Budget 2015 – PLC Expert Practitioners Piece

avatar Posted on March 20th, 2015 by Andrew Prowse

Once again, Fieldfisher’s tax partners have contributed to the popular PLC round-up of expert practitioners’ views on the Budget.  This year’s comments are below:

Hartley Foster

Another Budget, another raft of measures with the aim of reducing tax avoidance. And within this year’s raft is the introduction of a tax that has the potential to damage significantly the UK’s economy and standing in the global community: diverted profits tax (DPT). DPT will come into effect only a week after publication of the Finance Bill, with any time for proper Parliamentary scrutiny thereby having been precluded.

But for the desire to grandstand before the election, the introduction of DPT may have been postponed until after the end of 2015, when the OECD will have released its BEPS report that will address the shifting of profits of multinational groups to low tax jurisdictions. DPT is anticipated to raise only £360m a year by 2017/18. Postponing the introduction of DPT until after the OECD had concluded its work would have had all but no impact on the quantum of the fisc’s tax take; it would have enabled the UK to address the harm of the perceived tax avoidance in a way that is consistent with that to be adopted by other countries.

The three fundamental concerns are:

  • Gambling on all of the UK’s double tax treaty partners accepting that DPT falls outside the ambit of the treaties is akin to forcing the UK to risk its position in the global economy on rounds of Russian roulette where all but one of the chambers have been loaded.
  • There is, at the least, significant doubt as to whether DPT will be lawful as a matter of EU law, and, accordingly, there is a significant risk that the legislation will be the subject of, perhaps concerted, challenge on that basis.
  • DPT’s complex procedural framework will impose a significant, and disproportionate, compliance burden, not only on a vast number of companies, many of whom, as the Government accepts, will not be liable to pay the tax, but also on HMRC.

Whilst it is to be welcomed that the legislation has been revised to narrow the notification requirement, the fundamental concerns remain.

Graeme Nuttall, OBE

Budgets 2012, 2013 and 2014 contained unprecedented support for the employee ownership (EO) business model. After such an amazing era it was expected that the pre-Election Budget 2015 would be silent on EO policy. The heavy-lifting was done in Schedule 37, Finance Act 2014. The Government has ensured that tax does not distort the choice of EO business model by creating support for the indirect form of EO, as well as strengthening the direct form. Every month companies are now switching to EO. This is not because of the new CGT exemption for the sale of a controlling interest to an employee-ownership trust (EOT) or because employees in a company controlled by an EOT may receive up to £3,600 a tax year income tax free, as John Lewis Partners enjoyed recently. These tax exemptions provide an invaluable prompt to consider EO especially as a business succession solution. The main reason for choosing EO is that EO is a successful and enduring business model: one that is good for business performance and good for staff. This is why businesses such as Hayes Davidson, St Brides Partners and Stride Treglown have all switched to EO in recent weeks and why EO is establishing itself in the mainstream of the UK economy.

 

 

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Budget 2015 – Entrepreneurs’ Relief – Man Cos will not work

avatar Posted on March 19th, 2015 by Andrew Prowse

Entrepreneurs’ relief (“ER”), where it applies, provides an effective 10% rate of CGT on disposals on the first £10m of lifetime gains.  The attraction of a 10% rate has led to structures designed to access ER where, without such structure, the ER conditions would not be met.  In the context of share sales, broadly, ER may apply where the individual seller holds 5% or more of the votes and share capital in the target company which is a trading company or a member of a trading group, and is an officer or employee of that or a group company (there are also rules around how long the shares have been held).

Until yesterday, a trading company could include a company which was not itself a trading company but which held at least a 10% interest in a joint venture company which was a trading company.  In effect a portion of the trade of the JV company would be treated as a trade of the first company, making that first company a trading company.

Structures developed under which a management company (or ManCo) was established, in which individuals held shares, which in turn held 10% of the shares in an underlying trading company.  In that way, the managers could hold more than 5% of the ManCo, which was deemed a trading company, even though, had they held shares directly in the underlying company, they would not have passed the 5% ER shareholding threshold.

With effect for disposals made on or after 18 March 2015, the joint venture deeming provision described above will be repealed.

This will affect existing ManCo structures, probably rendering them ineffective (subject to the detailed facts).

It will also affect other existing corporate structures which happen for commercial reasons to involve joint ventures, irrespective of whether or not those structures derive from tax planning.  It is not uncommon for individuals to hold interests in trading companies through their own companies.  In those circumstances, ownership structures should be reviewed carefully in the light of the new changes.

Finally, the Budget Tax Note introducing the change was written confusingly and in some places suggested that any non-trading holding company (even with a grouped (rather than JV) trading subsidiary) would prevent the holding company shareholders from qualifying for ER.  Some other commentators have remarked on this.  Looking at the Budget Tax Note as a whole, it is only targeting the rules allowing non-trading companies to be deemed trading for ER purposes by reason of 10% or more holdings in non-grouped JV companies.  This is supported by the draft legislation.

Here is a link to the Budget Tax Note.

 

 

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Budget 2015 – Mini Bonds – some good news?

avatar Posted on March 19th, 2015 by Andrew Prowse

Yesterday, the Chancellor announced that the Government will explore further extending the list of ISA-eligible products to include debt and equity securities offered via crowd funding platforms.  They will consult on this proposal in the summer this year.  Given the increasing flexibility of ISAs, this will be a welcome shot in the arm for those companies wanting to raise funds through crowd-funding as opposed to more traditional bank debt.

As part of the Chancellor’s reform of the taxation of personal savings, he announced a new Personal Savings Allowance, to be created from April 2016.  It is therefore subject to the outcome of the General Election.  If introduced, it will exempt the first £1,000 of savings income from any tax for basic rate taxpayers and the first £500 of any savings income for higher rate taxpayers.  In keeping with the Chancellors’ stance on additional rate taxpayers, this change will not help them.

As a result, the automatic 20% withholding tax at source operated by banks and building societies on non-ISA interest income will no longer be necessary.

The Budget announcement refers only to savings income paid by banks and building societies.  It remains to be seen, therefore, whether this abolition will extend to comparable interest payments made by other entities, such as companies paying interest on mini bonds.  Whilst it may not, because the source legislation requiring banks and building societies to withhold tax is different from that applying to companies, it is to be hoped that it will.  The basic point is the same and otherwise there will not be a level playing field for entrepreneurial companies wishing to issue mini bonds and similar instruments to raise funds from individual savers.  Of course, if mini-bonds may be added to ISAs, the issue may be less important in many (but by no means all) cases.

 

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Budget 2015 – Entrepreneurs’ Relief – Companies in Partnership

avatar Posted on March 19th, 2015 by Andrew Prowse

Entrepreneurs’ relief (“ER”), where it applies, provides an effective 10% rate of CGT on disposals on the first £10m of lifetime gains.

As one of a number of measures announced in the Budget in connection with ER, companies that are members of a trading partnership will no longer be able to count a portion of the partnership’s trade as if it was their own (and so non-trading partner companies will no longer be able to look to the underlying partnership so as to be treated as trading for ER purposes).  This is allied to the changes repealing the joint venture rules concerning ER and companies holding interests in JVs, which is discussed in another of my blogs.

As a result, the usual assumption that a partnership is transparent for tax purposes should no longer be made in the ER context without a careful review of the exact ownership structure.

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Budget 2015; Inheritance Tax

avatar Posted on March 18th, 2015 by Amanda Gordon-Napier-Tompkinson

George Osborne has announced that the Government will conduct a review on the avoidance of inheritance tax through the use of deeds of variation and will report by the Autumn.

A beneficiary of a deceased person’s estate may redirect their interest in the estate by using a deed of variation.  If a non-exempt beneficiary redirects their interest in the estate to an exempt beneficiary (the spouse/civil partner of the deceased or a charity) that interest will no longer be subject to inheritance tax if the variation complies with the provisions set out in section 142 Inheritance Tax Act 1984 (for example the variation must be made within 2 years of the date of death, the variation must be in writing, the beneficiary redirecting their interest must be a party of the deed, the deed must state that the parties to the deed intend section 142 Inheritance Tax Act 1984 to apply to the variation and the variation cannot be made for consideration).

HM Revenue & Customs (‘HMRC’) are already cracking down on people avoiding inheritance tax through the use of deeds of variation.  For example, HMRC state in their inheritance tax manual number 35093 that if HMRC believe that the exempt beneficiary will return the interest to the original beneficiary, they will challenge the variation.

References:

Chancellor George Osborne’s Budget 2015 speech, https://www.gov.uk/government/speeches/chancellor-george-osbornes-budget-2015-speech, (accessed 18 March 2015).

‘After death variations: IHT and CGT’, Practical Law, (accessed 18 March 2015).

C. Butcher and A. King-Jones, Probate Practice Manual Thomson Reuters (Professional) UK Limited, 2014, paragraphs F1.1, F2.1-F2.24, F5.1-F5.4.

C. V. Margrave-Jones, ‘After-death variation: Narrative’, Butterworths Wills, Probate & Administration Service, Issue 71, December 2010, paragraphs F[1.1]-F[1.11].

Inheritance Tax Act 1984 s142

HM Revenue & Customs, ‘IHTM35093 – Property redirected to the spouse or civil partner: gifts back to original beneficiaries’, http://www.hmrc.gov.uk/manuals/ihtmanual/IHTM35093.htm, (accessed 18 March 2015).

 

 

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Budget 2015; the new non-resident CGT charge explained

avatar Posted on March 18th, 2015 by Penny Wotton

The Chancellor has not announced any new taxation measures which will apply to non-UK residents owning property in the UK but the Government has today issued long awaited guidance on how the new charge to CGT on gains which arise to non-UK residents from 6 April 2015 on the sale of UK residential property in their direct ownership will work.

The Government has confirmed that in calculating the gain arising from 5 April 2015 you will have a choice of either rebasing the value of the property at 5 April 2015 or carrying out a straight-line time apportionment of the whole gain over your period of ownership.

The rate of tax will be the same for non-UK residents as for UK residents i.e. 28% for trustees and personal representatives and 18% or 28% for individuals.

The Government has also confirmed that private residents relief (PRR) will be available if the property is your only or main residence for each year in which you satisfy a new occupancy test.  The new occupancy test will require you, in conjunction with your spouse/civil partner (but not allowing double counting) to stay overnight in the property at least 90 times during a tax year (apportioned where you own the property for only part of the year).  In addition, if you met the conditions to claim PRR under the old test before 5 April 2015 you will still be entitled to claim PRR under the old rules.

On disposal of UK residential property after 5 April 2015 you will need to report the disposal to HM Revenue & Customs on-line on a new NRCGT return and pay the CGT due within 30 days of completion of the sale.  If you already file a UK self-assessment return you will still need to report the disposal on the NRCGT return within 30 days of sale, but you will have the option of deferring payment of the CGTuntil your normal end of year tax payment date.

You will be required to file a nil return on a relevant disposal even if no CGT is due.

You will also be entitled to set any losses on disposal of UK residential property against gains on disposals of UK residential properties in the same year, or to carry those losses forward to later years and if you later become UK resident you will be allowed to claim those losses as general losses against other chargeable gains.

These changes do not affect ATED related CGT which will continue to apply.  However, where ATED related CGT is payable there  the gain will not also be subject to the new non-resident CGT charge.

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Nuttall Review of Employee Ownership – a guide to source materials including the employee ownership tax exemptions introduced in the Finance Act 2014

avatar Posted on March 14th, 2015 by Graeme Nuttall OBE

This article was originally published on 9 February 2014 and contains links to the main documents related to the Nuttall Review of Employee Ownership. It has been updated to include links to statutory instruments that deal with making EMI options compatible with employee-ownership trusts and amendments to the “Nuttall Review” share buy-back provisions. There are additional materials available from the Making employee ownership more accessible UK Government policy web page.

1.  Nuttall Review – main documents

2.  Nuttall Review announcements

3.  Informal consultation

4. “Right to request” consultation

5.  Robert Oakeshott Memorial lecture

6.  Employee ownership and share buy backs

7.  EO Day 2013 publications following Nuttall review recommendations

8.  Amending the rule against perpetuities

9.  Implementation Group on Employee Ownership

10.  Government home pages

  • UK Government web page with “making employee ownership more accessible” policy statement
  • Department for Business, Innovation & Skills and HM Treasury Employee Ownership home page
  • HM Revenue & Customs Employee Ownership home page

11.  HM Treasury internal review

  • Budget 2012 (21 March 2012) announcement that “HM Treasury would conduct an internal review to examine the role of employee ownership in supporting growth and examine options to remove barriers, including tax barriers, to its wider take-up”
  • Autumn Statement 2012 (5 December 2012) set out the key outcomes of HM Treasury’s internal review

12.  Employee ownership trust tax exemptions in the Finance Act 2014

Please note: Employee-shareholder status (originally announced as employee-owner status on 8 October 2012) is not a Nuttall Review recommendation, and neither is the Employer Ownership Pilot. For information on UK public service mutuals please start with the Cabinet Office Mutuals Information Service

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Diverted Profits Tax

avatar Posted on February 9th, 2015 by Hartley Foster

On 4 February 2015, we submitted our response to the consultation in respect of the introduction of the new tax, to be called the Diverted Profits Tax (“DPT”).

 

Our primary recommendation to the Government was that the introduction of DPT should be postponed until after the OECD has released its report on Base Erosion and Profit Shifting (“BEPS”), which report will address the shifting of profits of multinational groups to low tax jurisdictions and the exploitation of mismatches between different tax systems.

 

DPT is anticipated to raise only £360m a year by 2017/18. It is anticipated that the OECD’s report will be released by the end of 2015. Hence, postponing the introduction of DPT until after the OECD has concluded its work on BEPS would have all but no impact on the quantum of the fisc’s tax take. A comparatively short period of consideration would enable the UK to address the harm of the perceived tax avoidance in a way that is consistent with that to be adopted by other countries and it could be used to ensure that the DPT legislation is clear and targeted, and compliant with both EU and international law.

 

Our three fundamental concerns with the draft legislation are:

(1) Gambling on all of the UK’s double tax treaty partners accepting that DPT falls outside the ambit of the treaties is akin to forcing the UK to risk its position in the global economy on rounds of Russian roulette where all but one of the chambers have been loaded.

(2) There is, at the least, significant doubt as to whether DPT would be lawful as a matter of EU law, and, accordingly, there is a significant risk that the legislation would be the subject of, perhaps concerted, challenge on that basis.

(3) Its complex procedural framework would impose a significant, and disproportionate, compliance burden not only on a vast number of companies, many of whom, as the Government accepts, will not be liable to pay the tax, but also on HMRC.

 

If you would like a copy of our detailed submissions to the Government, please contact Hartley Foster (020 7861 4257; hartley.foster@fieldfisher.com).

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How to cope with a tax investigation

avatar Posted on February 2nd, 2015 by George Gillham

First as a tax inspector, and in more recent years as a solicitor, I have been dealing with tax investigations for many years. And I have seen the investigations landscape change. HMRC are much more aggressive than they used to be about challenging people- and businesses- they suspect are avoiding tax. They are pouring resources into combating avoidance and evasion. So it’s now much more likely that you’ll get a compliance check. Here are six tips on how to cope when HMRC start asking questions.

1. Try to work out what is happening

A ‘compliance check’ is the general term HMRC uses for their investigations. ‘Compliance checks’ can take place at any time but will only be carried out when HMRC has identified a risk or when a check is required as part of HMRC’s random programme.

HMRC will phone or write to you to tell you that they have started a check. If HMRC phone, listen carefully to what they say, and write down everything you can. You do not have to answer any questions there and then. The HMRC officer dealing with the check should tell you what they are checking, and why; and what information or documents they need from you, and when. If you don’t understand why HMRC is asking a particular question, ask them why they are asking it.

An ‘enquiry’ is a particular type of ‘compliance check’. An ‘enquiry’ can only be into a tax return so it can only take place once a tax return has been filed. An enquiry will always start with a written notification. The enquiry notice will explain what HMRC are looking into. It may be an aspect of the tax return or it may be the whole thing. You will probably be asked for further information and documents.

2. Don’t ignore any notification of a compliance check

HMRC has the right to make enquiries into your, or your business’s, tax affairs. HMRC do not go away if you just ignore them.

3. Don’t panic

While you should take any tax enquiry seriously, panicking won’t help. A tax enquiry is never going to be a pleasant experience even if your tax return is complete and correct. But it is not the end of the world. If there is nothing wrong with your tax affairs you have little to fear. We live in a civilised country where, despite hysterical newspaper reports to the contrary, justice is nearly always done. In Russia the Tax Police used to turn up armed with AK-47 assault rifles.

4. Don’t destroy the evidence

If you start getting rid of documents HMRC will assume that you’ve something to hide. If you didn’t keep records, obtain replacements (such as bank statements). This can often be done easily and cheaply by way of a request under the Data Protection Act 1998.

5. If you think there might be anything wrong with your tax affairs, seek professional advice immediately

Other than random checks, which are a small minority of the checks they do, HMRC rarely go on ‘fishing expeditions’. Before you get any notification of a compliance check HMRC will have reviewed any tax returns you have filed. They will have researched their ‘data warehouse’ for background information on any property, other assets, and interest bearing bank accounts you hold. They may also have information from other countries about assets held in your name, or for your benefit, there. So be honest with yourself. Is your tax return 100% correct? And can you prove it?

We all outsource aspects of our lives to specialists, and tax investigations are no different. For example, if you run a business you may get a bookkeeper to do your books. You may have an accountant to do your accounts. You might even have a tax specialist (perhaps a Chartered Tax Adviser) to do your tax return. In the same way you should get a tax enquiry specialist (a Chartered Tax Adviser or a former Inspector of Taxes working for a firm of accountants or solicitors) to deal with any compliance check.

You should consider calling a solicitor specialising in tax disputes to advise on anything that might involve a dispute in the Tax Tribunal and especially anything involving HMRC’s ‘specialist investigations’ teams (serious avoidance and evasion, sometimes known as COP8 and COP9). This is where the protection of legal privilege in terms of your communications with your adviser can be important.

You should always ask a solicitor to assist you if HMRC turn up with a warrant; or ask to interview you ‘under caution'; or allege fraud on your part.

6. Be honest with HMRC

Never lie in response to a question from HMRC. Never tell HMRC half-truths or disclose only half of a relevant chain of correspondence. Remember communications with your accountant are rarely covered by legal privilege- so HMRC can force them to provide copies of every email and file note.

If your tax enquiry specialist tells you there is something wrong with your tax affairs you will get credit for disclosing it early. Even if there is something very seriously wrong, disclosure (in the right way) is the best option. People often get prosecuted for the cover-up, not the crime.

George Gillham is a partner specialising in tax disputes. He can be contacted at george.gillham@fieldfisher.com and on 020 7861 4059.

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Recent articles on employee ownership – professional journals are raising awareness of EO

avatar Posted on January 18th, 2015 by Graeme Nuttall OBE

In 2014 UK professional journals published more articles on employee ownership (“EO”) than in any previous year. This is tremendous step forward in raising awareness of EO. A key idea in the Nuttall Review was that regulatory change would encourage more publicity for EO and this has happened. In 2013, changes to the Companies Act rules on share buy-backs and treasury shares prompted articles in journals such as Company Secretary’s Review. The introduction of the new tax exemptions for employee-ownership trusts (“EOTs”) in the Finance Act 2014 has prompted most of this year’s articles. Raising awareness of EO was one of the Government’s reasons for introducing these new tax exemptions. As HM Treasury explained in July 2013 “Following the findings of the Nuttall Review and in order to support this sector, the Government has decided to introduce … tax reliefs to encourage, promote and support indirect EO structures” and more explicitly “these tax reliefs will promote awareness of the sector and increase the attractiveness of indirect EO structures for businesses which might be considering converting“.

The following is a selection of articles on EO from 2014:

Employee Ownership: One Year On (Company Secretary’s Review, 15 January 2014) – “I have every expectation that when we look back at 2013 we will recognise it as having laid the foundations for a thriving and growing employee ownership sector in the UK. (Jo Swinson, Minister for Employment Relations and Consumer Affairs). Graeme Nuttall and Jennifer Martin from Fieldfisher explain more…”.

One minute with Graeme Nuttall, Partner, Field Fisher Waterhouse LLP (Tax Journal, 7 March 2014)

The life changing power of employee ownership (HSBC Corporate World, Spring 2014) – “Why would you want your employees, in Nick Clegg’s words, to own “a big chunk” of your company? The answer is simple – for many companies, employee ownership improves business performance, economic resilience, employee commitment and engagement. EO is a distinctive business model, a different perspective. And for some companies this is life-changing…”

The employee ownership business model (Tax Journal, 13 June 2014) – “Conventional approaches to the use of employee share plans need revisiting. In addition to understanding how to get shares tax efficiently into the ownership of individual employees, it is now important to understand the wider concept of EO, and especially the idea that a company may be owned by the trustee of an employee trust on behalf of all its employees…”

Securing the succession (Taxation, 24 July 2014) – “Everyone dealing with private companies should be familiar with employee-ownership trusts, especially as a business succession solution…”.

Neat – Graeme Nuttall OBE sees employee ownership trusts as the perfect succession solution (Trusts and Estates Law & Tax Journal, September 2014) – “Too many owner managers have overlooked employee ownership as a business succession solution. New tax exemptions should ensure that the indirect employee ownership business model achieves the recognition it deserves: one that provides a neat exit that is good for a business; good for employees and good for the UK economy…”

The employee ownership business model is incredibly welcome news – Expert Guide (Corporate LiveWire, September 2014) – “Read all about it “The UK Government endorses tax free buy-outs”. EO is finally getting the headlines it deserves. Tax exemptions introduced in the UK Finance Act 2014 are encouraging EOT buy-outs and this successful and versatile UK business model is attracting momentum internationally…”.

New Vehicle for Employee Shares (Company Secretary’s Review, 24 September 2014) – “The Government continues to demonstrate its support for employee share ownership in all its forms with the publication on 17 July 2014 of an open consultation seeking views on the introduction of a new employee shareholding vehicle…”

Tried and tested – Graeme Nuttall explains how employee ownership trusts can produce better business outcomes (Tax Adviser, October 2014) – “EOTs provide a refreshingly different ownership model for private companies. Anyone who focuses on the tax savings achievable through the new EOT tax exemptions is missing the big picture: EO can produce better business outcomes as well as a great place to work…”.

New tax exemptions promote employee ownership (Tax Journal, 13 December 2014) Graeme Nuttall OBE and Jennifer Martin explore the conditions for payment of income tax free bonuses by companies controlled by employee-ownership trusts.

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