The headline of the Budget for advisers was the restriction of entrepreneurs’ relief to £1m. This was widely expected and many individuals had accelerated transactions or undertaken other planning to ‘lock in’ the previous £10m limit. However, there are anti-forestalling measures which will render ineffective two of these planning strategies.
Contracts which unconditionally exchanged but were not completed (so called rescindable contracts, or resting on contract) until after 11 March will not be treated as effective on the date of exchange but rather the date of completion, and therefore subject to the new limit.
Elections under TCGA 1992 s 169Q (to disapply tax-free share exchange treatment under TCGA 1992 s 135) for transactions undertaken since 6 April 2019 will in certain cases only be effective from the date of the election rather than the date of the transaction – and therefore subject to the new limit. These cases include transactions where the shareholders remain the same after the share exchange, which is a transaction some individuals did in order to give themselves the option of tax-free share exchange (if entrepreneurs’ relief was not restricted), or a TCGA 1992 s 169Q election (to benefit from the old limit if entrepreneurs’ relief were restricted). There are further provisions which mean that if clearance was given for such a transaction, it is automatically treated as being tax-free, removing the possibility for an individual to argue that the transaction was not in fact undertaken for commercial reasons and therefore falls outside TCGA 1992 s 135.
I suspect that there will be representations made on the TCGA 1992 s 169Q election, as the anti-forestalling legislation will affect many transactions not undertaken solely to benefit entrepreneurs’ relief purposes. As the election is made on the tax return, there was no opportunity to make the election for transactions which have been undertaken in the current tax year.
The chancellor also applied the changes from 11 March (rather than from 12 March), so individuals hoping to rush through a transaction in the afternoon were not able to do so.
Robert Langston, Saffery Champness
The chancellor’s measure on limited liability partnerships (LLPs) particularly catches a lawyer’s eye because it relates to, or perhaps tries to pre-empt, an appeal that is still ongoing in the courts. This ‘retrospective and prospective’ measure deals with the case of LLPs (which can only by definition be registered as such if they are carrying on business ‘with a view to profit’) which are held on appeal not to have been ‘with a view to profit’. The FTT decided in Inverclyde [2019] UKFTT 408 that this caused all sorts of assessment problems for HMRC. HMRC is appealing Inverclyde, but this measure will cover HMRC in case it loses.
David Milne QC, Pump Court Tax Chambers
Targeting the ‘supply chain’ of marketed avoidance
With the focus of the Budget on more obviously pressing concerns, in terms of tax measures, there was a lot that felt like more of the same. The usual check on the amount of tax recovered, since 2010, in tackling non-compliance has grown to £200bn (from £185bn in the 2018 Budget). More resources have been promised to HMRC with a view to bringing in £4.4bn of additional revenue. That is to be welcomed if it eases the strain on HMRC. Most taxpayers want prompt (and helpful) engagement from HMRC. However, there is little detail as to what will actually be invested in HMRC and how it will be used.
The Budget continues with the approach that has been followed for many Budgets now in targeting the ‘supply chain’ of marketed tax avoidance. The Budget announced that HMRC would be publishing ‘a new ambitious strategy for tackling the promoters of tax avoidance schemes’ as well as a call for evidence on raising standards for tax advice. There are legitimate concerns about some who market aggressive tax avoidance structures, but the concern with these types of measures (and we have seen a number focused on enablers, promoters and facilitators in recent years) is the collateral damage: the additional compliance, the chilling effect on those who provide genuine advice or the targeting of advice that HMRC simply decides it does not like.
As part of this theme of addressing avoidance through administration rather than legislation, businesses will see no let-up in compliance. From 2021, large businesses will be required to notify HMRC when they ‘take a position which HMRC is likely to challenge’. Recent accounting guidance has concerned the reporting of uncertain tax treatments and the Budget suggests that these rules will draw on those accounting standards, which may also mean increased scrutiny over how these standards operate.
Gideon Sanitt, Macfarlanes
Of significant interest is the promise for consultations on, among other things, whether EMI option schemes should be open to a broader range of companies, possible changes to the anti-hybrid mismatch rules to ensure that they are proportionate and work
as intended and what, if anything, could be done to make UK holding companies a more attractive option for private fund investment structures. These are all areas in which interested parties have lobbied HMRC and the Treasury over a number of years
and, whether or not huge changes result from the consultations, their inclusion shows that the government might now be more open to making reasonable changes to support the UK’s private funds and investment funds industry.
The VAT zero-rating of certain products is a reminder that we are now in an era where the government has carte blanche (as they might say across the Channel) so far as the UK VAT regime is concerned. This is a significant moment, whatever one’s views on Brexit. This is evidently only the beginning, as the establishment of the working group around VAT on financial services, and other VAT-related measures and proposals set out in the Budget show.
David Klass, Hunton Andrews Kurth
For several years, tribunal cases have raised the problem that certain statutory functions are to be carried out by ‘an officer of HMRC’, yet HMRC has chosen to automate some of these processes. The recent case of Rogers & Shaw has shown
that the issue of notices to file tax returns (while generally automated) has sufficient level of officer oversight to satisfy the statutory rules. However, the FTT case of Bosher shows that the old TMA 1970 s 100 penalty processes are almost exclusively
automated with no human involvement at all. In Khan Properties, the tribunal struck out the penalty notices for this reason. The Budget has confirmed that legislation will be introduced so that all notices (which are supposed to have been issued by
an HMRC officer) will be treated as validly issued. As I wrote in Taxation (5 December 2019) when this was first mooted, the measure amounts to getting Parliament to revise the paperwork on a transaction long after the event. If any taxpayer had sought
to do that, it would amount to fraud.
Many pharma and tech companies will welcome the (rather unexpected) extension, from 1 July this year, of the IFA amortisation regime to the acquisition of pre-April 2002 assets. The government had previously rejected this measure due to cost (but, as with so much else in this Budget, cost is not the constraint it once was). Although an acutely political Budget, as expected, the digital services tax will kick in from next month. The US response will be interesting. The consultation on the hybrid mismatch rules which aims ‘to ensure that the hybrid mismatch rules work proportionately and as intended’ might conceivably provide some help to those of us who advise US multinationals, where hybrids are in the very DNA of the US tax regime. Previously announced measures to ensure EU compliance in respect of the tax neutrality of intra-group transfers and to clamp down on stamp duty ‘swamping’ are coming in as expected. Finally, with the announcement in the Budget of (historically) anaemic growth forecasts, even before the impact of COVID-19, it wouldn’t be a huge surprise if tax rises are coming down the line.
Jonathan Cooklin, Davis Polk & Wardwell
The headline of the Budget for advisers was the restriction of entrepreneurs’ relief to £1m. This was widely expected and many individuals had accelerated transactions or undertaken other planning to ‘lock in’ the previous £10m limit. However, there are anti-forestalling measures which will render ineffective two of these planning strategies.
Contracts which unconditionally exchanged but were not completed (so called rescindable contracts, or resting on contract) until after 11 March will not be treated as effective on the date of exchange but rather the date of completion, and therefore subject to the new limit.
Elections under TCGA 1992 s 169Q (to disapply tax-free share exchange treatment under TCGA 1992 s 135) for transactions undertaken since 6 April 2019 will in certain cases only be effective from the date of the election rather than the date of the transaction – and therefore subject to the new limit. These cases include transactions where the shareholders remain the same after the share exchange, which is a transaction some individuals did in order to give themselves the option of tax-free share exchange (if entrepreneurs’ relief was not restricted), or a TCGA 1992 s 169Q election (to benefit from the old limit if entrepreneurs’ relief were restricted). There are further provisions which mean that if clearance was given for such a transaction, it is automatically treated as being tax-free, removing the possibility for an individual to argue that the transaction was not in fact undertaken for commercial reasons and therefore falls outside TCGA 1992 s 135.
I suspect that there will be representations made on the TCGA 1992 s 169Q election, as the anti-forestalling legislation will affect many transactions not undertaken solely to benefit entrepreneurs’ relief purposes. As the election is made on the tax return, there was no opportunity to make the election for transactions which have been undertaken in the current tax year.
The chancellor also applied the changes from 11 March (rather than from 12 March), so individuals hoping to rush through a transaction in the afternoon were not able to do so.
Robert Langston, Saffery Champness
The chancellor’s measure on limited liability partnerships (LLPs) particularly catches a lawyer’s eye because it relates to, or perhaps tries to pre-empt, an appeal that is still ongoing in the courts. This ‘retrospective and prospective’ measure deals with the case of LLPs (which can only by definition be registered as such if they are carrying on business ‘with a view to profit’) which are held on appeal not to have been ‘with a view to profit’. The FTT decided in Inverclyde [2019] UKFTT 408 that this caused all sorts of assessment problems for HMRC. HMRC is appealing Inverclyde, but this measure will cover HMRC in case it loses.
David Milne QC, Pump Court Tax Chambers
Targeting the ‘supply chain’ of marketed avoidance
With the focus of the Budget on more obviously pressing concerns, in terms of tax measures, there was a lot that felt like more of the same. The usual check on the amount of tax recovered, since 2010, in tackling non-compliance has grown to £200bn (from £185bn in the 2018 Budget). More resources have been promised to HMRC with a view to bringing in £4.4bn of additional revenue. That is to be welcomed if it eases the strain on HMRC. Most taxpayers want prompt (and helpful) engagement from HMRC. However, there is little detail as to what will actually be invested in HMRC and how it will be used.
The Budget continues with the approach that has been followed for many Budgets now in targeting the ‘supply chain’ of marketed tax avoidance. The Budget announced that HMRC would be publishing ‘a new ambitious strategy for tackling the promoters of tax avoidance schemes’ as well as a call for evidence on raising standards for tax advice. There are legitimate concerns about some who market aggressive tax avoidance structures, but the concern with these types of measures (and we have seen a number focused on enablers, promoters and facilitators in recent years) is the collateral damage: the additional compliance, the chilling effect on those who provide genuine advice or the targeting of advice that HMRC simply decides it does not like.
As part of this theme of addressing avoidance through administration rather than legislation, businesses will see no let-up in compliance. From 2021, large businesses will be required to notify HMRC when they ‘take a position which HMRC is likely to challenge’. Recent accounting guidance has concerned the reporting of uncertain tax treatments and the Budget suggests that these rules will draw on those accounting standards, which may also mean increased scrutiny over how these standards operate.
Gideon Sanitt, Macfarlanes
Of significant interest is the promise for consultations on, among other things, whether EMI option schemes should be open to a broader range of companies, possible changes to the anti-hybrid mismatch rules to ensure that they are proportionate and work
as intended and what, if anything, could be done to make UK holding companies a more attractive option for private fund investment structures. These are all areas in which interested parties have lobbied HMRC and the Treasury over a number of years
and, whether or not huge changes result from the consultations, their inclusion shows that the government might now be more open to making reasonable changes to support the UK’s private funds and investment funds industry.
The VAT zero-rating of certain products is a reminder that we are now in an era where the government has carte blanche (as they might say across the Channel) so far as the UK VAT regime is concerned. This is a significant moment, whatever one’s views on Brexit. This is evidently only the beginning, as the establishment of the working group around VAT on financial services, and other VAT-related measures and proposals set out in the Budget show.
David Klass, Hunton Andrews Kurth
For several years, tribunal cases have raised the problem that certain statutory functions are to be carried out by ‘an officer of HMRC’, yet HMRC has chosen to automate some of these processes. The recent case of Rogers & Shaw has shown
that the issue of notices to file tax returns (while generally automated) has sufficient level of officer oversight to satisfy the statutory rules. However, the FTT case of Bosher shows that the old TMA 1970 s 100 penalty processes are almost exclusively
automated with no human involvement at all. In Khan Properties, the tribunal struck out the penalty notices for this reason. The Budget has confirmed that legislation will be introduced so that all notices (which are supposed to have been issued by
an HMRC officer) will be treated as validly issued. As I wrote in Taxation (5 December 2019) when this was first mooted, the measure amounts to getting Parliament to revise the paperwork on a transaction long after the event. If any taxpayer had sought
to do that, it would amount to fraud.
Many pharma and tech companies will welcome the (rather unexpected) extension, from 1 July this year, of the IFA amortisation regime to the acquisition of pre-April 2002 assets. The government had previously rejected this measure due to cost (but, as with so much else in this Budget, cost is not the constraint it once was). Although an acutely political Budget, as expected, the digital services tax will kick in from next month. The US response will be interesting. The consultation on the hybrid mismatch rules which aims ‘to ensure that the hybrid mismatch rules work proportionately and as intended’ might conceivably provide some help to those of us who advise US multinationals, where hybrids are in the very DNA of the US tax regime. Previously announced measures to ensure EU compliance in respect of the tax neutrality of intra-group transfers and to clamp down on stamp duty ‘swamping’ are coming in as expected. Finally, with the announcement in the Budget of (historically) anaemic growth forecasts, even before the impact of COVID-19, it wouldn’t be a huge surprise if tax rises are coming down the line.
Jonathan Cooklin, Davis Polk & Wardwell
