UK: Weekly Tax Update – Monday 20 April
1 General news
1.1 HMRC organisation chart
HMRC has published its latest organisation chart showing the names of senior management.
One point to note is the number of senior people now in roles such as change management as opposed to being in pure technical roles. This clearly demonstrates the direction of travel of HMRC.
1.2 New regulations for international tax compliance
HMRC has issued an update concerning the UK/US IGA and FATCA obligations. It confirms that (i) nil returns are not required from reporting financial institutions and (ii) holding and treasury companies are not automatically regarded as reporting financial institutions.
A new statutory instrument has been issued, SI 2015/878, that came into force on 15 April 2015. It revokes the previous International Tax Compliance (United States of America) Regulations 2014 (SI 2014/1506). It also contains provisions on electronic reporting of information, due diligence and reporting under rules for EU exchange of information obligations (Council Directive 2011/16/EU – the ‘DAC’), Common Reporting Standards (CRS) and for FATCA under the UK/US IGA.
SI 2014/1506 regulations 3 to 8 identified reporting financial institutions, which included holding and treasury companies. The statutory instrument also provided that certain US reportable accounts of deceased account holders, or their personal representative, were not reportable accounts. It also provided some flexibility in the spot rate to be used for conversion when assessing reportable thresholds for accounts denominated in a currency other than US dollars. It also provided for returns to be required even if there was no reportable information. These provisions ceased to have effect from 16 April 2015.
New SI 2015/878 contains a table setting out definitions under each of the agreements (DAC, CRS and UK/US IGA), referring back to the relevant Agreement. It also contains provisions for reporting of information, which must be submitted electronically by 31 May following the reporting period. For UK/US IGA purposes the first reporting period is calendar year 2014, while for DAC and CRS purposes the first reporting period is for calendar year 2016. SI 2015/878 replicates the penalty provisions in SI 2014/1506, so that they therefore apply for DAC and CRS purposes in addition to the UK/US IGA.
Using Service Providers
A new provision in SI 2015/878 states that while service providers may be used for due diligence requirements and reporting obligations, in each case responsibility for those requirements/obligations remain with the reporting financial institution.
Meaning of Reporting Financial Institution
For UK/US IGA purposes, the effect of SI 2015/878 is that the definitions of ‘reporting financial institution’ now follows those used in the 12 September 2012 Agreement. While the definitions in that agreement are not as precise as in the US regulations, the Agreement indicates that any term not otherwise defined in the Agreement is interpreted either:
• according to common agreement between the UK and US as permitted by UK law; or
• using UK laws, with tax laws prevailing over other laws.
The FATCA guidance published on 28 August 2014 sets out definitions using what appear to be interpretations and exclusions taken directly from the US regulations, although there appears to be nothing specific to indicate that those regulations have direct effect.
With respect to due diligence procedures, Annex I to the UK/US Agreement provides that:
“As an alternative to the procedures described in each section of this Annex I, the United Kingdom may allow its Reporting United Kingdom Financial Institutions to rely on the procedures described in relevant U.S. Treasury Regulations to establish whether an account is a U.S. Reportable Account or an account held by a Nonparticipating Financial Institution.”
The HMRC guidance at 1.3 includes the following comment:
“The UK regulations implement the IGA as it has effect from time to time. The Agreement now has different effect in the following respects since it was signed in September 2012…… A Financial Institution must apply the UK Regulations in force at the time with reference to the published HMRC Guidance. However where a Financial Institution identifies an alternative element of the US Regulations or alternative element of a different Intergovernmental Agreement that it feels it would like to apply then it should contact HMRC to discuss the issue….”
1.3 Liechtenstein disclosure facility
HMRC has updated its detailed guidance on the Liechtenstein disclosure facility. While at the time of going to press HMRC’s ‘.GOV’ website still indicated the facility closes on 5 April 2016, the March 2015 Budget announced it would close at the end of 2015.
2.1 HMRC guidance on national insurance concerning employment related securities
HMRC has updated its national insurance manual with a new section covering the updated employment related securities rules for internationally mobile employees.
3 Business tax
3.1 HMRC’s advance assurance for EIS and VCT
HMRC has announced some changes to its procedure for advance assurance of enterprise investment schemes (EIS) and venture capital trusts (VCT) schemes. They appear to introduce the ‘independence’ requirement for EIS investors as announced in Budget 2015 without any change to the existing legislation in ITA 2007. The current advance assurance procedure applies the existing EU state aid limits concerning the total permitted lifetime investment (€15m) and period over which this can be received (7 years), until higher limits are agreed with the EU and the appropriate legislation incorporated into UK law.
Amongst other changes announced for venture capital schemes, Budget 2015 announced that subject to EU state aid approval, the Government proposed to:
• require that all investments are made with the intention to grow and develop a business;
• require that all investors are ‘independent’ from the company at the time of the first share issue;
• increase the limit of total funding under venture capital schemes to £15m (£20m for knowledge intensive companies);
• increase the employee limit for knowledge intensive companies from 249 to 499 and;
• require that companies must be less than 12 years old when receiving their first EIS or VCT investment, except where the investment will lead to a substantial change in the company’s activity.
Following this announcement HMRC has issued a note concerning updated procedures for advance assurance for enterprise investment schemes (EIS) and venture capital trusts (VCT). These new procedures were effective from 6 April 2015.
Under the new procedures, HMRC will not process advance assurance applications in respect of companies within the following categories:
• Companies that are more than 7 years old and have not received a risk finance investment (any investment received under the SEIS, EIS or VCT schemes) in the past. For these purposes a company is regarded as more than 7 years old if it is more than 7 years since its first commercial sale. There is one exception to the age limit of 7 years. HMRC will provide an advance assurance to a company more than 7 years old that has not previously received a risk finance investment, if it meets the 50% turnover condition. The condition is met if total funds raised from all investors under EIS, SEIS, VCT or SITR over a 30 day period are at least 50% of the company’s average annual turnover, taken over the previous five years.
• Companies that have received more than £10 million risk finance investment funding (formerly known as risk capital investment funding). Risk finance investments of more than £10 million but less than €15 million (by reference to the sterling-euro exchange rate as on the date of issue of the relevant shares) will not exceed the currently permitted EU limits.
HMRC will process form EIS1 compliance statements in respect of investments into companies whose age or total risk finance investment exceed these limits, if the company wishes. However such companies and their investors should be aware there is a risk that HMRC may have to recover any tax relief claimed on investments made on or after 6 April 2015.
In the note on updated procedures, HMRC has also indicated it may also need to check that investors are ‘independent’. It indicates investors who claim tax relief under EIS must be independent from the company and hold no other shares in the company at the time they first invest in the company unless:
• the individual has made a previous risk finance investment in the company;
• the existing shares were issued to the individual when the company was founded;
• the existing shares were acquired when a pre-formed dormant company was bought ‘off the shelf’.
Currently, the EIS rules require an investor to have no connection with the issuing company (ITA 2007 s.162 (a)). In relation to interests in the capital of the company, having no connection means possession or entitlement to acquire no more than 30% of the company’s ordinary share capital, issued share capital, or voting power (ITA 2007 s.170
3.2 Methodologies for improving collection and analysis of data on BEPS
The OECD has published a discussion draft on Action 11 – improving the analysis of base erosion and profit shifting (BEPS), for comment by 8 May 2015.
The document concludes that while there are interesting indications by some countries of the actions of multinational enterprises (MNEs) leading to BEPS, this relates to the activities of a small number of MNEs and is of limited use in undertaking a broader analysis. It also reported that comprehensive and more detailed data regarding MNEs is needed to provide a more accurate assessment of scale and impact of BEPS.
A limitation of the current analysis is that while tax return data covering all subsidiaries of MNES are potentially the most useful form of data, most countries do not have or make such data available for the purposes of economic and statistical analysis, even on an anonymised or confidential basis. Furthermore the majority of governments do not report total revenue collections of MNEs separately from purely domestic companies using tax returns.
The document proposes that the development of indicators could identify the scale and economic impact of BEPS, to track changes in BEPS over time and to monitor the effectiveness of measures implemented to reduce BEPS. It considers that while no single indicator is capable of providing a complete picture of the existence and scale of BEPS, a collection of indicators may be constructed to help provide broad insights into the scale and economic impact of BEPS and provide assistance to policymakers in monitoring changes in BEPS over time. Indicators identified are:
• Disconnect between financial and real economic activities:
o concentration of high levels of net foreign direct investment (FDI) relative to GDP.
• Profit rate differentials within top (e.g. top 500) global MNEs:
o differential profit rates compared to effective tax rates;
o differential profit rates between low-tax locations and worldwide MNE operations.
• Domestic vs. foreign profit rate differentials:
o differential profit rates between MNE group domestic and foreign operations;
o differential effective tax rates between MNE affiliates and comparable domestic firms.
• Profit shifting through intangibles:
o concentration of high levels of royalty payments received relative to R&D spending.
• Profit shifting through leverage:
o interest expense to income ratios of MNE affiliates in high-tax locations.
The document summarises some of the empirical economic and statistical analyses previously undertaken using a variety of data sources, and proposes two approaches to further analysis:
• An aggregate tax rate differential approach; this would take estimates of the tax responsiveness of profit shifting to estimate the amount of shifted profits due to tax rate differentials.
• A specific BEPS channels approach; this would investigate specific profit shifting channels such as:
o hybrid mismatch arrangements;
o excessive interest deductions;
o harmful tax practices; treaty abuse;
o artificial avoidance of permanent establishment;
o transfer pricing outcomes that are not aligned with value creation;
o the circumvention of any applicable anti-avoidance measures, such as controlled foreign corporation (CFC) rules.
The report also proposes that some new analyses be undertaken.
4 VAT
4.1 Was HMRC entitled to make a compromise agreement?
The Upper Tribunal (UT) has confirmed the 2014 decision of the First-tier Tribunal (FTT) that a compromise agreement made by HMRC in 2010 for it to pay £1.4m to Southern Cross Employment Agency Ltd was a binding contract that was not ultra vires and therefore had to stand.
The claim arose as a result of a Fleming claim concerning supplies of dental nurses which had borne VAT, which at the time both HMRC and the claimant considered should have been VAT exempt. After the compromise agreement and repayment were made, it was determined in the case of Moher v HMRC ([2012] UKUT 260 (TCC)) that such supplies were in fact standard rated. Following the FTTs 2014 decision that their agreement could not be revoked, HMRC argued before the UT that (i) VATA 1994 s.80 prevented HMRC from entering into a binding agreement; (ii) that any compromise agreement would have been ultra vires and therefore void and; (iii) whether a compromise agreement was formed in any event.
VATA 1994 s.80(4A) permits HMRC to assess any excess credited to a taxpayer on or after 26 May 2005 where it exceeds the amount it was liable to give credit for. However the UT considered that where the parties reach an agreement prior to a Tribunal decision, that agreement has the consequences for both parties as if its contents were correct (VATA 1994 s.85). The UT agreed that other case law indicated VATA 1994 s.80(4A) could not be used to require repayment, nor prevent HMRC from making the agreement.
The UT also concluded the agreement made was within HMRC’s powers to make, and therefore could not be regarded as ultra vires. In contrast to HMRC’s claim that the FTT should have concluded that no contract had been formed, the UT considered that Southern Cross had given up 24% of its claim in order to achieve settlement and HMRC’s payment was its agreement to those terms. Dismissing HMRC’s claim that no contract had been formed, the UT agreed with the FTT that there had been a process of negotiation leading to a contractual agreement and HMRC’s payment was its agreement to those terms.
4.2 Utility and service supplies: part of a single property supply or separate?
The CJEU has concluded that whether the supply of utilities and refuse disposal services form part of a single rental supply with the provision of the property, or are separate supplies depends on the form of agreement between supplier, landlord and tenant. The distinction was of interest in this case referred from Poland (C-42/14), because the VAT rates would have ranged from 8% to 23% were they to be regarded as separate supplies in their own right. The supplies of utilities and refuse collection services should be regarded as distinct and independent supplies, assessed separately for VAT purposes, unless elements of the transaction, including economic reasons for concluding the contract are so closely linked that they form a single indivisible economic supply that would be artificial to split. It was for the national courts to make the necessary assessments taking into account all the relevant facts and circumstances. Other cases referred to in the decision include: Auto Lease Holland, C 185/01; Field Fisher Waterhouse, C 392/11; RLRE Tellmer Property, C 572/07; and BGŻ Leasing, C 224/11.
We have taken care to ensure the accuracy of this publication, which is based on material in the public domain at the time of issue. However, the publication is written in general terms for information purposes only and in no way constitutes specific advice. You are strongly recommended to seek specific advice before taking any action in relation to the matters referred to in this publication. No responsibility can be taken for any errors contained in the publication or for any loss arising from action taken or refrained from on the basis of this publication or its contents. © Smith & Williamson Holdings Limited 2015
