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Midweek Tax News
A weekly update on tax matters to 5 February 2019
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.
With various discussions taking place on the possible ‘alternative arrangements’ to the ‘backstop’ provisions in the Brexit Withdrawal Agreement, the expectation is that, after talks in Brussels later this week, Mrs May is looking to bring back a renegotiated Withdrawal Agreement by 13 February so that MPs can have a second ‘meaningful vote’ on 14 February.
Accordingly, we have moved our Financial Services webcast, 'Brexit – practical preparations for Day One' to Friday, 15 February 2019 so as to provide a more comprehensive update. If you have already registered, and are able to attend the new morning or afternoon session, you do not need to take further action. If you now want to register for the morning session, please click here, and to register for the afternoon session click here. Please note that the morning session will now start at 8:00am with the afternoon session remaining as a 3.00pm start.
We will also be hosting a webcast on the ‘People impacts of Brexit’, tomorrow, 7 February. With just over 50 days until the Exit Day of 29 March 2019, our Brexit leaders will be sharing some thoughts around how to ensure your talent is retained and supported, as well as guidance on how to navigate immigration challenges. The webcast will take place at 11.00am and you can register by following this link. Alternatively, for those based in financial services, you may like to look at our latest financial services publication, Preparing your people strategy for post-Brexit business. The report looks at some of the alternative approaches firms are taking and the emergence of a 'two-phased' approach to ensure business continuity and compliance on 'day-one' but to also plan for a more stable, cost effective long-term solution.
As yet, there has been little indication from the Government that an extension to the Exit Day of 29 March will be sought (though individual Cabinet Ministers have appeared more willing to consider an extension). If a ‘no-deal’ exit were to happen on 29 March, it is not clear that the necessary legislation would all be in place. It is clear that there is significant time pressure on both the outstanding primary legislation (the Trade Bill and the Immigration Bill being examples) and the outstanding secondary legislation (where a significant number of statutory instruments are still to be tabled).
Away from the Parliamentary debates, there have been a number of developments. While not all of them are specifically tax related, they all may have some impact on tax issues.
HMRC has written to VAT-registered businesses that trade only with the EU with details of important actions they need to take and changes to be aware of in the event of the UK leaving the EU without a deal. This is HMRC's third letter to businesses on preparing for the UK leaving the EU. The letter includes information on preparing to make customs declarations, changes HMRC will introduce to make importing easier and changes to VAT and VAT IT systems. These changes do not apply to trade across the Northern Ireland-Ireland land border, information on which is to be released ‘as soon as possible’.
On 4 February, the Government announced it is introducing new Transitional Simplified Procedures (TSP) for customs, to make importing easier for the initial period after the UK leaves the EU, should there be no deal. Once registered, businesses will be able to transport goods into the UK without having to make a full customs declaration at the border, and be able to postpone paying import duties. However, for controlled goods, businesses will have to provide some information before import. Businesses can sign up for TSP online from 7 February. They will need an Economic Operator Registration and Identification (EORI) number if they do not already have one.
The Brexit Secretary of State has provided an update on the Government's work with the other parties to the EU's international agreements, which aims to continue the effects, where possible, of these agreements in a no-deal scenario. These agreements cover various topics including financial services, trade and transport and are either bilateral agreements or multilateral agreements for which the government is taking action to become an independent party.
The Competition and Markets Authority (CMA) has published a draft guidance document to explain how EU Exit will affect its powers and processes after Exit Day. The guidance explains the treatment of ‘live’ cases in a no deal scenario, which are those cases that are being reviewed by the European Commission or the CMA on Exit Day. However, the guidance does not cover the exercise of the CMA's State Aid powers it will assume after Exit Day.
Finally, the Information Commissioner has published advice which points out that in the event of ‘no deal’, EU law will require additional measures to be put in place by UK companies when personal data is transferred from the European Economic Area (EEA) to the UK. The UK Government has already made clear its intention to enable data to flow from the UK to EEA countries without any additional measures. Businesses may wish to consider whether any additional measures may involve a change to their operating model and treatment of customer intangibles.
EY Tax Digital Innovation Forum
EY will host the next Tax Digital Innovation Forum at 8.30am on 28 February 2019 at 1 More London Place. The subject of this event will be data quality.
The Forum is a peer-group discussion, with input from the EY Tax Technology and Transformation team. The discussion will focus on:
• how poor data quality can impact tax and finance
• how technology can help to improve businesses' understanding of data quality and identify where improvements can be made
• the benefits which arise from focused efforts at improving data quality
The EY team will also share some of the technology solutions we are working on that look at data quality.
Space on this discussion forum is limited – if you are interested in attending, please contact Payal Bhatia.
Other UK developments
Profit Diversion Compliance Facility: HMRC issues first warning letters
Further to our report in Midweek Tax News last week, HMRC has now started to issue the first warning letters to taxpayers they consider to exhibit ‘red flags’ of profit diversion. The letters are being issued to selected businesses, regardless of whether they have notified a potential DPT liability. HMRC recommends that the letter is shared with the group's Senior Accounting Officer (where applicable) and Chief Financial Officer.
HMRC is expecting to issue these ‘nudge’ letters in small batches, and is looking to monitor reaction to the initial letters, with an expectation that the Profit Diversion Compliance Facility (and issue of letters) will continue beyond the end of 2019. Businesses potentially within the scope of the Profit Diversion Compliance Facility should therefore still consider whether to register, whether or not they receive a warning letter.
Structures and Buildings Allowance consultation: EY response
In Budget 2018, the Chancellor announced a new Structures and Buildings Allowance (SBA) for new non-residential structures and buildings. SBA will provide relief on eligible construction costs incurred on or after 29 October 2018, at an annual rate of two percent on a straight-line basis.
The Government requested views on a number of aspects of the design of SBA, and EY has now submitted its response to this consultation. Our comments cover the aspects where views were specifically requested within the Technical Note as well as wider comments on technical and practical considerations for the new relief, in advance of the drafting of the relevant legislation. Our response highlights four asset classes that we consider worthy of further consideration for inclusion within the scope of the SBA and looks at the potential difficulties with the proposed boundary of 35 years for the transfer of the SBA from a lessor to a lessee.
If you would like to discuss our response, please get in touch with your usual EY contact.
Draft secondary legislation introducing the SBA is expected to be published for comment in the next few months, to be laid before Parliament in the summer.
Corporate capital loss restriction consultation: EY response
On Budget day, the Government launched a consultation regarding its intention to introduce a restriction on the relief for corporate capital losses, with effect from 1 April 2020. EY has submitted its response to this consultation, highlighting that the proposed changes could have a detrimental impact on investment decisions, with certain sectors being particularly adversely affected. In many cases, the proposed restriction may prevent groups from obtaining relief for capital losses over the long term, (the obtaining of which is a stated Government principle), and may effectively result in permanent disallowances. We are concerned that the proposals could have a negative impact on the competitiveness of the UK as a location for future investment.
Given the challenges and uncertainty that groups currently face in relation to Brexit, and the stated aim of having a competitive tax regime, we consider that the Government should reconsider whether the proposals should be taken forward at the current time. However, if the Government decides to proceed with the implementation of the proposed restriction, we have suggested a number of amendments to the proposed rules that could be considered, including deferring the commencement of the rules, introducing a form of terminal loss relief and limiting the application of the restriction to particular losses.
If you would like to discuss our response to this consultation, please get in touch with your usual EY contact.
Treasury Commons Select Committee launches inquiry into the impact of Business Rates
The Treasury Commons Select Committee has launched a new inquiry into Business Rates to scrutinise how Government policy has impacted businesses. The Committee plans to examine how Business Rates policy has changed, including Business Rates retention, alternatives to property-based taxes (such as the proposed digital services tax or land-value based taxation), and how changes to Business Rates could impact businesses.
It is intended that the inquiry will to look at the impact of changes in Business Rates policy since 2017 on businesses, and in particular:
• the ability of businesses to pay
• the changes in reliefs and allowances
• the relationship between Business Rates and the behaviours it drives in business
The deadline for making written submissions to the inquiry is 2 April 2019.
Application of just and reasonable apportionment provisions in capital allowances claim
In the case of Glais House Care, the First-tier Tribunal has confirmed that a just and reasonable apportionment under section 562(3) of the Capital Allowances Act 2001 overrides any different amounts apportioned to fixed plant and machinery in the sale contract. In this case, the buyer sought to claim allowances for an amount exceeding the amount attributed to the plant and machinery in the contract. The Tribunal agreed that the starting point for the calculation of the amount of expenditure on which the buyer could claim capital allowances was the proportion of the total purchase price which is attributable to the fixtures “on a just and reasonable apportionment”.
The transaction in question took place before the introduction in Finance Act 2012 of provisions to ensure that a buyer cannot claim more than the seller's disposal value.
US Treasury official's comments on US involvement in the OECD discussion on international taxation of the digital economy
As reported in Midweek Tax News, on 29 January 2019, the OECD published its policy note on Addressing the Tax Challenges of the Digitalisation of the Economy. The new plans may impact any multinational company, including those with highly-digitalised business models and those relying heavily on intellectual property.
On the same day that the OECD policy note was released, a US treasury official made a speech outlining the involvement of the US in discussions to date and setting out further views with regard to the US position on many of the issues under debate. He stated that the US is engaged in the OECD process out of concern that “the longstanding international consensus around the allocation of taxing jurisdiction is breaking down.” This is highlighted, he said, by the accelerating trend of unilateral actions by various countries over the past five years. He also commented that the US therefore hopes that with increased involvement, a broad political consensus can be built at the OECD level as to how taxing jurisdiction can be allocated between different countries with different taxation models. Further detail can be found in our alert.
A global alert on the OECD's policy note on the tax challenges of the digital ecomony is available here.
Ireland deposits multilateral instrument with the OECD
Ireland has deposited its instrument of ratification for the multilateral instrument (MLI) with the OECD, which means the MLI will enter into force for Ireland on 1 May 2019 and will apply to covered treaties (including the UK's) from 1 January 2020 for withholding taxes and from 1 November 2019 for other taxes.
OECD releases update report on BEPS Action 5
The OECD has released an update report in relation to its assessment of harmful tax practices, as part of the ongoing implementation of Action 5 under the BEPS project. The assessments are conducted by the Forum on Harmful Tax Practices, comprising the member jurisdictions of the Inclusive Framework.
The assessment demonstrates that most territories have now amended their tax regimes to comply with OECD standards. All intellectual property regimes which were identified in the original Action 5 report have now been found to be ‘not harmful’ and consistent with the nexus approach (including the UK patent box). A global alert on this report is available.
Meanwhile, the OECD has announced that Greenland and the Faroe Islands have joined the Inclusive Framework, bringing the total number of member jurisdictions to 127.
EU Code of Conduct Group letters
On 1 February 2019, the Code of Conduct Group (Business Taxation) of the Council of the European Union wrote to the jurisdictions of Barbados, Belize, Curaçao, Mauritius, Saint Lucia and Seychelles, asking for commitments that they will replace harmful “preferential tax measures” with alternative measures.
The letters identify a particular aspect of each jurisdiction's tax system as constituting “preferential tax measures” which have been deemed by the Code of Conduct Group to have harmful effect. The letters ask that the jurisdictions make a high-level commitment to abolish or amend the measures concerned by the end of 2019 without any grandfathering mechanisms being introduced.
The letters suggest that if the measures are not abolished or amended, the Code of Conduct Group may consider recommending to the Council of the EU that the jurisdictions should be included on the EU's list of non-cooperative jurisdictions for tax purposes.
Panama signs multilateral competent authority agreement for CBCR
On 24 January, Panama signed the Multilateral Competent Authority Agreement on the Exchange of Country-By-Country Reports (CbC MCAA). The total number of jurisdictions that have joined the CbC MCAA is now 76.
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.
Italy: The Italian Supreme Court, in a decision of 13 December 2018, has denied the Italian withholding tax exemption under the European Union Parent Subsidiary Directive by claiming that no double taxation existed given the fact that the Luxembourg parent benefitted from a local dividend exemption regime.
Netherlands: The Netherlands has implemented Controlled Foreign Company (CFC) rules, applicable to fiscal years starting on or after 1 January 2019. Based on the Dutch CFC legislation, undistributed ‘tainted’ (passive) income (including but not limited to dividend, interest and royalty income) derived from subsidiaries that are tax resident in certain low-tax jurisdictions, is annually included in the taxable basis of the Dutch taxpayer.
Poland: From 1 January 2019, Poland has incorporated significant changes to its transfer pricing law. The implemented changes seek to reduce the administrative burden imposed on taxpayers by increasing documentation thresholds and introducing ‘safe harbors’, yet at the same time grants broader powers to tax authorities in assessing the merits of transactions between related parties and validating the applied TP approach.
Spain: On 25 January 2019, after a public consultation, the Spanish Government published a revised bill introducing a Digital Services Tax (DST). The bill will be sent to the Congress and Senate to be voted upon.
Spain: On 18 January 2019, the Spanish Council of Ministers approved the bill on the Financial Transaction Tax. This bill has been sent to the Spanish Congress and Senate to be voted on. The main features of the Financial Transaction Tax (e.g., taxable base, tax rate) remain almost unchanged from the original draft released on 23 October 2018.
Hong Kong: The Hong Kong Inland Revenue Department announced on 23 January 2019 that, effective from the taxable year 2018, Hong Kong taxpayers are required to disclose certain related-party information and confirm their compliance with transfer pricing documentation requirements in their profits tax return.
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.
+ 44 20 7951 0568
EY Tax Digital Innovation Forum
+44 20 7951 4602
For other queries or comments please email email@example.com.
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Midweek Tax News
Your succinct overview of the key tax developments that have occurred each week.