After 12 years of established law in this area, it’s disappointing (if understandable) that HM Treasury should mount a smash-and-grab raid on the professions to increase the tax yield, writes George Bull.
It’s understandable because of the size of the potential tax yield. By the time of the Autumn Statement, the anticipated yield from 2014/15 to 2018/19 had grown from initial estimates of £1.345bn to a whopping £3.265bn. Of course, HMRC’s poor track record in forecasting the yield from new tax measures (for example, the Swiss disclosure facility and the 50p tax rate, to name but two) means that the final yield from the LLP tax changes may bear no resemblance to initial estimates.
And it’s disappointing because the potential tax yield comes at the expense of major retrograde steps for the affected firms.
The form of the proposals which were the subject of the summer 2013 consultation have changed dramatically. To retain the self-employed tax status of their members, professional firm LLPs have to:
At the time of writing, we know that changes will be made to the draft legislation, and HMRC’s guidance notes will be rewritten. Uncertainty abounds but the impact of the proposed changes is already being felt. For example, the new legislation probably won’t receive royal assent until July 2014, but the first affected tax payments had to be made on 31 January 2014. What’s even worse, HMRC has stated that it will not confirm how the new tax rules will impact specific individuals or firms until July 2014.
When the Limited Liability Partnerships Act 2000 was being drafted, the then Department of Trade and Industry insisted that LLPs should be available to all types of business, not the professions alone. As a result, the take-up of LLPs has been immense, with LLPs becoming the business medium of choice in several business sectors. All of these could in principle be affected from 6 April 2014.
To change 12 years’ established tax practice in four months is to risk the enactment of unworkable legislation which requires subsequent changes. We urge HMRC to postpone introduction for 12 months: if there has to be change, let’s get it right from day one.
The ‘final 36 months’ concession is about to be cut to 18 months, but an immediate tax planning opportunity still exists even when there’s no current intention to sell, writes Andrew Goldstone.
A valuable CGT relief is being halved from 6 April 2014. This will mainly affect individuals who own properties that were once their main residence but are now let out.
A person who sells their only or main home can claim principal private residence relief (PPR) to reduce or eliminate their CGT liability. The total taxable gain is reduced by a fraction equal to the time when the property was occupied as the person’s main residence divided by the total period of ownership. For these purposes, the property is automatically treated as being the person’s main residence during their final three years of ownership, even if the property is let out and the person is eligible for PPR on another property.
For disposals after 5 April 2014, the concessionary three-year period is being cut to just 18 months. Can anything can be done before the change to improve the tax position, when there is no immediate plan to sell? The answer is yes and involves triggering a disposal now, perhaps to a family trust or to children. However, it won’t always be worthwhile and can even increase the overall CGT bill. Whether the sums add up depends on many factors, including the gain to date, how long the property was used as a main residence, the period it’s been let out, its current value, when it might be sold and projected future gains. But in the right circumstances, the tax saving can be significant.
For example, Mr and Mrs Fickle bought their dream home for £200k in January 2009. Just two years later, a nearby property tickled the Fickles’ fancy. They immediately bought it and let out their old house, which is now worth £650k. If they do no planning and then sell it in January 2016 for £700k, their CGT liability will be around £53k, after taking into account the reduced final 18 months’ relief, two annual CGT exemptions and £40k lettings relief.
If instead they each gift their half share into a trust before April, no CGT will arise on the transfer as the final three years’ relief will still apply, coupled with lettings relief and their annual exemptions. If the trustees then sell in January 2016, they will realise a gain of £50k leading to a CGT bill of just £11k. That’s a saving of £42k compared to doing nothing.
We have designed a complex spreadsheet to calculate the CGT saving (or additional liability) after inputting all the variables. The results for different scenarios make interesting reading. It’s clear the strategy works best for properties that were not long used as a main residence, have since been rented out for around three years and are showing large gains.
While principally aimed at providing certainty that the actions of UK fund managers will not make offshore funds UK tax resident, the extension of TIOPA 2010 s 363A is expressed more broadly. There are, though, traps for the unwary, writes Michael Alliston.
Section 363A was enacted by FA 2011 to provide certainty for offshore UCITS funds that having a UK fund manager would not result in their being treated as UK tax resident. As part of the government’s drive to improve the competitiveness of the UK investment management industry and to provide comfort for UK managers who wish to operate alternative investment funds (AIFs) under the Alternative Investment Fund Managers Directive, this relieving provision has now been extended to provide the same reassurance for non-UCITS funds.
Provided the fund is an AIF (which includes close-ended entities) which has a non-UK registered office and is resident outside the UK for income tax, it will not be treated as UK tax resident.
The easy conclusion to draw is that such funds can be more relaxed about ensuring they are not centrally managed and controlled in the UK – that care is no longer needed to ensure that the majority of the board are not UK tax resident and that board meetings do not happen in the UK.
There are, though, traps for the unwary. In order for the provision to apply, it needs to be ensured that the fund is resident outside the UK for income tax purposes. This would seem to rule out those jurisdictions which do not have tax on income (for example, the Cayman Islands, Bahamas and Bermuda). It would also rule out entities which would cease to be resident in their jurisdiction of incorporation were central management and control elsewhere. Furthermore, in order to access double tax treaty benefits in the home jurisdiction, it may be necessary to retain board management there in any event.
There may also be implications for other taxes. Where board meetings are held in the UK, care would need to be taken that a fixed or business establishment does not exist for VAT purposes, such as might give rise to an additional VAT cost on services provided to the fund. There may also be stamp duty implications where board business includes executing transfers of non-UK shares. Finally, non-UK resident directors coming to the UK for board meetings may also have to consider their own position and whether they may become liable for UK tax.
In conclusion, the expansion of s 363A is certainly good news for those funds with UK fund managers and potentially provides an opportunity for funds for whom maintaining central management and control outside the UK is otherwise problematic. Care should be taken though before any changes in board composition and conduct are adopted.
From 2015, there will be a fundamental change in the place where VAT is charged for broadcasting, telecommunication and electronically-supplied services (BTE) to non-business customers (B2C), writes Kevin Hall.
Currently BTE supplies are subject to VAT in the supplier’s EC member state, but this will switch to the non-business customer’s EC member state on 1 January 2015. The services affected will include downloaded applications (apps), e-books, music downloads, gaming, video on demand, anti-virus software, etc.
Hidden pitfalls include the possibility that suppliers may be required to register for (and charge) VAT in each EC member state where they have a non-business customer. This is the case even for low level or one-off sales, as most EC member states do not exempt from VAT registration small businesses which are not established in their territory. For example, a UK supplier selling a single app to a private individual in another EC member state could find itself registering for VAT there and struggling with language barriers, different interpretations of VAT rules (what is an e-service?) and awkward VAT authorities, including ensuring HMRC accepts the overseas address of the customer by ratification through credit card address verification, and so on.
A helpful new measure is the ‘mini one stop shop’ VAT registration (MOSS). Registration is optional, but MOSS will enable suppliers to avoid registering for VAT in multiple EC member states for the affected supplies.
Despite the new MOSS, there will still remain significantly increased burdens and pitfalls on BTE suppliers. Supplies will be subject to the VAT rate and rules in force in the customer’s EC member state. Retail pricing models and budgets will certainly need attention, in order to maintain profit margins and project viability, and to account for the wide variation in VAT rates across different EC member states (currently 3% to 27%), some of which are challenging the imposition of VAT and using rates that may prove too low. The MOSS VAT returns themselves will be administered differently from standard UK VAT returns; for example, periods will be fixed as calendar quarters and returns must be submitted within 20 days of the period end.
Practitioners and their clients should be preparing for these changes now to minimise additional administrative burdens.
With the new legislation affecting offshore employment intermediaries taking effect from 6 April 2014, now is the time to consider the practical implications, writes Punam Birly.
The proposed new s 689A for ITEPA 2003 is unclear in situations where there is more than one associated company of the offshore employer or more than one oil field licensee. This brings practical difficulties in ensuring that someone takes responsibility, as the legislation makes all associated companies and oil field licensees liable. So who will actually take responsibility for compliance?
Further, this new section seeks to define who is a continental shelf worker but includes different definitions for tax under s 689A than those that apply for NIC. In practice, it should be possible for HMRC to create a clear cut definition for both tax and NIC purposes, but it appears the opportunity to do so has been missed. As an example, a seafarer on a vessel operating in the UK continental shelf carrying supplies or as a safety vessel will be a continental shelf worker for tax purposes, but for NIC purposes he will be a mariner under the Social Security (Contributions) Regulations, SI/1004, reg 115. To add to the confusion, some seafarers may qualify for a seafarer’s earnings deduction. The possibility of confusion arising is therefore high.
The certification process also requires careful consideration. The legislation states that the offshore employer is able to apply for a certificate; this is to be provided to the oil field licensee to show that the offshore employer will be compliant. The contract needs to be directly or indirectly with the oil field licensee. Confusion is therefore likely to arise where there is no associated company in the UK of the offshore employer or indeed there is more than one associated company, a situation we have already experienced with our clients.
With the legislation due to come into force in less than two months, it appears that there may be uncertainty ahead.
All intra-group derivative transactions should now be reviewed in light of the new measures, writes Sandy Bhogal.
Following the publication of wide-ranging draft legislation last December, on 23 January 2014 HMRC published revised draft legislation with a revised technical note to tackle tax avoidance schemes making use of intra-group total return swaps and other financial derivatives. The revised legislation and technical note were published following a considerable amount of objection from taxpayers and advisers alike about the potentially wide effect of the measure on normal commercial transactions.
The new legislation will take the form of CTA 2009 new s 695A and will have effect from 5 December 2013 (subject to transitional rules). Broadly, it will catch derivative arrangements involving two companies in the same group, the result of which is, in substance, a payment (directly or indirectly) from the paying company to the other, comprising ‘all or a significant part’ of the profits of the paying company (or a company in the same group). There is an exception for arrangements that are of a kind which companies carrying on the same kind of business as the paying company would enter into ‘in the ordinary course of that business’. Where arrangements are caught, resulting debits (and certain credits) will be disallowed for UK corporation tax purposes.
The draft legislation and accompanying guidance are by no means perfect; notably, neither explains what ‘significant part’ means, even though this is evidently a fundamental part of the draft provision. In practice, it is expected that there will be two main ‘get-outs’ for ‘ordinary’ derivative transactions: firstly, where there is no payment of profits (as in the case of standard hedging transactions which move the return on the underlying transaction, rather than a company’s profits); and, secondly, under the ‘ordinary course of business’ test (which is summarised in the technical note). However, there may well be derivative transactions which do not fall neatly into either of these categories.
The revised technical note does contain examples of acceptable and unacceptable arrangements, including a statement that securitisation arrangements will not be caught ‘in the vast majority of cases’. Nevertheless, one is still left with the impression that this is something of a knee-jerk response, rather overlooking the fact that intra-group total return swaps and other derivative transactions are not always motivated by base erosion/tax avoidance, as in the case of non-tax driven balance sheet management, for example. All intra-group derivative transactions will now need to be analysed through the lens of the new rules, including where derivatives are used to centralise group risk or where derivative positions are entered into by group entities for operational or cost-sharing reasons.
The new rules propose a very particular approach to paying your ‘fair share’, potentially affecting non-abusive arrangements, writes Sophie Dworetzsky.
The chancellor announced in the Autumn Statement on 6 December that new legislation would be published targeting the avoidance of income tax by a small number of UK resident non-domiciled individuals using dual contracts as part of their employment arrangements. Draft legislation has since been published in January, and the consultation period ends this month.
The legislation massively restricts the areas where dual contracts will still work. In particular, the key question will be whether the employers are connected and the employments are related, given that related employments seem to include the situation where:
A particularly odd angle is the fact the new rules would catch non-abusive arrangements and go well beyond anything the GAAR would target, so it is not just abusive arrangements, but many other structures that will be caught. Advisers should review all their clients’ arrangements in this light. This is especially important, given that the rules will catch securities income as well as direct earnings.
In practice, many new UK residents will either adopt a consultancy structure or simply rely on overseas workday relief for the initial three years of UK residence, which remains unaffected.
Eat what you kill, asks Chris Agnoli.
The draft rules characterising certain members of UK LLPs as ‘salaried members’ has caused concern throughout professional service and asset management firms, with all parties looking for their members to fall outside the scope of the rules by failing one of the three conditions contained in new s 836B of ITTOIA 2005.
In particular, many LLPs and their members will be considering their remuneration arrangements in light of condition A as set out in the proposed s 863B(1) and the concept of ‘disguised salary’. In order not to meet condition A, each member needs to receive more than 20% of his remuneration in a form which is not disguised salary.
Whilst on the face of it, relatively low base advance drawings (which are fully repayable in the event of insufficient LLP profits at year end) and a substantial performance bonus would seem to meet this requirement, HMRC’s draft guidance suggests that performance bonuses where personal performance is the determining factor are within the definition of disguised salary, as the amount does not vary by reference to the overall amount of profit or loss of the LLP.
The issue comes to a head in ABC LLP (the UK arm of a global fund manager), where trader A makes a profit for the year, and traders B and C make losses greater than trader A’s profits. Trader A will want to be rewarded for his contribution. If another group entity pays amounts to UK LLP under a transfer priced services agreement to compensate trader A, ABC LLP will have made a ‘profit’, but trader A is strictly being rewarded for his own performance. Discussions with HMRC suggest that such ‘personal performance’ based remuneration may not be considered disguised salary, but we await the next draft of the guidance with interest.
As an aside, since the time of testing for condition A is on 6 April 2014 (or when a new member is appointed, if later), all members should remain optimistic regarding their future share of profits to ensure condition A is not met.
Tough new measures are proposed to restrict the deductibility of lease rental payments by offshore oil and gas contractors to associated companies in respect of assets used to provide services in the UK North Sea, writes Patrick O’Gara.
HM Treasury first announced its plans in the Autumn Statement, with a view to introducing legislation in the Finance Bill 2014 to counter what it has characterised as avoidance and aggressive tax planning. The Treasury believes that the use of intra-group payments by offshore contractors has resulted in up to 90% of the profits which it regards as made in the UK not being taxed here.
The new restriction will cap the deduction for arm’s length rental payments for assets used by groups in providing services to the oil and gas sector in the UK continental shelf (UKCS). The cap will be effectively 6.5% p.a. of the group’s acquisition cost of affected assets, plus any subsequent capital expenditure on refits and enhancements. The formula is intended to be a simple proxy for use in all cases.
The Treasury’s proposals are principally aimed at the bare-boat chartering of large vessels, such as drilling rigs, FPSOs, heavy lift vessels, well intervention vessels and flotels, and are intended to apply whenever composite services are provided by a group, or where such an arrangement is fragmented so that the group provides the composite service by means of separate contracts with a third party. The measure is expected to apply more broadly to the use of tangible assets with a market value of more than £2m, but will exclude assets involved in the transportation of goods or consumables. The measure is aimed at any form of lease, regardless of the location of the lessor, and anti-avoidance measures will be introduced to counter arrangements with a similar economic effect.
The restriction will operate through a new ‘ring-fence’ regime, which will cap the UK tax deduction for contractors’ lease rental payments against profits arising from the provision of services in connection with the exploration or exploitation of the subsea and subsoil of the UKCS. The new ring-fence will not apply to activities which do not use leased assets and which are therefore not subject to the cap. The capped element of a lease rental payment may be off-set against profits which arise from activities which are not within the ring-fence. Finance costs, management charges and other expenses or losses which arise from non-ring-fenced activities will not be eligible to shelter profits arising from ring-fenced activities. The measure will have a lesser impact on contractors with sufficient UK taxable profits falling outside of the new ring-fence to fully utilise the capped deduction.
Many important aspects of the Treasury’s proposals remain unclear and are subject to further discussion with industry. This is nevertheless an interesting example of the Treasury’s apparent willingness to introduce special measures where it perceives that the application of the arm’s length principle fails to determine an appropriate allocation of profits in cross-border transactions.
The proposal has generated a lot of opposition from the oil and gas sector, raising concerns that it will increase costs and potentially make marginal fields uneconomic, if additional tax costs borne by contractors are passed on to operators in the North Sea in the form of higher day rates. There is also a general concern that other jurisdictions may be inspired to adopt similar measures.
Read further guidance on the draft provisions due to be included in this year’s Finance Bill
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