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Midweek Tax News


A weekly update on tax matters to 25 November 2014

Midweek Tax News provides you with a succinct overview of the key tax developments that have occurred each week to allow you to stay up-to-date on tax issues that may have an impact on your business. If you would like to discuss an article in more detail, please speak to the relevant contact listed at the end of this issue or to your usual EY contact.

The Chancellor of the Exchequer, George Osborne, is due to deliver his Autumn Statement at around 12:30 Wednesday, 3 December. A week later, on 10 December, draft clauses for what is likely to be the first of the 2015 finance bills should be issued for consultation, possibly along with clauses that may be left until after the election. We are also expecting responses to a number of consultations and several new consultations, some of which have been trailed in advance. Here are some of the highlights of what we expect to be covered in the Autumn Statement or draft Finance Bill clauses.

• We expect an announcement on the introduction of a targeted anti-avoidance rule for certain companies holding intellectual property offshore. We understand the rule would target arrangements under which intellectual property is held by multinationals outside the UK in a low/no tax jurisdiction without the benefit of treaty protection, particularly where there is significant UK activity but little UK tax base and there is a separation of intellectual property assets from substance or a lack of value chain transparency.

• A decision is due on whether corporation tax will be devolved to Northern Ireland (the command paper on further devolution of taxes to Scotland is due by end November).

• A consultation will be published on the implementation of rules to prevent hybrid mismatches in line with BEPS Action 2. The UK already has anti-avoidance rules that deal with tax arbitrage and dual resident investment companies. However, there are some key differences between these and the proposed new OECD rules.

• Changes are anticipated to the loan relationships and derivative contracts regime following on from the working groups which have met over the last year. We are expecting a new regime anti-avoidance rule, changes to the late paid interest rules and measures that align tax more closely to the accounts.

• With country-by-country reporting expected to come in from 2016, we expect an announcement as to how this might be implemented in UK law.

• A Government response is likely to be made to the recent Office of Tax Simplification (OTS) report on tax competitiveness. We may also learn if the mandate of the OTS will be extended past 2015.

• More details will be provided on the proposed introduction of a capital gains tax for non-residents owning UK residential property. This will also include the withdrawal of the ability for all individuals with more than one residential property to make an election designating which property should be their principal private residence.

In addition, there are likely to be amendments to incentives and tax reliefs to broaden the economic recovery and target specific anomalies. Some of these have been consulted on. During the summer, HMRC issued a call for evidence on a reform of oil and gas taxation. We might see a consultation on various ways forward towards a reformed regime. There was also consultation on changes to the tax rules for venture capital trusts, seed enterprise investment schemes, enterprise investment schemes and the construction industry scheme. We may see the introduction of the concept of a marketable security into the employment-related securities legislation and the proposed restriction of the personal allowance for non-UK residents.

We will bring you further details through alerts to be issued in the evening of 3 and 10 December as well as our Tax Focus web seminar at 15:00 on 11 December.

The OECD has released a public discussion draft on Follow Up Work on BEPS Action 6: Preventing Treaty Abuse. This work was mandated by the OECD report on Action 6 (prevent the granting of treaty benefits in inappropriate circumstances) of the BEPS Action Plan, published on 16 September 2014.

Building on the September report, the discussion draft highlights various issues, including those relating to the limitation on benefits (LOB) rule and those concerning the proposed principal purpose test (PPT). The draft sets out issues in a number of other areas, including a new form of treaty tie-breaker clause and the triangulation rules necessary for permanent establishments in a third state. The draft specifically asks for comments on a number of the issues and appears to be an agenda for future work on Action 6. It does not look to offer any conclusions at this stage.

Interested parties are invited to submit written comments by 9 January 2015. The OECD intends to hold a further public consultation on the discussion draft on 22 January 2015. The consultation process provides businesses with the opportunity to comment on areas of concern and to minimise continuing uncertainty and the risks of double taxation. Please speak to your usual EY contact to discuss any concerns you have.

HMRC has published an Issue Briefing and a summary of responses to its May 2014 consultation on direct recovery of debts. This consultation document sets out the process to implement the Chancellor's announcement, at Budget 2014, that HMRC would be given the power to recover tax and tax credit debts directly from the bank and building society accounts of debtors.

The proposals prompted significant debate and concerns were raised by many of the respondents to the consultation and also by the Treasury Select Committee. In response to the concerns raised, HMRC has stated that the Government is introducing new safeguards, including a guaranteed face-to-face visit for every debtor who is subject to the measures and additional support for vulnerable customers.

In response to concerns raised about debtors' privacy and the use of their bank account data, the Government has decided not to implement the requirement for banks to provide 12 months of data on a debtor's account history. While the Government has committed to work with the banking sector to minimise the administrative impact, banks will need to focus on how they might build the systems they need to implement the proposals.

The Government intends to legislate in a Finance Bill in 2015 but after the next general election to allow for an extended period of scrutiny.

Separately, HMRC has commenced issuing accelerated payment notices (APNs) under its new powers to require up-front payment of disputed tax in relation to arrangements impacted by disclosure of tax avoidance scheme (DOTAS) rules, follower notices and the general anti-abuse rule.

These notices, which cannot be appealed, require payment within 90 days and are being issued on a phased basis over 20 months. To date, APNs have been issued in relation to DOTAS arrangements, following a short pre-warning period given by HMRC. The Government has said that by January 2015, HMRC will be issuing 2,500 APNs per month.

Our tax alert looks at how taxpayers who think they may be at risk of receiving a notice might develop an appropriate strategy to adopt in advance of its receipt.

We understand that HMRC is close to finalising its position on the UK implementation of the Court of Justice of the European Union judgments in the cases of PPG Holdings BV and ATP PensionService A/S. These cases concern the VAT treatment of pension fund management costs, specifically whether such supplies qualify for exemption from VAT and, if not, whether any VAT incurred is recoverable as input tax. Further guidance is expected to be issued very shortly.

Survey on reform of travel and subsistence taxation

Following the report by the Office of Tax Simplification in January 2014 on the tax treatment of employee benefits and expenses, the Government announced in Budget 2014 that it intended to review the rules underlying the taxation of travel and subsistence expenses. The review, which is underway, includes a two stage consultation process. This will enable the Government to improve its understanding of the commercial realities of travel and subsistence payments and will lead to a new set of principles on which to base an updated tax regime.

We are actively engaged in the consultation process and are keen to understand the impact of this review as well as of any proposed changes on business. To assist with this, we would be very grateful if you could complete our travel and subsistence survey which will only take a few minutes of your time.

Developments in respect of UK challenge to EU cap on bankers' variable pay

On 20 November 2014, the Advocate General (AG) considered the UK's challenge to the EU cap on bankers' variable pay. In his opinion, the AG suggests that all the UK's pleas should be rejected and that the Court of Justice of the European Union dismiss the action. Following the release of the AG's opinion, both the UK Treasury and the Chancellor made statements confirming that the UK legal challenge would be withdrawn.

HM Treasury noted that it will “look at other ways of building a system of pay in global banking that encourages rather than undermines responsibility. For example, it may be necessary to develop standards that ensure non-bonus or fixed pay is put at risk, maximise claw back, or pay senior staff in performance-related bonds.” The Chancellor has also written to the Governor of the Bank of England, discussing the need for further work at the Financial Stability Board on bank remuneration in the context of rising fixed pay within the EU.

Corporate transparency

The Small Business, Enterprise and Employment Bill has now passed into the House of Lords with its second reading due on 2 December. The measures in Part 7 of the Bill addressing corporate transparency include a requirement for every company to keep a register of people with significant control over the company; the abolition of bearer shares and directors which are corporates; and the imposition of directors' duties on shadow directors. The Bill has been amended to clarify the situations where individuals or a legal entity will not be subject to registration.

Regulations issued on accreditation of companies as social impact contractors

Finance Act 2014 introduced social investment relief, which allows individuals to receive tax relief for investing in social enterprises, including companies which are accredited as social impact contractors.

Regulations governing the accreditation of these social impact contractors have now been passed into law and will be effective from 10 December. The regulations define the conditions which must be met for a social impact contractor company to receive accreditation by a Minister of the Crown, in relation to a relevant contract. Contracts must be with a contracting authority (broadly, a public body) and have a social or environmental purpose. The regulations include a list of activities which will meet these criteria.

The regulations also make provision about procedural matters in relation to the accreditation process.

Increase in enforcement activities for pensions' automatic enrolment

The Pensions Regulator has published its latest figures on automatic enrolment compliance and enforcement. The results show an increase in the number of times it has exercised its enforcement powers against employers. These include the first use of fines relating to automatic enrolment, with three fixed penalty notices being issued. The Pension Regulator has carried out six investigations so far and we expect that these will continue to increase as more and more employers become subject to the challenges of automatic enrolment obligations.

For further details, please see our tax alert.

Inheritance tax and charitable trusts

In Routier and Anor, the High Court considered whether a disposition in a will was exempt from inheritance tax because it comprised property which was given to a charity under the Inheritance Tax Act 1986.

The disposition in the will was made to a trust, the objects of which were exclusively charitable purposes within the meaning in UK law. However, the trust was not established in the UK and was subject to Jersey law rather than UK law.

The Court found that the reasoning of the Court of Appeal in the Camille and Henry Dreyfus Foundation case applies to the relevant wording of the Inheritance Tax Act. In the Court's view, the expression “held on trust for charitable purposes” requires not only that the charitable purposes be charitable purposes within UK law but that the relevant trust be subject to the jurisdiction of the UK courts as well.

Supreme Court denies leave to appeal on VAT on arrears of gym fees

The Supreme Court has refused the application by Esporta Ltd for permission to appeal the Court of Appeal's judgment in favour of HMRC. This case concerns whether health and fitness club membership fees recovered from defaulting members after access to the club's facilities had been denied due to non-payment were compensation or consideration for a taxable supply of services. The First-tier Tribunal allowed the taxpayer's appeal, holding that the late paid membership fees constituted damages or compensation for breach of contract, and thus fell outside the scope of VAT. However, the Court of Appeal held that the monthly payments were consideration for a taxable supply of services by the taxpayer, namely the grant of the right to access the club's facilities. As the Supreme Court has refused the taxpayer leave to appeal, the Court of Appeal's decision is now final.

First-tier Tribunal finds that fee paid for an ice cream pitch is a taxable licence

In the case of Fareham Borough Council, the First-tier Tribunal considered whether the grant of a mobile catering concession constituted a taxable supply of the right to trade or an exempt licence to occupy land for VAT purposes.

The taxpayer, a local authority, permitted a concessionaire to park his ice cream van and trade from a specifically marked bay in a car park. The taxpayer contended that the charge made to the concessionaire was for the supply of a licence to occupy land, which was exempt from VAT. The taxpayer considered that its supply in the present case was not dissimilar to the grant of a pitch at a car boot sale, which HMRC accepts as meeting the criteria of a licence to occupy land. HMRC contended that the taxpayer granted the concessionaire a standard-rated licence to trade, and not an interest in land. In dismissing the taxpayer's appeal, the Tribunal held that the real subject matter of the catering concession was the right to sell ice cream, compared to which the use and enjoyment of the land was of secondary importance.

This case demonstrates the complexities associated with determining whether a particular land related supply constitutes an exempt licence to occupy land.

Update on developments in US international tax

Negotiations are continuing in Congress to extend more than 50 tax provisions that expired at the end of 2013 or are due to expire at the end of 2014. Options considered range from making some of the extender provisions permanent to only extending the 2013 measures to 2014. This latter option, favoured by some Republicans, is seen as the least controversial ‘lowest common denominator’ approach.

The IRS has also issued new regulations on documents to be filed on the transfer of stock or securities to outside the US. The regulations are generally favourable to taxpayers but a related rule that allowed backing documents to be submitted later on has been revoked.

Finally, the IRS has issued a ruling concerning back-to-back loans to a controlled foreign company which may be relevant to US taxpayers with offshore cash pooling or funding services.

Our international tax alert has more details.

European Commission reports comparing taxes on wealth and corporate tax rates

EY has produced a report for the European Commission comparing taxes on wealth, including inheritance tax, capital transfer duties and real estate duties, across the EU. The report found that wealth taxes, broadly construed, range from almost 3.5% of GDP in France through 2.25% in the UK to less than 0.25% in several Member States.

The Commission has also published a comparative report by the Centre for European Economic Research on corporate tax rates in the EU and some other jurisdictions. The report looks behind headline rates to establish the level of taxation on various classes of assets. It finds the highest ‘mean corporate tax rate’ is France with 39.4% (compared to its headline rate of 38.9%), followed by Japan and the US. High tax rates on certain assets are also noted, such as the UK taxing industrial buildings at 31.6% (compared to its headline rate of 21%) and Ireland taxing financial assets at 24.4% (compared to its headline rate of 12.5%). Thus the report not only highlights differences in tax rates between the countries considered, but also across different sectors within each country.

Other international tax alerts

Please see links to a selection of our international tax alerts in respect of the following developments. Additional articles are available in our Global tax alert library.

Ghana: The 2015 Budget has introduced a special petroleum tax of 17.5%, an extension of the national fiscal stabilization levy, amendments to VAT rules and various other changes to the tax rules.

Cameroon: The Government has proposed a reduction in the current corporate income tax rate from 35% to 30% in the 2015 Budget as well as various other proposals.

Russia: The Duma has approved a new law which amends the controlled foreign company rules. The new tax monitoring regime for large corporates has also been signed into law.

Costa Rica: The tax thresholds for corporate income tax and individuals for the 2015 tax year have been published.

Peru: A new law establishes a special regime for depreciation of buildings and revises VAT rules in order to promote economic growth in the country.

Qatar: The Ministry of Finance has published details of the new tax administration system which requires taxpayers and advisors to register from 28 September 2014.

Other publications

Please speak to your usual EY contact, or email us at, if you would like to receive a copy of our regular indirect tax newsletter, or information about our other publications.

Further information

If you would like to discuss any of the articles in this week's edition of Midweek Tax News, please contact the individuals listed below, Claire Hooper (+ 44 20 7951 2486), or your usual EY contact.

Autumn Statement/draft Finance Bill clauses

Email Claire Hooper

+ 44 20 7951 2486

OECD issues BEPS discussion draft on follow up work on treaty abuse

Email Claire Hooper

+ 44 20 7951 2486

Developments in HMRC's tax collection powers

Email Jim Wilson

+ 44 20 7951 5912

VAT treatment of pension fund management costs

Email David Bearman

+ 44 20 7951 2249

For other queries or comments please email

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