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The business and tax landscapes have changed dramatically, and the pace and complexity of change continues to increase. Governments are tempering the need for revenue with increased competition for labor and capital. Tax authorities are adapting their enforcement strategies, focus and policies in response to the changing dynamics of business. Companies are balancing competing priorities, ensuring they maintain compliance while adding value.
We can assist you with these critical issues in today's tax environment, including:
Improving large business tax compliance:
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- Midweek Tax News
A weekly update on tax matters to 9 February 2016
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.
Challenges to the 45% tax rate on restitution interest payments
In the Six Continents judgment, the High Court dismissed an application for permission to challenge the lawfulness under EU and human rights law of the 45% tax rate on certain payments of restitution interest, introduced by Finance (No. 2) Act 2015, on the grounds that the taxpayer had not yet received a final award in its favour. The 45% rate on restitution interest is aimed at situations where the courts may award compound interest on overpaid direct and indirect tax payments. For example, payments of compound interest in relation to VAT overpayments are currently pending the final outcome in the Littlewoods case while the ongoing FII GLO case relates to taxation of foreign dividends.
In his judgment, Mr Justice Henderson noted that, once a taxpayer receives an assessment for the 45% rate, the First-tier Tribunal would be the initial forum to challenge the assessment. He rejected any question of the compensation awards being grossed up to take account of the tax to be levied on them. If the 45% tax was found to be invalid, taxpayers would be able to recover any overpaid tax under the statutory appeal machinery, and there would be no need for grossing-up.
In the judgment, several other ongoing cases in respect of restitution interest were mentioned. In cases where HMRC has already started to deduct the 45% tax from interest payments at source, some recipients have appealed to the First-tier Tribunal, both on procedural grounds and to argue that the tax is not lawful. Groups are also pursuing applications for judicial review. For the moment, none of these cases have moved to the stage of considering the substantive question of the lawfulness of the 45% tax.
Groups with outstanding claims in respect of which they expect to receive compound interest, such as the Littlewoods and FII GLO cases, may wish to keep abreast of the ongoing litigation in this area.
Draft legislation published on the apprenticeship levy
HMRC has published draft legislation for inclusion in Finance Bill 2016, as well as explanatory notes and a policy document, to enact the apprenticeship levy. This will be charged at a rate of 0.5% of an employer's pay bill. Each employer will receive an allowance of £15,000 to offset against their levy payment meaning it will only become payable on pay bills over £3 million. It will be introduced from 6 April 2017. The apprenticeship levy was initially announced at Summer Budget 2015, and at Autumn Statement 2015 it was further announced that it would come into effect in April 2017. The Government expects that it will raise about £3 billion a year and represents a significant new liability for large businesses.
The levy will be payable through PAYE alongside income tax and national insurance. It will be based on the total employee earnings subject to Class 1 secondary national insurance contributions. The draft legislation features a ‘connected companies’ rule to ensure that groups who employ workers through a number of companies will only be able to claim one allowance, with provision in the draft legislation for those companies to decide which company can claim.
Groups with payrolls in excess of £3 million may wish to review whether their payroll systems can manage the reporting and payment of the levy, whilst coping with nuances such as payments to international staff.
Please see our employment tax alert for more details.
Tax Focus web seminar this Thursday, 11 February, on the new patent box regime
Our next Tax Focus web seminar will take place at 10:00 am this Thursday, 11 February 2016, and will focus on the practical aspects of the transition to the new patent box regime which is scheduled to come into force from 1 July this year.
From 1 July, companies wishing to claim the maximum benefits of the regime will need to have research and development (R&D) spend incurred directly by the patent box claimant company, rather than through group R&D companies. Many groups will, therefore, be looking to restructure their R&D functions, but care will be required to ensure this puts them in a better position going forward and does not inadvertently bring them into the new regime earlier than intended or reduce the regime's benefits to them.
Register now to hear Claire Hooper, Robert Peers and Sarah Churton discuss the details of the new regime (based on the information available to us so far and from our extensive discussions with HMRC), the compliance challenges of the new regime, the restructuring possibilities that may be available to enable groups to continue to claim maximum benefits under the new regime, and some of the pitfalls that need to be avoided.
Other UK developments
Parliamentary committee chairman asks whether fines paid by banks are deductible
Following last week's hearing at the Treasury Select Committee as part of its investigation Shifting sands: An inquiry into UK tax policy and the tax base, its chairman Andrew Tyrie has written to the Chancellor of the Exchequer asking him to clarify whether banks can offset the costs of fines and other payments imposed by regulators against their corporation tax bill. The letter recognises that regulatory fines are generally not deductible, but suggests that certain types of payments to regulators which are imposed on banks might be. Affected groups may wish to keep this development under review.
Debates in Parliament on tax
The shadow Chancellor, John McDonnell, used an opposition day debate in the House of Commons last week to call for measures including public country-by-country reporting; independent scrutiny of HMRC and tax policy; and an end to staffing cuts and office closures at HMRC. The Financial Secretary to the Treasury, David Gauke, responded by pointing to BEPS and the diverted profits tax as measures the Government is taking to tackle tax avoidance.
Meanwhile, the House of Lords Finance Bill Sub-Committee held a hearing last week to consider the draft Finance Bill clauses and wider issues regarding corporation tax. Evidence was provided by EY's Head of Tax Policy, Chris Sanger, and John Whiting from the Office of Tax Simplification. The committee heard that the proposals under consideration from the draft Finance Bill could have been simpler and introduced with more consultation. Although tax simplification was the main item on the agenda, the committee also took the opportunity to discuss the future of corporation tax, asking whether corporation tax needs to be reformed wholesale and whether the answer is to get rid of corporation tax and move to a tax on sales.
The Budget on 16 March will be an opportunity for the Chancellor to respond to wider questions raised by the current public debate on taxation.
First-tier Tribunal considers VAT treatment of supplies between connected parties and VAT deduction relating to hire purchase sales
The First-tier Tribunal has partly allowed the taxpayers' appeal in the case of Temple Finance Limited and Temple Retail Limited. HMRC contended that supplies between the taxpayers were made for a consideration below open market value and assessed Temple Finance Limited (TFL). The Tribunal was satisfied that the majority of supplies were charged at the open market value except for ‘advertising services’ which it held should be recalculated by reference to a method which it specified.
HMRC also contended that only a proportion of VAT incurred on overheads should be recovered by TFL, which made supplies of goods on hire purchase. The Tribunal held that TFL's exempt supplies (finance) and taxable supplies (goods) were “inextricably linked”. TFL could not make exempt supplies of finance without making taxable supplies as it did not provide finance other than for the purpose of enabling a customer to purchase goods from it. On this basis, the Tribunal held that a use-based adjustment to the VAT recoverability on overheads was not required as the overheads were used in the course of its entire business.
The case serves as a reminder that HMRC has the power to challenge the value of supplies between connected parties where the recipient of those supplies is VAT averse, as well as challenging partial exemption methods. Affected businesses might wish to review the position and challenge relevant HMRC assessments and/or submit retrospective claims if appropriate.
Upper Tribunal decides holding company was not carrying on economic activity for VAT purposes
The Upper Tribunal has released its decision in the case of Norseman Gold plc in an unsuccessful appeal by the taxpayer. The taxpayer registered for VAT on the basis of its stated intention to provide management services to its Australian subsidiaries and reclaimed VAT on various related costs. However, at the time, nothing was done by way of agreeing the amount of the management charge, the frequency with which invoices would be sent, to which subsidiary they would be sent, and the detail of the services to be provided in exchange for the charge. It was not until two years later that the first management charge was invoiced, with invoices following at roughly quarterly intervals thereafter. The amounts invoiced were less than the costs incurred.
HMRC's position was that the taxpayer was not carrying on an economic activity during the relevant period because it was not making, nor did it have an intention to make in the future, taxable supplies for consideration for VAT purposes. The Upper Tribunal upheld the First-tier Tribunal's decision, agreeing with HMRC that the management services did not amount to the making of taxable supplies. Consequently, the taxpayer was not entitled to deduct VAT.
The case demonstrates that, in order for a holding company to deduct VAT, any intention to make future taxable supplies for consideration must be established at the time when the VAT was incurred, agreed between the relevant parties and documented in writing.
Some valuation check services withdrawn by HMRC
HMRC has announced that, due to the limited resources of its Shares and Assets Valuation (SAV) team, the decision has been taken to withdraw the valuation check service that it has previously offered on an informal basis, for the purposes of PAYE Health Checks and ITEPA Post Transaction Valuation Checks, with effect from 31 March 2016. Any requests for these valuations received after this date will not be processed. Currently, almost 90% of ITEPA Post Transaction Valuation Checks and PAYE Health Checks are accepted as submitted.
Accordingly, HMRC has announced that the SAV team will, instead:
• Provide further help to taxpayers, to sustain and improve levels of compliance, by updating guidance in its manual
• Considering the possibility of running a small number of valuation workshops
• Work with colleagues in other teams to identify the minority of cases where a review of the valuation is appropriate
The announcement goes on to state that the SAV team will also be examining the valuation check service in other areas. However, it confirms that capital gains tax checks, which the SAV team operates in conjunction with the Valuation Office Agency, will continue.
Changes to expense payments start in April
Following the abolition of the P11D dispensations regime from April 2016, together with the introduction of a new exemption for paid or reimbursed expenses, employers who wish to reimburse employee expenses from 6 April 2016 by way of ‘scale rate’ or round sum payments will need to comply with new rules regarding systems and approvals. Legislation is now in place to cover employee expenses and, specifically, situations where employers wish to use scale rates which have previously been agreed on a non-statutory basis. HMRC has also now published detailed guidance and put in place an online application process for employers who may wish to use ‘bespoke’ scale rates. Our employment tax alert provides further details.
The payment of scale rate expenses will also have a significant impact in the way in which umbrella employers pay salaries and expenses to their employees. This is because of the change to the rules around travel and subsistence that also comes into effect from 6 April 2016 and which denies tax relief for travel and subsistence expenses where the umbrella employee is subject to supervision, direction and control as to the manner in which they work. Our employment tax alert provides an update for umbrella employers and looks at the changes to the breakfast and evening meal rates.
HMRC launches a consultation on common reporting standard regulations
HMRC is consulting on draft regulations that require advisors and financial institutions to remind their UK-resident clients about the common reporting standard under which HMRC will soon be receiving reports of their financial accounts in the UK and overseas. The draft regulations come into force on 6 April 2016. The closing date for comments is this Friday, 12 February.
EY submits representations on new rules for company distributions
On 3 February 2016, we submitted our letter of representations to HMRC in relation to the consultation document and the proposed Finance Bill clauses relating to the taxation of company distributions for income tax purposes, as well as the proposed targetted changes to the transactions in securities rules and the proposed targeted anti-avoidance rule (TAAR) in relation to certain arrangements for converting income to capital, both applying from 6 April 2016.
Among the issues we raised in response to the consultation was to highlight the impact of the proposed TAAR on demergers. We made various points about this, including a suggestion for a more general exemption from the new rules for demergers. Additionally, we noted that the proposed changes to the transactions in securities rules to expand the definition of assets available for distribution to include distributable assets of controlled companies, could raise problems where controlled companies have distributable assets but are prevented from distributing them, for example due to banking restrictions or because an intermediate company has a dividend block. We also questioned whether, given the expansion of the scope of the transactions in securities rules, a new TAAR was needed at all to deal with the Government's concerns.
To discuss our representations or to read our full response, please get in touch with your usual EY contact.
EY responds to Labour Party consultation on business investment
We have responded to the recent Labour Party policy consultation on Business Incentives for Investment. The Labour Party is engaging with business and industry to develop proposals on how tax reliefs can best be used to incentivise businesses to invest.
If you would like to discuss our comments, please get in touch with your usual EY contact.
Public country-by-country reporting (CBCR)
It has been reported that the European Commission is planning to publish proposals on 12 April to make public CBCR compulsory within the EU. This date is consistent with its announcements last week when releasing its draft anti-avoidance directive. Any new rules will follow on from the consultation on the impact of public CBCR that the Commission concluded last year. In its summary of responses to the consultation, the Commission noted that most business respondents felt no change is necessary and that the EU should rely on international initiatives for the disclosure to tax authorities only. However, non-business respondents were in favour. Public CBCR would require groups to publish their profits and the tax they pay in all EU Member States in which they have operations.
The European Parliament has also considered whether CBCR should be made public and the report of the ECON committee in December 2015 called on the European Commission to bring forward proposals. Previously, the European Parliament has considered amending the Shareholders Rights Directive (and through it the Accounting Directive) to implement public CBCR. This does not appear to have progressed since June 2015 but, in any event, the Accounting Directive is due to be reviewed in 2018. Amending the Accounting Directive would require only a qualified majority vote in the European Council. By contrast, were a new directive to be proposed by the Commission, this might well require unanimity among Member States as the directive could be treated as concerned with direct tax, where every Member State has the power of veto.
BEPS Action 13 includes a minimum standard for CBCR to be shared between tax authorities but not made public. The Multilateral Competent Authority Agreement for the automatic exchange of CBCR was signed by 31 countries, not including the US, in January. One of the Conservative Party's pre-election pledges was to review the case for making CBCR publically available on a multilateral basis. In welcoming the agreement, the Chancellor is reported as saying that this was “an important step forward” but that “we now want agreement so that information can be made public.”
Other global tax alerts
Please see links to a selection of our tax alerts in respect of the following developments. Additional articles are available in our global tax alert library.
Japan: The 2016 tax reform introduces country-by-country reporting as well as master file and local file transfer pricing reports in line with BEPS Action 13.
The Netherlands: A decree has introduced some additional flexibility into the tax-advantaged fiscal investment institutions regime for structured funds.
South Africa: The Revenue Service has published a revised list of reportable tax arrangements including the provision of inbound services and loss selling transactions.
The February edition of The non-dom newsletter considers the Government's policy document and draft legislation for Finance Bill 2016 on the proposed changes to the taxation of non-doms.
Please speak to your usual EY contact, or email us at email@example.com, if you would like to receive a copy of our regular indirect tax newsletter or our employment, reward and mobility newsletter, as well as information about our other publications.
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.
Challenges to the 45% tax rate on restitution interest payments
+ 44 20 7783 0859
Draft legislation published on the apprenticeship levy
+ 44 20 7951 9586
Tax Focus web seminar this Thursday, 11 February, on the new patent box regime
+ 44 20 7783 0859
For other queries or comments please email firstname.lastname@example.org.
- Operating in a shifting tax landscape
The global tax landscape continues to change in a dramatic fashion, with near-constant news hitting the headlines regarding shifting tax policy, increasing levels of enforcement and the growing potential of reputational risk.
Multinational companies now have to balance more competing priorities than ever before, ensuring they protect their business by monitoring and responding to changes in policy, legislation and tax enforcement, while at the same time ensuring they not only maintain the highest levels of compliance but also add value from the tax function.
Governments work to secure each tax dollar they're due
From a policy perspective, all governments want their country to be viewed as an attractive place to do business, to attract jobs and capital in an increasingly competitive globalized arena.
At the same time, they want to increase the amount of revenue they bring in. Governments are treading a fine line, constantly assessing how to secure the tax revenues they see as rightly theirs, while at the same time being in direct competition with other nations, making sure they do not scare off mobile capital.
Tax administrations for their part are adapting their enforcement strategies, focus and policies in response to the changing dynamics of business. They are working to ensure that their resources are being applied to the right issues and taxpayers. They share more leading practices and taxpayer information with their foreign counterparts, to help them collect every dollar due.
Disputes are on the rise
The result has been more frequent, complex and higher value disputes between taxpayers and taxing authorities — a trend that is only increasing as countries collaborate together and as emerging markets gain in stature and influence, taking a more sophisticated approach to taxation. Penalties are becoming more stringent and the threat of reputational risk has risen significantly in recent months.
We can help you to navigate a route through this complex landscape.
We can help you monitor and react to quickly-changing tax policy and assess the economic and fiscal impact.
Where tax policies might create an impediment to your business that is unintended by policy makers, we can help you to collaborate – either solely, or as part of a broader grouping of companies who share a common objective – with government to:
- Explain the impediment
- Develop alternative policy choices which are logical and well thought out
- Model the potential outcomes
- Deliver an alternative choice to the government in a form with which policy makers can comfortably work
We also help you address your global tax controversy, enforcement and disclosure needs.
We focus on pre-filing controversy management to help you properly and consistently file your returns and prepare the relevant back-up documentation.
Where a controversy has already occurred, our professionals leverage the network's collective knowledge of how tax authorities operate, and increasingly work together, to help resolve difficult or sensitive tax disputes. To ensure that continuous performance improvements are instigated after a controversy, we work with EY's other tax professionals to ensure that similar events are less likely to occur.
Below you can access our views and analysis of some of the substantial policy and enforcement trends and issues at play today.
- Seizing the opportunity in Global Compliance and Reporting
Global Compliance and Reporting (GCR) is at a tipping point, with risks on the rise. Many companies distribute responsibility for GCR processes throughout their organization, creating a patchwork. Local jurisdictions are rewriting regulations, focusing more intently on the collection of tax revenues and sharing more taxpayer information across borders.
Due to the combination of evolving business models, transforming finance functions and an increasingly complex regulatory landscape, there are new opportunities to better optimize efficiency, control and value, to help mitigate risk and improve performance.
What is Global Compliance and Reporting?
GCR comprises the key elements of a company's finance and tax processes that prepare statutory financial and tax filings as required in countries around the world. These duties include:
- Statutory accounting and reporting
- Tax accounting and provisions
- Income tax compliance
- Indirect tax compliance
- Governance and control of the above processes
GCR activities reside in the middle of a broader set of record-to-report (R2R) processes. R2R is the intersection between any company's finance and tax departments and is used to capture, process and store information that is essential to statutory accounting, tax compliance and reporting. Any change to R2R processes, information, finance systems, roles and responsibilities will have a direct impact on GCR processes.
Helping you meet the new GCR demands
Fast changing compliance and reporting requirements are more demanding on tax and finance functions today than ever before. So how do you improve control and quality, manage risk, create efficiency and drive value?
Our market-leading approach combines standard and efficient processes, highly effective tools and an extensive network of local tax and accounting subject matter professionals.
- Building effective supply chains
As multinational companies seek to reach new markets and compete more effectively in mature markets, they are adapting and differentiating their supply chains. Companies’ operating models need to cater for efficiency and scale in mature markets, while having the flexibility and local ability to support growth in emerging markets. Consequently, driving true shareholder value requires an operating model that combines global and regionally differentiated processes, and integrates these with local striking power and operational excellence.
Leading companies recognize the need for integrating tax in their business planning and decision processes
Whether companies seek to enter new markets or drive efficiencies in mature markets, leading companies understand the complexities of the international tax systems. The impact of both direct taxes and indirect taxes needs to be carefully considered and integrated to drive the effectiveness of the operating model while complying with all applicable local and international tax laws and effectively manage all tax risks. Operating model effectiveness is becoming one of the cornerstones of successful competition and differentiation.
The EY TESCM offering helps ensure you do just that. Our advisory and tax professionals operate as one team to assist our clients with developing and implementing operating model optimization where business needs and requirements are the driver while making sure that tax is an integrated part of the design of the operating model architecture.
- Managing mobile workforce risk
In today's globally integrated, tightly regulated and increasingly competitive business environment, one critical success factor stands out: people. It’s no wonder that leading companies are focusing their efforts on:
- Attracting and retaining the right people
- Global talent deployment and mobility
- HR and payroll effectiveness
- Risk, governance and compliance
Managing the risks of mobile employees
While optimizing the competitive advantage of your people has long been a core objective, a more recent set of trends in the tax landscape means that large companies with an internationally mobile workforce are at a higher risk of tax noncompliance and resulting controversy than ever before.
Fortunately, an increasing number of organizations are currently either planning or embracing a wider process of change for their mobility teams.
Unintended tax compliance obligations
These travelers are increasingly creating unintended tax compliance obligations, and the resulting risks are not just personal. They are felt at the corporate level, with the corporate tax function often unaware of the extent of the spreading problem. Tax administrations are becoming increasingly aware of the issue, however, and are very effectively using new technology to identify where a tax obligation has arisen. In a rising tax enforcement landscape, this issue has significant potential to grow.
Managing these risks should be a burning platform issue for multinational companies.
Will your tax risks prompt a tax audit?
What may start as a relatively simple personal income tax compliance issue can quickly create a ripple effect, with risks such as the creation of a permanent establishment, an employment tax audit or the payment of a significant related penalty all occurring at the corporate level.
Companies, recognizing the spectrum of reputational, personal and financial risks related to tax, are making strong efforts to be compliant. There is an increasing acceptance that such issues are becoming increasingly urgent from both a reputational and a financial perspective.
How we are helping companies
Our Human Capital network embeds processes and technology that will help companies to identify and manage short-term business traveler-related risks before they occur. Where controversy has already arisen, our global Tax Controversy network can use our insights into the culture and processes and relationships with each key tax administration to remediate issues. With prior year issues being rapidly unearthed, and with tax administrations focusing on this issue more than ever before, the time to act is now.
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Striking a balance
Our new report asks how far HMRC should dictate how businesses should operate, and whether tax administrators should use compliance rather than legislative change to achieve their objectives. It’s about striking the right balance between enabling and mandating 1.5Mb.