matching’ of benefits received by an individual to the income arising to the person abroad, is now the subject of further consultation. Perceived inadequacies of the current legislation centre on questions of timing and allocation, which typically are brought into focus where more than one individual is within the scope of the charge with reference to the same ‘relevant income’. Further views are sought and a working party is to be established to discuss and develop options for reform.

More significantly, comprehensive draft guidance has now been published and this material will, ultimately, replace the current somewhat scant guidance contained in HMRC’s International Manual. The guidance is also now the subject of consultation. The draft guidance in particular acknowledges the desire for clarification and a better understanding of HMRC’s interpretation of this legislation that was apparent in the response to the initial consultation. This is welcome progress.

Retail export scheme

HMRC aims to make the retail VAT expert scheme easier to use, while limiting opportunities for error and fraud, writes Daniel Lyons

HMRC launched its consultation about possible changes to the VAT retail export scheme, which was promised at Budget 2013, on 1 July 2013. The scheme allows non-EU visitors to claim a refund of VAT on goods they buy and export from the EU in their personal luggage. HMRC would like to make the retail export scheme easier to use and understand, and to limit opportunities for error and fraud. Whilst HMRC has already identified some options for change, its consultation invites general comments on options for redesigning the scheme, as well as asking some specific questions relating to a number of possible changes. Responses to the consultation are requested by 30 September 2013.

The consultation seeks input on ways of improving the customer experience from the point of sale (validation of eligibility and so forth) through to the validation process at the point of departure from the UK and obtaining the refund. One of the options that might be considered is a ‘digital’ process to replace the current, largely paper-based system, which relies on a variety of different forms produced by operators of the scheme to provide the necessary information in a range of formats. Another possibility would be the introduction of a UK threshold (say £150) to eliminate ‘low value’ claims. The refund scheme is required under EU law for goods valued at more than €175, but unlike most Member States, the UK has taken advantage of the discretion available to Member States to implement the scheme for less valuable goods. At present, the UK leaves it to individual retailers operating the scheme to set their own minimum values for purchases under it and according to the consultation document, about 20% of claims made are below the EU-wide threshold.

Anyone with experience of the scheme is invited to respond to the consultation, whether to comment on the areas of potential change already identified or to suggest additional ones.