We highlight government proposals for new legislation, an overview of global tax policy trends and individual countries’ policy developments.
We’ll help you navigate the global tax landscape
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:
Building the balance: Cooperative compliance in practice
The administration of our tax regime is a key factor in the attractiveness of the UK as a place to live and do business. Our report outlines the proposed agreement and offers a view on the most effective way to take it forward. Read more 2.1Mb, March 2016
Engaging with HMRC
255K, July 2015
New measures applicable from April or July 2016
494K, December 2015
Corporate Governance Code meets Tax Code of Practice
203K, July 2015
- Midweek Tax News
A weekly update on tax matters to 26 April 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.
Likely delay to the enactment of Finance Bill 2016
It is usual for the Finance Act to receive Royal Assent before Parliament rises for the summer recess, which commences on 21 July 2016. However, David Gauke has informed us that, this year, Royal Assent may not occur until after Parliament re-convenes on 5 September 2016. This is because of an additional parliamentary recess from 15 to 27 June to allow for campaigning in the referendum on the UK's membership of the EU.
As a result, the committee stage of the Bill, which is normally concluded around mid-June, is scheduled to complete not later than 14 July 2016, just five sitting days before the start of summer recess. Neither the start of the committee stage nor the committee of the whole house that precedes it has been scheduled to date.
Once Parliament re-convenes on 5 September 2016, it will sit for less than 2 weeks before going into conference recess from 15 September until 10 October. However, the latest possible date for Royal Assent is 16 October 2016 since the Finance Bill must be enacted within seven months of Budget Day or measures introduced with effect from that date will lapse.
There is also no date set so far for the report stage of the Bill which is the last occasion that it can be amended. Hence, the report stage represents the date of 'substantive enactment' for accounting purposes, such as the prospective corporation tax rates to use for deferred tax calculations.
Significant pieces of legislation scheduled to be introduced through amendments include:
• Additional patent box provisions, for instance those covering business acquisitions and collaborative development
• Broadening the definition of 'UK source' for the purposes of withholding tax on royalties
• Provisions dealing with the taxation of non-resident property developers
A delay in Royal Assent would also mean that measures that have effect from that date will come into force later than expected. Examples include the requirement for large businesses to publish their tax strategy and measures that tighten up VAT compliance for online business.
Although it is not certain, groups should be prepared for a delay to Royal Assent until autumn.
First-tier Tribunal invokes the Ramsay principle when finding for HMRC in two cases
The First-tier Tribunal has considered two separate cases where HMRC put forward arguments based on the Ramsay principle, finding against the taxpayer in both cases.
In Morrison Trustees, the Tribunal considered arrangements where shares were acquired by certain Irish trusts under an option. UK law treated the sale as taking place at the strike price of the option but, for Irish tax purposes, the trusts were treated as acquiring the shares at market value, which was rather higher. The shares were then sold by the trusts at market value for a minimal gain. The trusts subsequently became UK tax resident and claimed double tax relief under the UK/Ireland treaty so that no UK tax would be due in respect of the disposal.
The Tribunal found that the arrangements were a pre-ordained series of transactions and should be considered as a whole. The transactions treated as a whole gave rise to an economic gain that the UK Parliament intended to tax as a capital gain. The fact that the option was exercisable only if a ‘relevant event’ occurred (this being connected to the USD/GBP exchange rate) was dismissed by the Tribunal as ‘an anti-Ramsay device’.
In the case of Clavis Liberty 1 LP, a partnership purchased the right to receive a dividend without purchasing the underlying shares. The partnership argued that a rule aimed at dividend-striping transactions in Income and Corporation Taxes Act 1988 required that it treat the dividend as if it had been received by the owner of the shares and so was not taxable in its own hands. The First-tier Tribunal found for HMRC, deciding that, under the Ramsay principle, the arrangements were to be treated as a single composite transaction involving both the purchase of rights to dividends and the payments of dividends pursuant to those rights. When they were considered as a composite, the dividend-stripping rule that the taxpayer was relying on could not apply to the transactions.
Furthermore, the Tribunal decided that the rule in question could only deem that the dividend was received by another party if this was consistent with the policy and purposes of the legislation. In this case, since it was an anti-avoidance provision, Parliament could not have intended that it be used to prevent the partnership from being taxed.
HMRC issues draft guidance on VAT treatment of pension costs
HMRC has issued draft VAT pension guidance to relevant stakeholders, which takes into account a number of cases which have been through the courts in recent years.
Historically, VAT was charged on investment management services supplied to defined benefit and defined contribution schemes. HMRC agreed by concession that an element of the VAT incurred on fund management charges was recoverable by the employer regardless of whether the fund or the employer engaged with or paid the investment manager.
However, the Court of Justice of the European Union (CJEU) has held that fund management services supplied in respect of defined contribution schemes should be exempt from VAT. For defined benefit schemes, the CJEU held that VAT incurred by employers on fund management services was recoverable in full by fully taxable employers, where these costs were not passed on to the pension fund. This opened up claim opportunities for employers but also meant that the UK's VAT position on pensions required updating.
HMRC subsequently published guidance which confirmed that fund management services supplied to defined contribution schemes meeting certain conditions should always have been exempt. For defined benefit schemes, the updated guidance set out the use of ‘tripartite’ arrangements to evidence an employer's entitlement to deduct VAT paid on services relating to the management of the scheme. A transitional period during which the ‘old’ rules could continue to be applied originally ran until 31 December 2015, but was later extended to 31 December 2016 as a result of the regulatory, VAT and corporate tax complexities associated with ‘tripartite’ arrangements.
As a result of the transitional period coming to an end later this year, the latest HMRC draft pensions guidance is likely to be of particular interest to parties operating defined benefit pension schemes. The draft guidance suggests that a combination of the use of a ‘tripartite’ arrangement, VAT grouping and a service company may enable parties to achieve both a VAT and corporation tax deduction. The draft guidance also provides clarity on what activities HMRC considers are covered by the term ‘management’, an issue which is relevant when determining the VAT liability of certain services provided to special investment funds.
As the guidance is issued in draft form, minor changes may well be made ahead of implementation. However, employers, pension fund trustees and investment managers may wish to consider the implications further.
Other UK developments
HMRC publishes consultation on increasing scope of disclosure rules on VAT and inheritance tax
HMRC has published a consultation document on the disclosure of avoidance schemes in respect of VAT and inheritance tax.
The consultation proposes revising the VAT Disclosure of Avoidance Schemes rules (VADR) to bring them more into line with the disclosure of tax avoidance schemes (DOTAS) rules. As with DOTAS notifications, having considered a notification from a promoter, HMRC would issue a scheme reference number to the promoter who, in turn, would be required to pass this number on to scheme users. Users would report the scheme number to HMRC each time the scheme was used. VADR disclosure would be driven by hallmarks analogous to those in the DOTAS rules together with a main benefit test (rather than main purpose test, as currently). The consultation further considers widening the scope of the VADR regime to include gaming duties and insurance premium tax, as well as other indirect taxes such as landfill tax, climate change levy, aggregates levy, all the duties of excise, and customs duties.
The consultation also includes revised regulations on expanding the scope of the DOTAS rules in respect of inheritance tax. Under the proposed regulations, a disclosure would be triggered by a scheme with a main purpose of obtaining a tax advantage which is also contrived or abnormal, or contains contrived or abnormal steps. Certain common planning techniques are specifically exempted.
Comments are requested by 13 July 2016.
Court of Appeal finds that preference shares transaction had an unallowable purpose
The Court of Appeal heard an appeal from Fidex on the grounds that HMRC could not bring forward an argument on unallowable purpose because it was not mentioned in the closure notice or statutory review, and that the Upper Tribunal was wrong to attribute the entire deduction claimed by the taxpayer to an unallowable purpose. The Court dismissed the appeal on both grounds.
The case involved a transaction whereby the taxpayer issued preference shares entitling the holder to 95% of the proceeds from some bonds the taxpayer already held. Under UK GAAP, the bonds continued to be recognised in the balance sheet of taxpayer after the shares were issued but, on conversion to IFRS, it had to derecognise 95% of the bonds. Therefore, the taxpayer claimed a tax deductible debit for 95% of the value of the bonds.
On the matter of the closure notice, the Court of Appeal noted the critical issue was whether the First-tier Tribunal was correct to find that the conclusion of the closure notice was simply that the taxpayer could not claim the debit, so it was not necessary for HMRC to state in the notice exactly which part of the loan relationship code led to the loss being disallowed. Following the case of Tower M. Cashback in the Supreme Court, the Court of Appeal found that the First-tier Tribunal was correct and so HMRC could bring forward the argument on unallowable purpose.
On the unallowable purpose issue, the Court noted that it did not matter that the taxpayer would have held the bonds irrespective of the unallowable purpose. The right question was whether and to what extent the debit was attributable to the unallowable purpose for which the bonds were held. Agreeing with the Upper Tribunal, the Court found the debit arose from and was entirely attributable to the transaction with the unallowable purpose. Without it, there would have been no debit at all.
First-tier Tribunal finds that income deemed to arise from a trade is business profits for the purposes of a tax treaty
The case of Fowler concerned the taxation of income earned by a South African resident individual for work as a diver on the UK continental shelf. UK tax rules stated the income earned by the taxpayer, where it would otherwise be employment income, was income arising from a trade. The taxpayer contended that his diving income therefore constituted business profits falling within Article 7 of the UK/South Africa Treaty and was, accordingly, exempt from UK income tax because he had no permanent establishment in the UK. HMRC argued that the legal character of the taxpayer's relationship was actually that of employment, so, even if it were not held to be such under UK tax law, it comprised employment for the purposes of the treaty. This would mean it was taxable in the UK.
The Tribunal considered the relevant UK law meant that the activities of an employed diver on the UK continental shelf constituted trading activities so that the resulting income must be trading income and, consequently, business profits for the purposes of the treaty. HMRC submitted that the rule did not supply a ‘meaning’ but only a ‘treatment’ but the Tribunal considered the two terms to be effectively the same. It therefore held in favour of the taxpayer that the activity did fall within Article 7 of the treaty and therefore, in the absence of a UK permanent establishment, the activity was not subject to UK income tax.
Supreme Court hearing date set for the Littlewoods case on compound interest
The Supreme Court will hear HMRC's appeal against the Court of Appeal's judgment in favour of Littlewoods Retail Ltd and others on 3 to 6 July 2017. This case concerns the availability of compound interest on refunds of overpaid VAT, in circumstances where the VAT was paid and collected in breach of EU law. The High Court had previously found against HMRC, holding that the Littlewoods claimants were entitled to compound interest where VAT had been overpaid. The Court of Appeal upheld the High Court's judgment in full.
The case is also relevant to other claims for breaches of EU law such as in respect of franked investment income and portfolio dividends.
HMRC publishes proposed tax framework for a secondary annuities market
HMRC has published a consultation document outlining the proposed detail for a tax framework to create a secondary market in annuities. The intention to create such a market was announced by the Government in March 2015 with a call for evidence containing questions on the proposed policy framework around the secondary market. A summary of responses (including a response from EY) was published on 15 December 2015 in which the Government confirmed that from 6 April 2017 tax restrictions for people looking to sell their annuity will be removed.
The consultation document sets out detailed questions covering the conditions for assignment or surrender of an annuity, the tax treatment of sellers and of annuities following the sale, and information requirements.
The Government intends to issue draft secondary legislation later this year, with any changes to primary legislation being included in Finance Bill 2017.
Responses to the consultation are required by 15 June 2016.
HMRC issues consultation on new rules for part-surrenders and part-assignments of life insurance policies
Following an announcement in Budget 2016, HMRC has released a consultation on changes to the treatment of part-surrenders of life insurance policies. This follows cases where the current rules have given rise to unfair outcomes to taxpayers who have been taxed on amounts that far exceed their economic gains. The consultation includes a number of options for reform and asks for comments by 13 July 2016.
Government releases further details on the apprenticeship levy
The Department for Business, Innovation and Skills has provided some further information on the operation of the apprenticeship levy. New details include how the £15,000 allowance should be applied across groups of connected employers and the way that the funds raised by the levy can be spent on training from approved providers.
With the levy coming into force from April 2017, employers may wish to consider how it fits their existing plans for training as well as looking into potential for the expansion and adaptation of their apprenticeship programme. Employers may also consider assessing the readiness of their systems and the likely costs of the levy.
Please see our employment tax alert for more details.
Bermuda agrees to share country-by-country reporting (CBCR) data
Bermuda has signed the Multilateral Competent Authority Agreement for the automatic exchange of CBCR data which puts in place the framework for exchanging CBCR reports, as contemplated by BEPS Action 13.
This is a particularly important development for many insurance and reinsurance groups that are headquartered in Bermuda. Previously, such groups with UK operations would have been required to file a CBCR report in the UK covering the UK subgroup and foreign subsidiaries held under it. However, a group headquartered in Bermuda will now be able to file a CBCR report in Bermuda from where HMRC will be able to obtain a copy.
European Commission introduces new directive on rules governing posted workers
The European Commission has introduced a new directive covering a number of rules that govern the treatment of employees posted across borders within the EU. Issues such as equal rules on the remuneration of posted workers; the use of temporary work agencies; and the treatment that applies to those posted for long periods of time are addressed in the directive.
The directive must be implemented by EU member states before 18 June 2016.
Please see our global tax alert for more details.
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.
New Zealand: The Government has proposed changes to simplify the business tax system relating to provisional tax, withholding tax paid by contractors, late payment penalties and various other measures.
Germany: The Finance Minister has published a ten point Action Plan against tax fraud, tax avoidance schemes and money laundering with key points to be enacted before the summer recess.
Canada: A motion has been put before Parliament to implement various budgetary matters including freezing the small business tax rate.
Puerto Rico: New transitional rules have been issued in relation to the introduction of VAT from 1 July 2016.
Please speak to your usual EY contact, or email us at firstname.lastname@example.org, 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.
Likely delay to the enactment of Finance Bill 2016
+ 44 207 951 2486
First-tier Tribunal invokes the Ramsay principle when finding for HMRC in two cases
+ 44 207 951 2686
HMRC issues draft guidance on VAT treatment of pension costs
+ 44 (0) 207 951 2279
For other queries or comments please email email@example.com.
- 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.
Find your nearest Tax contact:
Find out about our Law services.
Tax guides and resources
Connect with us
Stay connected with us through social media, email alerts or webcasts. Or download our EY Insights app for mobile devices.
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.
Read all our commentary, thought leadership and insight into Budget 2016.
Mobile Tax Insights