Autumn Budget 2017
Today’s Budget put enormous pressure on the Chancellor to pull something out of the hat, or, at the very least, not to foul up. It was a great day for Maths teachers because over £40 million was committed to their teacher training. The Chancellor was in good spirits and joked “More Maths for everyone. Don’t let anyone say that I don’t know how to show the nation a good time.” However, aside from a few sops to millennials, including stamp duty land tax relief for first time buyers and an under 30 railcard, there was little substantive change to the UK tax system.
Our newsletter focusses on the taxation of foreign domiciliaries and their advisers and cross-border tax matters.
Anti-avoidance rules applying to offshore trusts
Although not mentioned in the Budget, the Finance Bill 2018 will include a number of anti-avoidance rules to increase the tax due on UK resident settlors and beneficiaries of offshore trusts. Separate rules exist for income tax and capital gains tax.
They identify two forms of mischief. The first is where trustees makes distributions or give benefits to the settlor’s close family. From 6th April 2018 onwards such payments or benefits will be taxed on a UK resident settlor. Close family for this purpose means the settlor’s spouse, civil partner, cohabitee or minor child. This is the case even if the child is taxed in his own right. The settlor can recover the tax from the beneficiary.
The second relates to trust distributions made to beneficiaries, who do not pay tax on the distribution because they are either non-resident individuals or remittance basis users but who later make a direct or indirect gift on or after 6th April 2018 to a UK resident individual. If at the time the distribution is made by the trustees there were arrangements or an intention as regards the direct or indirect passing-on of the whole or part of the original distribution, the UK resident individual is treated as receiving the distribution directly and taxed accordingly.
Generally, the close family members rules apply in priority to the onwards gift rules. The rules apply to all gifts made on or after 6 April 2018, even where the original distribution was made before the rules came into force. The indirect gift rules apply to all UK resident individuals, even those who are not beneficiaries of the trust or are excluded from benefitting from the trust.
In our view these rules are impractical and will be difficult to enforce. This is because the UK taxpayer may not necessarily know that gifts have been funded by trust distributions which create a tax liability.
Offshore trustees should seek UK tax advice as soon as possible to ascertain what actions they should be taking before the commencement of the rules on 6 April 2018. Although in many cases trustees and beneficiaries will be inclined to make distributions and gifts before 6 April 2018, there are hidden dangers.
Non-resident companies – Extending the Scope of Corporation Tax
Following consultation between March and June 2017, it has been confirmed that income received by non-resident companies in respect of UK property interest(s) will be chargeable to UK corporation tax rather than income tax. The reasoning behind this is to consolidate the manner in which tax applies to property income for UK and non-UK residents alike.
Two particular areas that will change as a result of this relate to the deduction of interest/finance expenses and the way in which losses are treated differently between the income tax and corporation tax regimes: Specifically:-
Interest expenses: as of April 2017 a worldwide group, or single entity with no associates, within the scope of corporation tax may only offset up to £2 million net interest expense, without restriction.
These rules will now apply to non-resident companies affected by the changes. Certain companies may qualify for exemption from the £2million limit in respect of third party debt under the public infrastructure rules, which apply where the UK property business consists of the provision of UK property to a third party.
Losses: For corporation tax purposes, only 50% of the profits made by a company in any given period are available to offset against carried forward losses. However, this does remain subject to an annual allowance per group (or single entity) of £5 million worth of profits, which can be relieved in full.
Non-resident investors – UK Land Transactions
The Government has announced that, from April 2019, corporation tax or capital gains tax will be charged on gains made by non-residents on the disposal of UK land, creating a single regime for disposals of any UK situated land.
Capital gains tax currently applies to non-residents that dispose of UK situs residential property. This is charged on: individuals, trusts, personal representatives and close companies.
Two further extensions to the rules will see the introduction of:
1)The concept of an “indirect” disposal. Broadly, this is where the shares in a company, or interest in a partnership, holding UK land are disposed of and where 75% or more of the value of the entity is attributable to UK land (so called “property rich”). The indirect rules will cover both commercial and residential interests in land.
2)The extension of the charge to widely held companies and other investment vehicles.
The new rules will only apply to gains arising and accruing on or after 1 April 2019 (for companies) or 6 April 2019 (for other persons). Thus, there will be rebasing to April 2019 for non-residents now caught by the new regime.
The rules will include a targeted anti-avoidance rule (“TAAR”) which will apply to all arrangements entered into after the 22 November 2017, with the main purpose (or one of the main purposes) of securing that gains are not subject to the new rules, including under the terms of a double taxation treaty.
Taxpayers who make a chargeable disposal, be it direct or indirect, will have 30 days in which to report the disposal to HMRC. This is with the exception of corporation taxpayers, who must register for corporation tax and make returns in line with the corporation tax regime.
Additionally, the concept of third party reporting is being introduced in relation to indirect disposals. This measure is to ensure that indirect disposals are reported to HMRC which puts the emphasis on UK based advisers who are aware that a transaction is taking place.
Taxation of Carried Interest
The Government is continuing to tackle the perceived tax avoidance by financial professionals in the City of London. This includes continued changes to the rules determining how “carried interest” is taxed. In this budget, the Government is withdrawing the transitional rules previously in place to exclude certain carried interest arising, but not paid, prior to 8 July 2015 and certain timing provisions in respect of the application of the “disguised investment management fee” rules.
The transitional rules, which excluded amounts of carried interest relating to the disposal of partnership assets before 8 July 2015 (providing there was genuine commercial reasoning), have been removed with immediate effect.
Taxation of trusts
The Government will publish a consultation in 2018 on how it intends to “make the taxation of trusts simpler, fairer, and more transparent”. Given that we have spent the last three years waiting for the Government to legislate on the impact of the Non-dom changes on Trust tax rules, there is a certain amount of uncertainty as to what this consultation is proposed to cover. If this can be taken as an example, it is unlikely that the Government will be able to propose changes that can be classified as simple…
A common theme over the Government’s last few budgets has been tackling “disguised remuneration” arrangements involving Employee Benefit Trusts (”EBTs”) and similar schemes. This Budget continued that theme, with the Government announcing what it intends as the final measures towards ending such arrangements.
This Budget announced the addition of a “close company gateway” into the legislation, aimed at preventing small companies setting up arrangements to benefit their shareholders and key employees.
The Government also announced the requirement for all outstanding arrangements post 5 April 2019 to be notified to HMRC to ensure compliance. The final measure will see the implementation of new rules allowing the collection of tax charges from UK employees where the employer is located offshore.
With these additions to the already robust legislation on disguised remuneration, it is even more important for clients with outstanding EBT arrangements to take advice and seek to resolve any outstanding issues before 5 April 2019.
Corporation Tax Avoidance
Whilst corporation tax has been reduced in the UK to attract foreign businesses to relocate here, the Government has been equally mindful of ensuring that UK companies are taxed fairly when considered as part of a multinational group.
Today’s Budget made a few minor changes to the corporation tax system with the aim of enhancing this fairness. Amongst the measures were small changes to the hybrid mismatch regime and small amendments to the “corporate interest restriction” rules. It also included measures to restrict relief in the UK for UK companies with overseas permanent establishments where losses made abroad by those permanent establishments have been relieved in other jurisdictions.
The Government has proposed that it will consult on changing the current “intangible fixed asset” regime, and also on measures aimed at preventing UK traders or professionals from “fragmenting” their income between non-resident entities in order to avoid UK tax. Both of these consultations will run in 2018, and we will know more about the impact of these proposals once the consultation papers have been issued.
In addition, the Substantial Shareholdings Exemption rules will be changed in order to avoid the unintended creation of a corporation tax charge where the assets of a foreign branch of a UK company are transferred to overseas subsidiaries in return for shares in that subsidiary.
The fact that these rules need revision to avoid “unintended consequences” demonstrates just how complex these rules are. We recommend that clients who have any involvement in multinational businesses seek advice on the potential impact of these changes on their business.
Corporate Tax and the digital economy
The Government has published a position paper on “Corporate tax and the digital economy” which describes the difficulty that the government has (and all governments have) in trying to recognise where profits should be taxed in today’s digital, automated world.
The paper recommends immediate action aimed at multinational companies who hold intellectual property, for example a brand name, in no tax or low tax jurisdictions. This strategy enables profits to be transferred to an entity which holds the intangible assets and pays little or no tax.
Legislation will be introduced which applies a UK withholding tax, basic income tax rate, to royalties paid in connection with sales of products and services to UK customers. The tax will apply even if it is paid by a non-UK resident supplier to a non-UK resident intellectual property holding company.
The paper recognises that this is an interim action as this is an international issue and can only be solved with multilateral cooperation.
The paper stresses that the withholding tax will be applied in accordance with the UK’s international double tax treaty obligations.
In my view this measure is unlikely to be successful in collecting much tax. The government acknowledges that it will respect double tax treaties, so to avoid this measure intellectual property holding vehicles could be migrated from a country where there is no double tax treaty to a country where there is a low withholding tax applied by the treaty.
In addition there are some significant practical obstacles to overcome. It may be difficult for the UK to enforce compliance as the UK does not have jurisdiction over non-residents.
The Government has announced a number of changes to the current SDLT rules. Foremost amongst these changes are certain amendments in the application of the additional (or “supplementary”) rate of SDLT applicable to persons acquiring a second home.
These amendments include legislative changes that aim to prevent the ability of taxpayers to claw back additional rate SDLT suffered where a replacement main residence is subsequently acquired by reason of certain arrangements. Specifically, a claw back will be prevented where a taxpayer only disposes of part of their only or main residence, or where it is sold to their spouse. Moving forward, the claw back will only be available if the taxpayer disposes of the whole of the interests in their previous main residence, to someone who is not their spouse.
Additional changes to the SDLT rules will dis-apply a charge to the additional rate where an individual buys a property from their spouse or civil partner. They will also disregard the interests of a former spouse or former civil partner upon divorce, specifically when the property is held under certain ‘property adjustment orders’ in the case of a divorce. Finally, it is intended that new rules will disregard a property held by a child’s parents when a property is purchased by a child’s trustee pursuant to a power conferred on the trustee by a relevant court appointment.
In addition, the Government has introduced, with effect from 22 November 2017, SDLT reliefs for first time buyers (being individuals who have never owned an interest in residential property anywhere in the world) who acquire properties for less than £500,000. Those paying up to £300,000 for their first residential property will no longer pay SDLT at the prevailing rates, whilst those paying up to £500,000 will only pay SDLT at 5% on the purchase price exceeding £300,000.
First time buyers purchasing property for more than £500,000 will not be entitled to any relief and will pay SDLT at the normal rates.
Time limits for discovery of offshore non-compliance
In line with recent moves towards hardening the Government’s stance on the use of offshore jurisdictions to avoid UK tax, HMRC will consult (in Spring 2018) on extending the minimum time limit in which they are able to assess underpaid tax from offshore arrangements.
It is proposed that where a taxpayer has an “offshore connection” that has led to the avoidance of UK tax, the time limit within which HMRC can recover underpaid tax will extend to 12 years. The justification for such a proposal is that HMRC believe that it often takes longer to establish the facts in offshore cases.
Currently HMRC is only able to raise an assessment for underpaid tax up to 4 years from the end of the tax year in question, in most cases. The exceptions to this rule are where an underpayment can be demonstrated to arise from careless or deliberate behaviour, in which case the limit is increased to 6 and 20 years, respectively.
Requirement to notify HMRC of offshore structures
On 1 December 2017, the Government will publish a response to its consultation into the proposed requirement to notify HMRC of the creation of offshore tax structures and complex financial arrangements. The proposals could require intermediaries such as tax advisors, lawyers and accountants to provide HMRC with the names of clients using such structures, even where they are used for perfectly legitimate reasons. The Government has committed to engage with international partners such as the EU and OECD who are considering similar proposals, and we will wait to see what their consultation response contains.