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Midweek Tax News

A weekly update on tax matters to 22 May 2018

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.

A new report, The UK's future immigration system and access to talent was published by TheCityUK on 21 May 2018, in collaboration with EY. TheCityUK is the industry-led body representing UK-based financial and related professional services, however whilst the report focuses upon the immigration needs of the financial services industry, the recommendations are relevant to all sectors and industries.

The report urges the Government to reform the UK immigration system to ensure that Britain remains globally competitive beyond Brexit. It notes that the total costs of applying for visas to allow businesses to access international talent after Brexit could increase by up to 300% if current immigration rules are applied to European citizens and the planned ‘Tier 2’ visa fee increases come into effect.

The report calls for a new ‘robust and flexible immigration system for business which is fit for the whole economy’ and sets out nine practical recommendations for Government to achieve this. These include:

• Introducing a flexible short-term immigration category to enable qualifying international staff to work in the UK for up to six months without needing to apply for a visa first

• Creating a new independent Skills Advisory Board with representatives from business, education, the Home Office and Parliament

• Establishing a new ‘dynamic’ Shortage Occupation List that reflects the actual shortages employers face, including digital and cyber security skills

• Introducing a specialist branch of the Tier 2 visa category to cover overseas experts

• Extending the period for which indefinite leave to remain can be retained while living outside the UK from two to five years

The full report is available from TheCityUK's website which can be accessed here.

Today's tax and finance functions are under tremendous pressure as they struggle to attract and retain talent, to keep pace with significant legislative and regulatory change and to make sustainable investments in technology whilst having to reduce their costs.

To better understand how companies are responding to this new reality, we have conducted a survey Reimagining the Tax and Finance function: find your path forward which aims to shed light on how companies are reacting and how tax and finance functions are being impacted. The survey involved senior executives from 1,722 organisations globally, including 315 of the world's largest 500 publicly listed companies.

The results of the survey show that companies are not standing still and that they recognise the need to be bold and innovate their tax and finance functions to successfully manage the pressures and deliver value. Indeed, 84% of companies are taking action due to deficiencies in their targeting operating models (53% said they are not confident in their current model). In addition 27% say that they are already outsourcing tax and finance functions whilst 57% are exploring the possibility of outsourcing.

Our experience from advising organisations around the world is that merely keeping pace is not a successful long-term strategy. Companies must identify and execute the change required within their own organisations to adapt to the continuing challenges they face. For global organisations, that means reimagining the tax and finance function.

The full report is available here and it is hoped that this will help readers draw conclusions of their own as well as allowing them to benefit from our actionable insights and the suggested path forward found in the conclusion.

On Friday, 18 May 2018 HMRC launched a new consultation on off-payroll working in the private sector with a view to ensuring that people effectively working as employees pay the right amount of tax. Legislation already exists (the intermediaries legislation, more commonly known as IR35) that requires the operation of a simplified form of PAYE and national insurance contributions (NIC) if the worker is paid via their own limited company but operates as a ‘deemed employee’ of a business contracting with that company. However, HMRC notes that there is evidence that the legislation is not working effectively and that non-compliance is widespread.

Changes were introduced in April 2017 to address non-compliance in the public sector, making the engager responsible for assessing whether IR35 applies and the entity paying the worker's company liable for making any PAYE/NIC deductions. HMRC suggests that these changes have been effective in increasing compliance and is seeking to explore options to address the perceived private sector non-compliance. The new consultation seeks to provide an early evaluation of the public sector reform and invites views on how to achieve a similar result in the private sector.

In our view, the consultation appears to be weighted in favour of a simple roll out of the public sector changes into the private sector. Whilst no implementation date has been given and HMRC has previously stated that it will not rush any implementation, a start date of 6 April 2019 cannot be ruled out. The closing date for responses is 10 August 2018 and any business engaging contractors will need to carefully consider the consultation as the impact could be significant.

For further details, please see our employment tax alert.

We will be hosting a joint Making Tax Digital (MTD) webcast with HMRC at 10:00 am on Tuesday, 5 June 2018. All VAT registered businesses above the VAT registration threshold will be compulsorily required to meet the MTD requirements with regard to their VAT obligations from 1 April 2019 unless specifically exempt (for example, due to the inability to use electronic systems for religious or practical reasons). By this date, those businesses will need to make sure that they store VAT records electronically, are able to prepare and submit VAT returns electronically via an interface that is compatible with HMRC's software and that they can demonstrate a clear electronic audit trail from source systems to digital VAT return submission.

The MTD changes will require new processes and systems and, with a relatively short lead time until the mandated start date, there is a pressing need to act now to identify any gaps and to implement any required changes. MTD is likely to extend to other taxes from 2020 so whilst the issue today is readiness, those readiness preparations must be viewed as part of the wider strategic objectives of tax functions.

HMRC's Agent Portfolio Lead for MTD, Heather Elliott, will join EY's Chris Lewis and Fiona Campbell to discuss the current status of the process and consider how the MTD requirements will work on a practical basis. The webcast will also cover the most frequently asked questions, including the level of manual intervention permitted, making manual adjustments and how to deal with partial exemption.

To register for the webcast, please click here.

Other UK developments

The Upper Tribunal has allowed the taxpayer's appeal in Coal Staff Superannuation Scheme Trustees Ltd, reversing the First-tier Tribunal's decision and finding that the manufactured overseas dividend regime did involve a restriction on the movement of capital up to its repeal in 2014. The case involves a pension scheme which was exempt from UK tax on its investment income. As such, it could receive no credit for UK tax withheld from manufactured overseas dividend payments that it received because it had no tax liability. However, there would have been no UK tax withheld from UK dividends and the trustees claimed that the manufactured overseas dividend regime was therefore contrary to EU law because it made it advantageous to hold UK shares over non-UK shares.

The Upper Tribunal considered that it was incorrect to compare the manufactured overseas dividend regime with the tax treatment of the receipt of actual dividends paid on non-UK shares, rather the comparison should be with the manufactured dividend regime representing UK dividends. It further said that, in any event, it was wrong to consider whether a difference in treatment constituted a restriction on a fundamental freedom by asking whether the person affected was in a better, worse or neutral position. The Upper Tribunal also concluded that the manufactured overseas dividend regime could not be justified by reference to the need to preserve a balanced allocation of taxing powers between the UK and any other Member State, nor could it be justified on the basis of the prevention of tax avoidance. Finally, the Upper Tribunal concluded that the case did not need to be referred to the Court of Justice of the EU.

On 15 May 2018 the European Commission approved the prolongation of the UK's Enterprise Management Incentive (EMI) share scheme under the State Aid rules. The scheme, which reduces the taxation of employee share options in certain circumstances, had previously been approved, although this had lapsed on 6 April 2018. The detailed decision is not yet available and so it is not yet possible to confirm that EMI share options issued between 7 April and 15 May 2018 are eligible for the tax advantages available to option holders (though this may be implied from the Commission's case summary). There has been no announcement as yet from HMRC.

The new decision would last until 2023, although the approval period will be affected by the UK's departure from the EU and any relevant terms in the Withdrawal Agreement. As with other State Aid issues, the position may need to be revisited if a future trade agreement includes rules similar to the EU State Aid rules, as has been suggested by the EU's Brexit negotiators.

The Scottish Government released its response to the consultation on first-time buyer relief from land and buildings transaction tax on 17 May 2018. The consultation, launched in February 2018, sought views on the Scottish Government's proposals and draft legislation to introduce the relief from June 2018. As a result of the consultation, the Scottish Government proposes to make some changes to the relief:

• Relying upon the existing definition of ‘major interest in land’ rather than introducing a separate definition

• Amending the approach on linked transactions to align it with a similar relief under stamp duty land tax, allowing relief for linked transactions in two specific circumstances

• Updating the draft legislation to clarify that the relief will not be available where the Additional Dwelling Supplement applies, to reflect the Scottish Government's position on trusts and alternative finance, and to specify that the relief means tax will not be chargeable on the first £175,000 of consideration payable

Subject to approval of the draft legislation by the Scottish Parliament, the relief will be available for transactions undertaken after 30 June 2018.

International developments

The draft agenda for the next ECOFIN Council meeting on 25 May 2018 has been published. From a tax perspective, the Council is expected to approve measures to boost administrative cooperation in the area of VAT and may also be called upon to agree two other VAT proposals (reduced rates for e-publications and an optional reversal of liability to prevent fraud). The Council is also expected to adopt a directive putting the current minimum standard VAT rate on a permanent footing.

Ministers are expected to make adjustments to the EU's list of non-cooperative jurisdictions in taxation matters and to approve a standard provision on taxation to be included in agreements with third countries. The Council is also expected to approve a directive boosting transparency in relation to tax intermediaries.

The list of non-cooperative jurisdictions has also been a subject of discussion for the members of the TAX3 Committee, the special committee on financial crimes, tax evasion and tax avoidance established in the wake of the ‘Panama Papers’ leak. The Committee sought to examine the existing list of non-cooperative jurisdictions, the transparency around the decisions and whether the process could be improved. The panel discussing the process, which included Mr Valère Moutarlier from the Directorate General of Taxation and Customs Union within the European Commission (and who assisted the European Council with the economic analysis and evaluation), noted that the criteria for assessing non-cooperation precluded EU Member States from being on the list, but that internal measures, such as the State Aid process, provided some safeguards. However, some committee members considered that the position in respect of the UK would need to be reassessed after Brexit. It was also noted that whilst the US currently meets all the criteria, further work will need to be undertaken to ensure that the transparency rules are met by March 2019, otherwise the US may need to be placed on the list.

On 17 May 2018 the Inclusive Framework on BEPS, set up to monitor the implementation of the G20/OECD BEPS Project recommendations, released updates on the review of preferential regime reviews under Action 5 of the project.

The Inclusive Framework notes that 11 new preferential regimes have been identified since the last update, bringing the total identified to 175 regimes across 50 countries. According to the update, 4 new regimes were designed to comply with the Forum on Harmful Tax Practices standards, meeting all aspects of transparency, exchange of information, ring fencing and substantial activities and another 4 regimes have been abolished or amended to remove harmful features, whilst 3 others have been found to pose no Action 5 risks and so are out of scope. Despite the ongoing work, nearly half of the regimes identified are still in the process of being amended and 12 regimes are still under review.

On 16 May 2018 the European Ombudsman, who investigates complaints against the EU institutions, issued a special report to the European Parliament on the transparency of the Council of the EU's legislative process. The Ombudsman considers that the Council's current practices constitute maladministration. She has made a number of recommendations to the Council, including suggesting that it should record the identity of Member State governments when positions are expressed in Council preparatory bodies, and that the routine labelling of documents as ‘limite’ (intended to restrict access to such documents to the Council) prior to the final adoption of the legislative act should be reviewed to recognise the legal obligation to make legislative documents directly accessible. The Council is not obliged to follow the recommendations.

The key themes of the report in relation to the development of EU tax policies and legislation were discussed with the Ombudsman at the European Parliament's TAX3 Committee meeting earlier that week, as part of the Committee's public hearing on the fight against harmful tax practices within the EU and abroad. There are a number of tax related proposals currently progressing through the Council's legislative process (such as the Commission's digital economy taxation proposals, the Common Consolidated Corporate Tax Base and proposals for public country-by-country reporting) and it will be interesting to see how the Council responds to the recommendations.

On 17 May 2018, the European Commission issued a regulation allowing the EU to suspend the World Trade Organisation concessions on import tariffs for certain US goods. In the event that the US applies import duty safeguard measures against imports of EU goods, the Commission will apply additional ad valorem custom duties to various US goods imported into the EU from 20 June 2018. The first stage of duties will apply at a rate of 25%, with a second stage potentially applying from 23 March 2021 with duties ranging from 10% to 50%.

For further information, please see our global tax alert.

The new Prime Minister of Malaysia has confirmed the intention of the country's new government to abolish Goods and Services Tax (GST) and to replace it with a version of the Sales and Service Tax (SST) that was in effect prior to the introduction of GST. An order has already been issued and reduces GST from 6% to 0%, with effect from 1 June 2018, in an attempt to ease the transition back to SST.

The transition from GST to SST, which is likely to occur in a relatively short time frame, will require careful management. Businesses operating out of Malaysia may wish to address the associated implications as soon as possible, which include systems, commercial, pricing, tax and contractual issues.

For more information on the legislation impacted, please see our global tax alert.

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.

Netherlands: The Dutch Finance Minister has published a new Decree on the application of the arm's length principle in light of the amendments to the OECD's Transfer Pricing Guidelines and developments in Dutch case law.

Nigeria: The Nigerian Senate has passed a new bill on corporate law reform which, amongst others, introduces the concept of a limited liability partnership and removes requirements for limited companies to have at least two shareholders.

Thailand: Thailand has enacted emergency decrees on digital assets (cryptocurrencies and digital tokens) to govern and regulate business operations related to these.

Turkey: The Turkish Parliament has approved a law to restructure tax receivables, including taxes, tax penalties, delayed interest penalties and late fees for tax periods prior to 31 March 2018.

United Kingdom: A global alert is now available in respect of HMRC's consultation on short-term business visitors from overseas branches of UK companies.

United States: The US Internal Revenue Service has released a revised mandatory template to be used for all Advanced Pricing Agreement requests.

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.

New report on the UK's future immigration system and access to talent

Email Margaret Burton

+ 44 20 7951 6183

Reimagining the tax and finance function: find your path forward

Email Tim Steel

+ 44 20 7951 1149

HMRC issues consultation on off-payroll working in the private sector

Email John Chaplin

+ 44 20 7951 4654

Joint EY and HMRC webcast on Making Tax Digital to be held at 10:00 am on 5 June 2018

Email Olivia D'Silva

+ 44 20 7951 0769


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

 

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