Once again, Fieldfisher’s leading tax experts were asked to contribute their thoughts on the Chancellor’s Autumn Statement for use in PLC’s Leading Experts Article.
You can find our contributions by clicking the links below:
In his Autumn Statement speech, the Chancellor sought to capitalise on the popular moral indignation about “multinational businesses” avoiding their “fair share” of tax. His new Diverted Profits Tax will, he said, raise over £1 billion over the next 5 years. That is perhaps a relatively modest sum, although that may be because the Treasury expects the corporation tax take to increase as companies adopt more straightforward business structures in response to the new rules.
The Autumn Statement itself introduced the DPT under the sub-heading “Tackling tax avoidance”, and referred to “the use of aggressive tax planning to avoid paying tax in the UK” (“aggressive” has become the word of choice lately). The tone was clear.
It remains to be seen how the DPT will fare under EU freedom of establishment and movement of capital rules and how it will interact with double tax agreements and comparable measures expected to be proposed by the OECD only next year – the system risks becoming fiendishly complex.
The DPT draft legislation and guidance, published on 10 December, bear detailed scrutiny (the Office of Tax Simplification may be having palpitations!), but, if fairness is the order of the day, some more work is needed. First, the taxpayer itself must notify HMRC if it is potentially within the scope of DPT (within 3 months of the end of its accounting period), and then HMRC gets a generous 2 years to issue a notice of chargeability. Moreover, the company then has a mere 30 days to make representations (which in effect are restricted because HMRC can only consider representations on certain matters)! That is absurd in the context of a multinational structure. HMRC then can assess the appropriate imputed amounts and consequent DPT. If HMRC issues a charging notice, then the tax must be paid within 30 days even if a review is to be sought and an appeal is expected to be made – the tax cannot be postponed on any grounds: fair’s fair (or maybe not!).
Whilst entirely understandable, both politically (having regard to the heightened public consciousness of tax planning) and economically, it is unfortunate that such an important and complex measure will be rushed through in Finance Act 2015.
Panem et circenses
The Autumn Statement provided the headlines for the popular press: “Google tax” and reform of stamp duty. 552 pages of Draft Finance Bill 2015 constitutes the detail. A brief exegesis of the Google tax follows.
Diverted Profits Tax (“DPT”) is described by the Government as a new tax designed “to counter the use of aggressive tax planning techniques used by multinational enterprises to divert profits from the UK.” Whilst HMRC will be holding an Open Day on 8 January 2015 to hear views regarding the technical aspects of the draft legislation, it is reasonable to assume that DPT will be introduced by Finance Act 2015. DPT will be applied at a rate of 25% from 1 April 2015. There are 2 circumstances when it will apply:
(i) when businesses “design their activities to avoid creating” a permanent establishment in the UK; or
(ii) where businesses create a tax advantage by using transactions or entities that “lack economic substance“.
Small or medium-sized enterprises will not be subject to DPT and there will be an exemption where total sales revenues from all supplies of goods and services to UK customers do not exceed £10 million for a 12 month accounting period.
The process is that a company must notify HMRC if it considers that it is potentially within the scope of DPT within 3 months after the end of the accounting period. The company is not required to quantify the profits that it considers are potentially chargeable to DPT. HMRC may issue a preliminary notice of chargeability within 2 years after the end of the accounting period; the time limit is 4 years if no notification has been made by the company. After a preliminary notice has been issued by HMRC, the company has 30 days to make representations. Whilst the grounds on which representations can be made are unrestricted, HMRC may consider them only if they pertain to certain defined factual matters. Having considered the representations, HMRC must, within 30 days, either issue a charging notice or confirm that no charging notice is to be issued. DPT must be paid within 30 days from the issue of the charging notice. There is no right to postpone the tax.
The DPT administrative process requires a company first to determine whether it may be within the ambit of DPT, and, if so, to notify HMRC of this. It then permits the company to make representations (that could include representations on the company not being within the scope of DPT), but precludes HMRC from considering representations on DPT that do not fall within the prescribed matters. This process stands unhappily in contrast to, for example, the GAAR. There is no provision in Finance Act 2013 (or in the Taxes Management Act 1970) that imposes an obligation on a taxpayer to self-assess under the GAAR. A procedural precondition for the application of the GAAR is an officer of HMRC issuing a notice under paragraph 3, Schedule 42, Finance Act 2013 setting out, inter alia, the proposed counteraction to the tax arrangements that HMRC consider are abusive.
The UK taking a unilateral stand by introducing a quasi-corporation tax (that is estimated to raise only £360m a year by 2017/18), without having obtained advance agreement from the UK’s double tax treaty partners, and possibly with the primary aim of seeking to placate a populace wound up by a demagogic Public Accounts Committee, is deeply troubling. A fortiori a quasi-corporation tax that is, at the least, ‘vulnerable’ to an EU law based challenge.
In November 2014, OECD published a discussion draft that considered the need to update the double tax treaty definition of permanent establishment in order to prevent artificial profit shifting; and the OECD intends to release its report on Base Erosion and Profit Shifting (addressing the shifting of profits of multinational groups to low tax jurisdictions and the exploitation of mismatches between different tax systems) by the end of 2015. A more measured approach would have been to await the conclusion of the OECD’s work, particularly as it is in a complex area that is dependent on international consensus. Indeed, the wider changes to the international tax regime that are currently being negotiated by the G20 countries could result in the DPT rules effectively being rendered nugatory shortly after their enactment.
It’s as if the Coalition Government wants to keep an employee ownership and employee share schemes “to do” list for the next administration. After postponing the abolition of the perpetuities period for employee-ownership trusts it has now rejected the Office of Tax Simplification employee shareholding vehicle proposal. Acknowledged as “creative and far-reaching” by HMRC the rejection of this proposal is disappointing.
Para 2.135 of the 2014 Autumn Statement, headed OTS review of non-tax-advantaged share schemes: employee shareholding vehicle (“ESV”), states simply “Following consultation launched after Budget 2014, the government has decided not to proceed with a new employee shareholding vehicle”.
Offshore trust administrators and tax advisers will be relieved. The ESV was a serious threat to fee income. If implemented in full the ESV would have provided an onshore capital gains tax efficient alternative to an offshore employee trust and a solution to the loan participator charges that can arise when lending to an employee trust and other long-standing technical issues with the warehousing and market making of shares for use in employee share schemes.
Perhaps the ESV proposal was too ambitious but surely something will be done about the loan to participator rules to help the nascent employee-ownership trusts buy-out market? No, para 2.154 of the 2014 Autumn Statement refers to its review of the loan to participator rules and announces “The government does not intend to make any changes to the structure or operation of the [loan to participator] tax charge following this review”.
HM Treasury and HMRC has published ESV: summary of responses (December 2014) which explains its reasoning on each issue, and its overall conclusions. A key message is that there were insufficient responses to the consultation to demonstrate a demand for change. The consultation “received a very limited response of just over 20 representations and very few of these were from businesses (particularly unquoted companies) or their representative groups”. This argument is a little harsh. Given the Government’s success in creating a moral agenda against tax planning it is unlikely that many businesses will write in to HMRC to say “we set up our trust offshore to save CGT” or “it was only after we made the loan to our trust that we were advised there was a 25% tax charge” and, remember, these are highly technical issues. Also, there could be consultation fatigue. Since 2011 there has been a succession of important employee share schemes related consultations. It is entirely correct for HM Treasury and HMRC to state “The OTS’s recommendations have enabled the government to undertake the most significant package of reform to the tax rules for employee share schemes for many years”. And, of course, for the employee ownership sector there have been all the Nuttall Review related consultations including on the new employee-ownership trusts tax exemptions.
Great progress has been made by this Government in revamping the UK’s tax advantaged employee share schemes and in promoting, for the first time, an employee ownership agenda complete with tax exemptions. As to the tax issues the ESV would have solved, well, there is some hope. The Government has said it will continue to keep the individual issues raised by the discussion paper under review.
In 2014 UK professional journals have 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 recent articles on EO:
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…”.
In September 2010, the Chief Secretary to the Treasury, Danny Alexander, pledged to make funding available to HMRC for a five-fold increase in criminal prosecutions for tax evasion. In January 2013, the incumbent Director of Public Prosecutions, Kier Starmer QC, said, in respect of non-organised tax fraud, that the Crown Prosecution Service (“CPS”) was aiming to prosecute seven times as many people in 2014/15 as it had done in 2010/11.
I have always been uneasy with the concept of ‘targets’ for prosecutions. Absent a five-fold increase in staffing in HMRC’s criminal investigations team (which was unlikely ever to happen, it takes years to train a good investigator) and a five-fold increase in the number of criminal investigations and raids, a five-fold increase in number of prosecutions could also be achieved by HMRC and the CPS ‘lowering the bar’ on the chances of a conviction before suspects were charged. If this were happening we would expect to see lower conviction rates for tax evasion offences going forward. The latest figures hint that this might indeed be starting to happen.
In a previous post on this blog about HMRC’s criminal investigations activity. I explained that there are three figures I track (I aim to exclude prosecutions for tax credits fraud) that reveal the extent of HMRC’s criminal investigations activity, and the extent of its success (or failure).
1. warrants executed by HMRC (“raids”);
2. decisions by the CPS to charge for tax offences (“prosecutions”); and
3. convictions for tax offences in the courts (“convictions”).
All three are tracked because they deal with different stages in the prosecution cycle. It often takes a year or more between a raid and a prosecution; and a similar period again between a prosecution and any conviction.
I now have the complete figures for all four years tax year from 201/11 to 2013/14 derived from a combination of Parliamentary Answers and Freedom of Information Act requests.
Year Raids Prosecutions Convictions
2010/11 498 420 280
2011/12 731 545 401
2012/13 793 770 522
2013/14 744 774 682
As I noted in June there was a dramatic increase, in all three metrics, between 2010/11 and 2012/13, with raids up 59%, prosecutions up 83%, and convictions up 86%. However, the indications are that the HMRC criminal investigations team has reached maximum capacity, with the number of raids falling 6% in 2013/14 and the number of decisions to prosecute (which is a function of the number of files HMRC forwards to the CPS) static. The number of convictions rose 30% in the period but that is a function of the lag between decision to prosecute and the decision of the court.
What is more concerning- and bears out my previously- expressed fears about a target- driven culture- is the hint that the percentage of prosecutions which result in a conviction is falling: that is, there are more cases where the conclusion of the court is that HMRC were wrong when they accused the defendants of tax evasion. If we take the lag between decision to prosecute and conviction to average a year, the conviction rate is 95% in 2011/12, 95% in 2012/13 but falls dramatically to 88% in 2013/14 as the first wave of cases from the ‘great leap forward’ of 2011/12 result in trials.
If you are a regulated (SRA, FCA, ICAEW or the like) professional and are charged with a criminal tax offence, because these are dishonesty offences it is inevitable (at the moment) that you are going to have your licence to practise suspended, and thus will lose your means of earning a living, for at least a year- even if you are eventually found to be innocent by a jury. If the alleged offence relates to a complex conspiracy to defraud, with lots of co-defendants, it may take two, three, or even four years (I have known it be longer) for the case to come to trial. If you are acquitted, even if your previous professional firm will have you back again, you will never get back the money you could have earned in that time, nor will you get back the full sum you have spent on legal fees.
In other words, being charged with a criminal tax offence is likely to mean virtual financial ruin for a regulated professional, whether or not you actually ‘did it’. So, if HMRC show an interest in you; and you have a concern that something is, or might be perceived to be, open to question or to adverse interpretation in your tax affairs; talk to a lawyer, under the protection of legal privilege, as soon as possible.
The decision of the ECJ in Skandia America Corp. (USA), filial Sverige v Skatteverket ECJ Case C‑7/13 has been widely reported.
In brief, the facts of the case are that a company based outside the EU acted as a global purchaser of IT services which it supplied to its Swedish branch. The Swedish branch was registered as a VAT group with other related Swedish companies. Under normal circumstances, no supply would be recognised between a company’s head office and its branch so the reverse charge to VAT would not apply to the importation of the services. The first question referred to the Court was whether:
“… supplies of externally purchased services from a company’s main establishment in a third country to its branch in a Member State, with an allocation of costs for the purchase to the branch, constitute taxable transactions if the branch belongs to a VAT group in the Member State.”
The court actually answered a wider question (in that it was not restricted to supplies of externally purchased services) in ruling that:
“…supplies of services from a main establishment in a third country to its branch in a Member State constitute taxable transactions when the branch belongs to a group of persons whom it is possible to regard as a single taxable person for value added tax purposes.”
On this basis, the VAT group was liable to account for the reverse charge on the imported services.
Clearly, then, this is going to result in increased VAT costs for partially exempt VAT groups in this position.
A planning point appears to arise where a partially exempt branch consumes at least part of the imported services (rather than supplying them on to other companies within and outside the VAT group). In such cases, the branch should consider being removed from the VAT group – the import of services from its head office will then remain outside the scope of VAT.
Our Pensions team has published a client alerter explaining the issues around the new provisions allowing lump sums to be paid by Pension Schemes to Scheme Members.
You can view the alerter here.
The Fieldfisher Tax & Structuring Group has launched a new brochure, aimed at owner managed businesses. The brochure explains how we can help business owners and their businesses. Thinking about the tax position of the business owners as well as the tax position of their business is often overlooked, which can lead to disjointed advice. We take a more holistic view. You can take a look at our brochure here. To mark our recent office move to Riverbank House, we have included a picture of our new offices on the front cover of the brochure!
The Government tabled a series of amendments to Schedule 33 to the Finance Bill 2014 (Companies owned by employee-ownership trusts (“EOTs“)) on 25 June 2014.
HM Revenue & Customs has explained in an email to those who have engaged with the Government on the introduction of this legislation that:
“… these amendments are to provide protection against abuse without creating unfairnesses which might expose the UK to legal challenge.
They provide for relief from capital gains tax [“CGT“] to be withdrawn, and for further claims to relief to be barred, if certain events occur. They also amend the relief requirements which must be met for a claim to be made. Where relief is withdrawn and further claims barred, this will supplant the deeming of a gain or loss on the trustees. The amendments are intended to prevent abuse of the relief where an EOT exists only for a short time.
… we have defined ‘disqualifying events’ at section 236O TCGA in terms similar to the relief requirements at section 236H(4), and if a disqualifying event occurs then a gain or loss is treated as accruing to the trustees of the EOT. As a result of the new amendments:
We recognise that these rules are new to the scheme, and so they will not apply to disposals of shares to trustees which took place on or after 6 April 2014 but before 26 June 2014.”
The amendments are available on the Parliament website at http://services.parliament.uk/bills/2014-15/finance/documents.html There is an accompanying explanatory note.
For additional information on these EOT reliefs see the article The employee ownership business model and Nuttall Review of Employee Ownership – quick guide to source materials