Midweek Tax News

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A weekly update on tax matters to 21 March 2017

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.

On 20 March, the first of the two Finance Bills expected to be released in 2017 was published. A significant proportion of the material contained within the Bill had been published in December for consultation purposes, with some aspects being further supplemented in January. At over 760 pages in length, the Finance Bill is the longest ever published, despite the relatively light Spring Budget, although a significant proportion of the volume of the Finance Bill relates to measures first announced by the former Chancellor, George Osbourne. Our overview of the key proposals published on 20 March is available here.

Corporation tax

The corporation tax measures introduced represent a large proportion of the Bill, with key provisions including the new corporate interest restriction rules, the loss relief reform and the amendments to the substantial shareholding exemption. The main changes to the corporate interest restriction rules over and above the January draft were trailed at the Spring Budget, although there were some additional changes in response to representations made. However, there remain areas where the rules do not quite work as hoped, such as when addressing volatility in earnings across multiple periods.

There were few changes to the general loss reform rules also published in January, although amendments announced in the Spring Budget in relation to the oil and gas sector have now been incorporated. Hoped-for amendments in relation to the transfer of trades have not been included.

A number of amendments have been introduced to the proposals on the substantial shareholding exemption, including the extension of the holding period to include periods of ownership by other group companies regardless of their tax residence. However, the rules do not address the high ownership threshold proposed for the qualifying institutional investor exemption, which could impact mixed funds.

Non-doms

The legislation published in the Bill was substantially different from the draft legislation published in December and January. HMRC has now also issued a ‘technical briefing on overseas trusts’ which advises that it has not been possible to make all of the necessary changes to some of the trust provisions before the Bill was published and the Government has taken the view to defer publication of the provisions affected. The note sets out the provisions that are included in this Finance Bill and those that will now be included in a future Finance Bill. The deferred provisions include many of the changes to the matching of benefit provisions for both income and capital gains, including provisions preventing the matching of gains to non-residents and provisions to tax onward gifts. The continuing evolution of the rules means that taxpayers should seek specific tailored advice before taking action.

Salary sacrifice arrangements

The published legislation in the Bill contains a large number of amendments to try and clarify the intention of the rules. There has also been a tightening of some of the rules and, as variations may trigger the loss of transitional protection, the impact of any planned changes should be considered carefully. The HMRC guidance, published alongside the Bill, provides some much-needed clarification of how the rules will apply.

A number of the measures introduced in the Bill come into force within the next couple of weeks, which gives taxpayers little time to fully consider the rules and take action where appropriate. Whilst draft legislation has been previously published, many of these rules have been subject to ongoing changes and so taxpayers will need to consider the latest revisions published before taking action.

A spokesperson for the Prime Minister has confirmed that Mrs May will give notice under Article 50 of the Lisbon Treaty of the UK's intention to leave the EU on 29 March. It is understood that notification will be given by letter to the European Council and Mrs May is then expected to make a statement to the House of Commons.

The spokesperson also confirmed that the European Council, headed by President Donald Tusk, has been told of the date when Article 50 will be triggered. In response, President Tusk has said that within 48 hours of the UK triggering Article 50, he will present draft Brexit guidelines to the EU27 Member States. Mr Tusk has now said that he expects to call an extraordinary summit of the 27 other Member States on 29 April, to draw up a mandate for the European Commission's chief negotiator, Michel Barnier. Mr Tusk said that the priority must be certainty and clarity for citizens, companies and Member States.

There has again been speculation that any negotiation would focus first on the broad principles of any ‘exit’ payment the EU might demand in respect of commitments that the UK has already signed up to, along with the principles for the rights of EU citizens in the UK and vice versa.

The task of triggering Article 50 is only the beginning of the process and it has been estimated that Parliament may need to scrutinise at least 15 further pieces of legislation in order to deliver Brexit. With typically 20 bills being introduced into Parliament in the Queen's Speech each year, and bearing in mind the level of debate on the short two-section Act to allow Article 50 to be triggered, it is possible that Parliament may have limited capacity for non-Brexit legislation.

Brexit is the topic of our next EY Indirect Tax Perspectives event, to be held on Friday, 7 April, where Mats Persson, former special advisor to the Prime Minister, will talk about his thoughts and experience around Brexit. Mats was a member of the team that renegotiated the UK's EU membership terms in 2015/16 and is now the Head of International Trade at EY.

Please click here to register for the Indirect Tax Perspectives event or contact Alex Dixon for further information.

On Tuesday, 11 April 2017 we will be hosting a breakfast seminar in our More London offices, which will look at the proposals under consideration for US tax reform. These are far reaching and will, if enacted, fundamentally change corporate taxation in the US, as well as potentially lead to responses in the rest of the world. The potential changes include a materially lower US corporate income tax rate, a territorial system for foreign income, base broadening proposals including the denial of corporate interest expense deductions and a border adjustment tax which will tax the imports of goods and services and exempt from tax income from the export of US goods and services.

These proposals will impact all companies with US operations and even those companies with no direct operations in the US due to the potential changes to customer supply chains, the impact of currency movements and potential policy responses.

The seminar will cover the following areas:

• The political backdrop in Washington DC and the impetus for reform

• The current proposals put forward by the House, the Senate and the Trump administration

• The legislative process and how legislation will progress through Congress

• Likely transition rules and approaches

• The likely impact of the proposals on US companies with foreign operations and European companies with US operations

• The potential for knock-on effects to companies operating globally

To register for the seminar, or to obtain further details, please click here.

The Upper Tribunal (UT) has released its decision in the case of Adecco Limited and Ors (Adecco). The case concerns claims for VAT paid by Adecco on non-employed workers introduced to its clients. Adecco had historically accounted for VAT on the full amount it received from its clients, most of which it passed on to the non-employed workers as wages, but argued that it should only account for VAT on the commission it retained for introducing them. The First-tier Tribunal dismissed Adecco's appeal, finding that the non-employed workers supplied their services to Adecco and not directly to the clients, such that VAT was due on the total consideration received.

The Upper Tribunal considered that the First-tier Tribunal was correct to start by reviewing the contractual position. There were contracts between the temps and Adecco and between Adecco and the clients. Those contracts formed a legal relationship between the temps and Adecco pursuant to which there was reciprocal performance. The Upper Tribunal did not accept the argument that because Adecco did not receive the services performed by the temps it meant that it could not make a supply of the temps. The Upper Tribunal considered that certain contractual clauses further indicated that Adecco was supplying the temps to the clients, for instance, the definition of ‘supply’ in the contract between Adecco and the clients made it clear that what Adecco was supplying was the provision of a temp; any unauthorised absence on the part of the temp could result in Adecco breaching its obligations to the client; Adecco had rights to suspend an assignment; and the client paid Adecco, as a principal, a fee which was calculated by reference to the temp's hourly rate and a commission which indicated that the client considered that it was paying Adecco for the provision of the temp. The Upper Tribunal went on to consider the economic reality of the arrangements and held that the contracts reflected the position appropriately. Ultimately, the Upper Tribunal held that this meant that Adecco made a supply of the temps to its clients and VAT was due on the total fees Adecco received.

This case is likely to have implications for all businesses which supply or engage temporary staff, and particularly VAT-averse users of temporary staff (including charities, universities, housing associations and organisations in the healthcare and financial services or insurance sectors). Employment agencies and VAT-averse users of temporary staff may wish to consider submitting claims to protect their position if they have not already done so. Alternative contractual arrangements, which could reduce the VAT cost of temporary staff, may be considered for future transactions.

Other UK developments

On 17 March 2017 the Finance Bill Sub-Committee of the House of Lords published its report on the Making Tax Digital for Business provisions intended to form part of Finance Bill 2017. Whilst the Sub-Committee supports the digitalisation of tax, it considers that the roll-out of the scheme is being rushed and, in its view, imposing unnecessary burdens on small businesses with little benefit to the Government.

The Sub-Committee recommends the following series of modifications:

• Revise and improve the assessment of the benefits and costs. It considers the Government's estimate of the ‘tax gap’ savings are fragile and not based on adequate evidence, and that the estimated initial costs do not reflect the reality of what businesses will incur.

• Delay the scheme until 2020 to enable a full pilot which will allow the Government to test whether the proposals do reduce taxpayer errors, assess the actual costs to business, and receive valuable feedback from business users. This would also give the Government time to raise awareness and put in place support systems for those who lack digital skills.

• Make keeping digital records and quarterly reporting optional for businesses with a turnover below the VAT threshold. It considers that for smaller businesses, quarterly reporting will impose an unnecessary burden and will be of limited use to HMRC.

• Look again at which businesses are included in the scheme and examine whether some kinds of businesses, such as those with seasonal or highly irregular income, should be outside the scheme.

Whilst the Government does not have to take into account the views of this Sub-Committee, the views echo those being expressed elsewhere, including the House of Commons Treasury Select Committee and comments made by respondents during the recent consultations. The Sub-Committee's report therefore adds to the pressure on the Government to respond to those concerns.

Regulations have been made to amend several aspects of the legislation applying a special rate of corporation tax at 45% on restitution interest paid by HMRC.

In particular, charitable companies and life insurance companies that historically have been wholly or partially exempt from tax on investment income will be excluded from the regime (with amounts representing income of policyholders of with-profits funds being excluded from life insurance companies). The regulations also strengthen the anti-avoidance provisions, to address the consequences of a transfer of rights where the transferor is subsequently wound up or dissolved.

Both of these measures have retrospective effect from 21 October 2015, the time when the regime was first introduced by Finance (No. 2) Act 2015. The introduction of anti-avoidance legislation having such a long retrospective effect sets an unhelpful precedent for taxpayers looking for certainty under the UK tax rules.

In addition to the retrospective measures, the regulations also make some minor amendments to definitions, including references to ‘restitution-related’ when looking at a tax advantage for the purposes of the anti-avoidance provisions. These changes have effect from 14 March 2017, the date the regulations entered into force.

The Chancellor, Philip Hammond, announced in a ministerial statement on 15 March 2017 that the planned increase in rate of Class 4 National Insurance Contributions (NICs) announced in the Spring Budget 2017 would not be going ahead, and that there would be no increase in rates of any class of NIC during the lifetime of the current parliament. Although the legislation addressing the tax ‘triple lock’ pledge made as part of the Conservative manifesto currently only covers Class 1 NICs, the Chancellor has indicated that in order to comply with the spirit of the triple lock, it would be applied to the rates of all classes of NIC.

The NIC increase was due to raise approximately £2bn over four years, and the Chancellor announced that the cost of this reversal would be funded by other measures to be announced in the 2017 Autumn Budget. Given the manifesto pledge, the Chancellor has limited room to manoeuver and it has been speculated that one option might be to look at the annual allowance for pensions, although this would not be without complications.

The Upper Tribunal has released its decision in the case of U-Drive Ltd (UDL). The case considers UDL's claim for the repayment of VAT relating to the costs of certain vehicle repairs. The issue was whether the supplies of vehicle repairs were made to UDL (in which case VAT would be recoverable) or to the third party.

Customers hiring a vehicle from UDL were insured by UDL's fleet insurance policy. All customers were informed when hiring a vehicle that if there was an accident, UDL's contact details, set out on a ‘bump card’, should be given to the third party. This ‘bump card’ would encourage the third party to contact UDL rather than notify their own insurers. UDL's accident and repair handling team would then negotiate with the third party and a vehicle repair workshop, with a view to the third party agreeing that the repair workshop appointed by UDL would carry out the repair work to the third party's vehicle and provide a courtesy car. UDL contracted directly with the repair workshop that it appointed, which issued UDL with an invoice for UDL. It was the VAT on these invoices which UDL sought to recover.

The Upper Tribunal concluded that UDL simply agreed to pay for the repair of the third parties' vehicles. UDL had no interest in the repairs other than as a means to meet (at reduced cost) a liability that would otherwise be incurred. The fact that UDL contracted to pay for the repairs did not make UDL the recipient of the supply and on this basis, UDL was not able to recover the VAT on the vehicle repair costs.

Businesses which operate similar fleet insurance policies may wish to review the VAT treatment of similar transactions.

International developments

On 17 March 2017, the Secretary-General of the OECD issued a report to the G20 finance ministers covering the latest developments in the international tax agenda, including updates on the implementation of BEPS counteractions. The report noted that work on considering the tax challenges of the digital economy will continue, with an interim report being delivered in 2018 and the final report in 2020, updating the 2015 deliverable to set out the latest developments. The Secretary-General's report also included updates on tax transparency (including the implementation of the Common Reporting Standard and the exchange of information) and a discussion of the ongoing efforts to address the needs of developing countries in tax matters.

The report included the findings from the recent survey conducted on tax certainty, which was subsequently published as a standalone document on 18 March. This identified that corporate taxes and VAT were considered important factors affecting investment and location decisions, although tax was not the only or most important factor. The report recommends some practical actions to support greater tax certainty, including:

• Reducing complexity and improving clarity through better tax policy design

• Improving dispute prevention and resolution through mechanisms that are fair, independent, accessible and timely

• Considering other tools to enhance certainty, including cooperative compliance programmes, advanced pricing agreements as well as simultaneous and joint audits

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.

Iceland: Iceland removes most restrictions on foreign exchange transactions and cross-border movement of domestic and foreign currency.

Italy: Italy releases its 2017 work permit quotas for non-EU nationals, with applications able to be submitted from 20 March.

Canada: The Canadian province of Alberta issues its Budget 2017-18, with tax rates remaining as had previously been announced.

Other publications

Please speak to your usual EY contact, or email us at eytaxnews@uk.ey.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.

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.

Finance Bill released including updated legislation

Email Claire Hooper

+ 44 20 7951 2486

Notice under Article 50 to be given on 29 March 2017

Email Michael Gibson

+ 44 20 7951 0568

US tax reform seminar to be held in London on 11 April 2017

Email Lindy Sing

+ 44 23 8038 2255

Upper Tribunal holds that VAT is due on the full amount received for the placement of temporary staff

Email Robert Crooks

+ 44 16 1333 2815

For other queries or comments please email eytaxnews@uk.ey.com.

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