The draft Finance Bill (DFB) repeated and added a little flesh to the bones of the Autumn Statement as well as including a few developments from other, earlier announcements, such as the “simplification” of IHT on trusts.
We have confined ourselves to selected areas of the DFB for immediate commentary which we intend to add to as our understanding of the issues, in particular those under consultation, evolves.
New CGT charge on non-resident owners of UK residential property
The draft Finance Bill contains two important changes to the capital gains tax (CGT) régime on residential property. As from 6 April 2015:
- non-residents who realise gains on UK residential property will have to pay UK CGT;
- new restrictions on Principal Private Residence (‘PPR’) relief will affect anyone c claiming the relief for a property in a country where they are not resident.
Not only individuals
This affects non-UK resident individuals, trusts and estates, narrowly controlled companies and partnerships who own UK residential property unless they would already be liable to UK tax on capital gains. PPR changes affect UK-residents owning residential property abroad and non-residents owning residential property in the UK.
Calculating post- 6 April 2015 gains
The new charges only apply to gains accruing from 6 April 2015 onwards. The normal calculation method will involve rebasing (calculating increases over the property’s 6 April 2015 value) but other options available will include time apportionment and simply returning the entire gain.
New charge hits non-UK quasi-close companies
The new charge will take priority over the existing anti-avoidance legislation which attributes gains to UK participators of non-UK resident companies and to settlors and beneficiaries of non-UK resident trusts.
ATED-related CGT trumps non-resident CGT
Properties already subject to the annual tax on enveloped dwellings (ATED) will remain subject to ATED-related CGT.
Self-assessment or separate declaration?
Non-residents who complete self-assessment tax returns will declare the gain in their return and pay the CGT at the normal due date of 31 January following the year of disposal. Non-residents who are not within SA will be required to report the disposal on a return filed within 30 days of the conveyance and any pay the tax within 60 days of the conveyance.
Private residence relief restricted in relation to cross-border ownership
From 6 April 2015, PPR relief on gains from the disposal of an individual’s only or main residence will only be available for any year:
- for a property in a territory in which the individual is resident; if
- the individual spends at least 90 midnights in that property.
The extension of CGT to non-residents who realise gains on UK residential property had already been announced. The publication of the draft legislation clarifies how rebasing will apply where property is already owned by non-residents.
Everyone who owns a second home should be aware of the changes
UK residents with second homes (whether in the UK or abroad) or people with a UK home that is not occupied full time, e.g. expats, will need to satisfy the occupation test regardless of whether they have previously elected for the second home to be their CGT main residence.
Non-residents investing in the UK residential property market will need to determine whether owning the property directly or through a structure is most beneficial to them.
The changes to PPR will not affect many UK residents. However, individuals who go abroad for any reason but retain a property in the UK will need to ensure that they meet the 90-midnights rule to retain the exemption from CGT throughout.
And finally, don’t overlook the interaction between these rules and the statutory residence test. A person who spends 90 nights in their UK residence to secure PPR relief will thereby have a “UK-tie” and could be on the way to being UK-resident.
Simplification of IHT restricts multiple trust planning opportunities
As trailed in the Autumn Statement coverage, the Finance Bill will contain restrictions on the use of ‘pilot’ trusts to multiply the benefit of nil-rate bands (NRBs) by having one in each trust. The proposed new rules apply to IHT ten-yearly and exit charges arising on or after 6 April 2015. They will apply to all trusts established by the same settlor where property has been added to more than one trust on the same day if the addition was made on or after 10 December 2014.
IHT is only payable on a trust’s assets if their value exceeds the NRB. Previously, it has been possible to set up a number of trusts with nominal amounts on different days and then later add to them, most often on death, so that each trust effectively has its own NRB. Careful planning could result in little if any IHT being paid on the assets put in the trusts.
The Treasury proposed, a single “Settlement NRB” to deal with this but has had a change of heart. Under the latest proposals, individuals will be able to settle property up to the value of the NRB into a trust every seven years.
Some protection is being offered to existing trusts which receive additions under the will of the settlor before 6 April 2016 on terms which are substantially the same as existed immediately before 10 December 2014.
This moderation of the original proposals cuts out the ploy of settling pilot trusts to receive the settlor’s estate in tranches on death but the restriction to transfers on the same day appears to leave the door slightly ajar for multiple trusts that receive settlements in the settlor’s lifetime at different times.
It remains to be seen whether this will be the last attempt to “simplify” IHT on trusts.
For more information contact Paul Barham, Senior Tax Manager, Milton Keynes
Subsidised renewable energy companies to lose VC reliefs
Investors in companies involved in renewable energy generation will no longer be able to claim valuable tax reliefs. The Government is seeking EU approval for increases in the investment limits applying to community organisations that can offer investments attracting social investment tax relief (SITR). Individuals and/or fund managers that invest in this sector may also be affected.
On 1 April 2015 Seed Enterprise Investment (‘SEIS’), Enterprise Investment Scheme (‘EIS’) and Venture Capital Trust scheme (‘VCT’) reliefs will be withdrawn from companies that are eligible for government subsidies for renewable energy production, or have entered into a Contract for Differences.
Exception for community organisations
Community organisations and social enterprises will continue to qualify for the above reliefs after 1 April but only until the expanded Social Investment Tax Relief (‘SITR’) obtains EU approval.
Effects on investors
The measures will have a direct impact on individuals or fund managers investing in this sector but will have a knock on effect on those companies and community organisations who are looking for funding.
The Government understandably wants to avoid giving the same people ‘two bites at the cherry’ but the direct financial impact will be on individuals or fund managers who might otherwise have considered investing in this sector. Rather than improve the tax take, all this will do is make that proposition less attractive and therefore make it harder to get investment into the renewable energy sector.
Enabling variation of the reliefs by Treasury Order makes it significantly easier for the Government to make further exclusions to these reliefs and also to permit those changes to apply retrospectively. This mechanism is used in many areas of tax but does increase the potential for uncertainty as it makes tinkering easier.
ATED relief claims simplified from April 2015
FA 2015 will go some way towards reducing the ATED compliance burden of companies claiming reliefs in 2015/16 and later years but could have gone further. No changes are made to the system for returns where ATED is payable.
The present system and changes previously announced
ATED currently applies to any single dwelling worth over £2m (as at 1 April 2012 or the date of acquisition if later. As from 1 April 2015 the property value threshold will be reduced to £1m and from 1 April 2016 it will be £500k.
A separate ATED return will still be required for every single dwelling on which ATED is payable; the return changes only affect cases where no ATED is due because a relief is claimed (see below). The normal deadline for filing a return and paying ATED is 30 April except in the case of newly acquired or constructed property and for some 2015/16 returns.
For newly acquired property the normal filing and payment deadline is 30 days from acquisition.
For newly constructed property that deadline becomes 90 days from the earlier of the date on which the dwelling is deemed to come into existence for Council Tax purposes and the day on which the dwelling is first occupied. there had been suggestions that the Council Tax test might be dropped because of the time it can take local authorities to recognise new properties for Council Tax but that fear was not realised.
Filing and payment deadlines for £1m-2m properties
For properties newly brought into ATED the normal filing and payment rules are relaxed for 2015/16 only so that for properties already owned on 1 April:
- returns must be filed by 1 October 2015; and
- any ATED due must be paid by 31 October 2015.
Those dates are overridden by the normal filing and payment rules if those rules produce a later filing and/or payment date (e.g. for a property worth £1.5m acquired on 25 September 2015 the return would be due on 25 October and payment on 31 October).
The new Relief Declaration Return system
Relief declaration returns (RDRs) will be available to all entities that own any single dwellings and so would be liable for ATED but for the availability of one or more of the reliefs for:
- property development businesses;
- property rental businesses;
- property trading businesses
- employee accommodation;
- occupation as a farmhouse;
- social housing; and
- dwellings open to the public.
Every company eligible to claim an ATED relief will be able to make a single RDR for each relief that applies which covers all properties owned at the start of the year (1 April) to which that relief applies.
So a company that both develops and rents property could have to make two separate RDRs.
Properties acquired in the year
Once an RDR has been filed it covers both properties owned on 1 April and any new property acquired in the year to which the relief already claimed applies.
If a new property does not qualify for a relief that has already been claimed a new RDR must be made (e.g. where a company that owns property which is rented out acquires a new property that is not rented out and is instead used for employee accommodation). The same applies if a property is put to a different use, e.g. where a company that had only claimed relief for property development appropriated a newly completed property to a property letting business.
2015/16 will be a transitional year because of the introduction of the RDR form as well as changes that HMRC are making to their online reporting systems. Therefore the first RDR filing deadline will be 1 October 2015, the same as the transitional deadline for filing returns for single dwellings worth between £1m and £2m.
The normal RDR filing deadline will be 30 days from acquisition of an existing property or 90 days from the earlier of the date on which the dwelling is deemed to come into existence for Council Tax purposes and the day on which the dwelling is first occupied, i.e. the same as the normal ATED filing deadline.
Extending social Investment tax relief (SITR) to more, bigger enterprises
Subject to EU approval the Government intends to increase the investment limits for SITR to £5 million per year, up to a total of £15 million per organisation, and widen the range of qualifying vehicles. Social enterprises include a wide range of businesses set up to carry out business activities and specific projects on a not-for profit basis.
SITR started small
In its present form SITR is available for investments in social enterprises made in the period 6 April 2014 to 5 April 2019. The limit on the aggregate investments in any one SE that may attract SITR is €344,827. Individuals may claim up to £1m SITR p.a. on investments in SEs.
Nurturing the green shoots
The Government intends to widen the scope of SITR by both increasing the limits and making additional vehicles such as small-scale community farms and horticultural entities qualify, but this will not take effect until next year. If approved, the increased limits which are in line with general proposals for amended Europe-wide limits on venture capital schemes, would significantly enhance the appeal of SITR by offering qualifying enterprises the opportunity to establish sounder financial foundations.
A consultation to introduce a Social Venture Capital Trust to enable collective investments will start early next year. At present investments may only be made individually and directly in the specific social enterprises.
Whilst there is no guarantee that the EU will approve what the Government eventually comes up with this is a very encouraging development. Many social enterprises must have wondered if the cost and hassle of obtaining relief were justified within the current limits.
A specialised vehicle aimed solely at social enterprises was proposed by the Government in its 3 December response to consultation on expanding SITR. The main features proposed are that they would:
- be entirely separate from existing VCT structures;
- follow similar scheme architecture to take account of the nature of the social investment market;
- have a definition of eligible organisations that replicates the definition for SITR investee organisations
- have a minimum equity requirement of 70% investment in qualifying holdings in refer to qualifying equity and debt (defined as for SITR);
- not be subject to the 10% minimum equity holding per investee company that applies to VCTs.
The Government intend that Social VCT legislation should not cater for “hybrid” funds that combine social and commercial VCT investments.
Greener green shoots
SITR is to be modified to replace EIS, SEIS and VCT as the only vehicle for investment in entities that receive government subsidies for renewable energy generation (see below).
For more information contact Melanie Orriss, Tax Partner, London
Modest but welcome CT loan relationship and corporate debt reforms
Finally we have the outcome of a long-running review of the tax rules which determine how UK companies are taxed on interest payments and other profits and losses connected with corporate debt. The changes are much less radical than originally suggested and may not impact most trading companies.
The changes to the loan relationship rules potentially affect all companies that pay or receive interest, that lend or borrow money or are a party to financial instruments.
From January 2015 the rules on tax charges and reliefs where a loan is released (forgiven) are changing. These changed rules will operate in much the same way as the current regime under which a third party lender to a company is distress is permitted to claim bad debt relief on its loss whilst the borrower is not taxed on the benefit of the release. Loan relationships credits arising on debt releases will be exempt in situations where, at the time of the release, there is a material risk that the borrower will be unable to pay its debts within 12 months.
From April 2015 there are new anti-avoidance provisions that are intended to prevent companies taking advantage of the loan relationship rules. HMRC have had a succession of victories in the courts when they have challenged tax planning arrangements. Despite this the provisions are being strengthened with something akin to a mini-GAAR. The new section 455B of the Corporation Tax Act 2009 will counteract ‘loan-related tax advantages’ arising from ‘relevant avoidance arrangements’. One potentially troublesome aspect of the new provision is that where a company has gained an advantage, the company may have to show that this advantage “can reasonably be regarded as consistent with any principles on which the loan relationship provisions are based” (this being the wording of the exclusion). The draft legislation sets out examples of scenarios where the exclusion may not apply, such as where the arrangements result in the economic profits being greater than the taxable profits, or conversely the tax loss is greater than the economic loss. Timing differences and arrangements to manipulate the accounting treatment are also given amongst the examples. Whilst the new anti-avoidance provision means some other anti-avoidance provisions are being repealed, the unallowable purposes rule will remain.
Last, but not least, other changes will apply to companies’ first accounting period beginning on or after 1 January 2016. Taxation will be even more closely aligned to amounts included in a company’s profit and loss account.
The changes being proposed are mostly welcome. They will simplify certain aspects of the loan relationship rules. Under current rules where debits or credits are made to reserves the starting point of the legislation is to impose a charge. This is then modified by many exceptions. From accounting periods beginning after 1 January 2016 there will be no tax on amounts recognised in reserves. As and when the profits or losses are recycled to profit and loss there may be a tax charge.
The appearance in legislation of a provision that requires one to ascertain the “principles” of the legislation is a novel departure. In a recent tax tribunal case on a completely different area of tax law the tribunal gave short shrift to HMRC’s attempts to deny the relief sought as it went against principles of the legislation. However, it is highly likely we will see other new tax legislation in the future including similar wording in an effort to limit avoidance.
Diverted Profits tax may increase large groups’ tax bills
A new tax being introduced on 1 April 2015 aims to charge a 25% UK tax on specified offshore profits of multinationals using offshore subsidiaries to reduce their exposure to UK corporation tax on UK trading activity.
Any multinational group selling its products or providing services in the UK and non-UK associated entities involved in this activity will need to test their structure against the detailed rules. This could include companies in the supply chain or companies that own Intellectual property rights used in the supply.
The Government have responded to the publicity around some well known global groups and their structures to minimise the tax liability on profits. There are considerable complexities in the new diverted profits tax to deal with potential conflicts with:
- existing UK anti-avoidance rules such as transfer pricing;
- the UK’s obligations under its double tax agreements;
- EU rules on non-discrimination and freedom of establishment;
- duplicate tax charges on the same profit (to take account of tax paid in the non-UK territory).
Two scenarios are targeted
The first is an economic activity in the UK involving the supply of goods or services but the way a large group structures its affairs so that under UK tax rules (including relevant double tax treaties) it does not have a UK taxable presence in the form of a permanent establishment. A main purpose of the structure is to avoid a charge to UK corporation tax on the UK activity for this to trigger the tax.
The second involves cross-border structures that result in a disproportionate part of the profits of a large group being taxed at a lower rate. This is aimed at companies setting up in low tax jurisdictions companies that have little substance.
The tax requires companies to notify HMRC that they are potentially within the tax. Other anti-avoidance provisions within self-assessment, for instance transfer pricing, test against an objective standard, the non-connected transaction in the case of transfer pricing.
The new tax was announced with great fanfare but on closer examination it is not expected to actually collect a large amount of tax bearing in mind its much tax. The projections as certified by the Office for Budget Responsibility show the expected amount of tax peaking at £360m p.a.
HMRC are likely to face a number of challenges on the legality of the tax and on its administration. Whilst the wording of the proposed legislative provisions for the new tax show that HMRC have had in mind the many existing agreements that the UK is subject to that give taxpayers various rights, it seems to us there are weaknesses in the tax.
The obligation on groups to notify HMRC that they may be subject to the tax is potentially fraught with difficulty. The group may believe – and have reasonable grounds for that belief – that its structure was wholly designed for business reasons and the tax saving was not a main objective. Others may see it differently.
The new tax increases complexity and introduces further uncertainty into the UK tax system. It remains to be seen how the government will square this with their stated intention to make the UK’s fiscal environment attractive for business.
For more information contact, Andrew Ross, Senior Manager, Milton Keynes
Compliance and anti-avoidance
An unsettling proposal? HMRC consult on partial closure of enquiries
A consultation document issued on 18 December 2014 sets out HMRC’s proposed framework for empowering HMRC to close one or more aspects of an income tax, capital gains tax or corporation tax enquiry whilst leaving other aspects open. Whilst the principle is good, the practice may be a bit more difficult. This will affect anyone whose tax affairs are under HMRC enquiry, in particular those involved in high tax risk areas, including tax avoidance.
The proposal to allow for part to be closed and part remain open seems sensible but the existing legislative framework would require major surgery to make it work. At present, a tax enquiry remains open until all points are settled. This can produce some peculiar results when, say, HMRC are satisfied with everything except, for example, one technical aspect that is being argued through the Courts in another case. That can delay final settlement for years waiting for the other case to be resolved and for as long as the enquiry stays open, the taxpayer’s liability for that year remains unsettled. This is particularly relevant to the larger corporate entities where a complex technical point on one small aspect of the company’s affairs can result in many years’ liability remaining open and unsettled.
What the consultation document proposes
HMRC state that the enquiry process will (they say “will”, not “would”, so they must be confident of getting the proposal accepted) work as it does currently up until the point to be referred to the Tribunal is identified. They expect referrals to be made jointly but if the taxpayer did not agree to mutual referral:
- a senior officer of HMRC could authorise “sole referral” to the Tribunal; and
- the taxpayer would have a right of appeal against sole referral.
Taxpayers and HMRC would enjoy the same rights of appeal against the First Tier Tribunal’s decision as on any other appeal, i.e. on a point of law.
Once all avenues for appeal were exhausted the tax due on the point in question would be payable.
Sauce for the goose: what about taxpayer referrals?
Under the current legislation, a taxpayer can apply to the Tax Tribunal to have an entire enquiry closed. Would this proposal result in the right for the taxpayer to ask for a partial closure: that issues A and B are settled whilst C and D aren’t; or could HMRC oppose and seek for D to be closed and A to remain open? The proposal talks of HMRC targeting high tax risk cases or issues including those which they regard as involving tax avoidance but again it is difficult to see how this would interact with a taxpayer’s right to seek a closure notice.
The thrust of these changes is aimed at expediting the collection of tax due, by requiring payment of the tax in respect of those parts of the enquiry which are closed.
The proposal has merit and is probably long overdue but the practical application may take some working out – and may well have impacts across the whole enquiry process.
There should also be a corresponding option for the taxpayer to make a sole referral or request partial closure to obtain certainty and consistency of treatment but no such option is envisaged in the consultation document.
A penalty too GAAR?
Alongside the draft Finance Bill clauses the Government announced that it proposes to consult on whether and how to introduce penalties for breaches of the GAAR. We question whether there is any need. The answer would seem to be “No!”: this is likely to affect no-one, although it would allow HMRC another opportunity to rattle their much-polished sabre.
The Finance Act of 2013, which came into effect on 17 July 2013, introduced a General Anti-Abuse rule (the GAAR) in order to further discourage tax avoidance. It would appear that the GAAR was effective – or, some might argue, totally unnecessary – in that to date there appear to have been no cases that have yet been referred to the GAAR Advisory Panel for consideration. Nonetheless, the government proposes to consult upon whether and how to introduce penalties for GAAR cases.
There is an old two-part joke involving elephants and pepper:
“Why are you sprinkling pepper around your house?”
“To keep the elephants away.”
“But there aren’t any elephants within miles.”
“That shows how well it works.”
So for GAAR:
“Has anyone been caught by the GAAR yet?”
“That shows how well it’s working.”
One can only wonder what motivates HMRC to consider introducing a penalty for an offence that nobody appears inclined to commit; bolting the stable door when the horse apparently suffers from agoraphobia. The only conclusion is that it might afford another opportunity to speak of its commitment to prevent and deter tax avoidance.
The GAAR is said to be regarded by HMRC as the “nuclear option”. Perhaps it would be better termed the unclear option.
For more information contact, Tony Monger, Director, Tax Investigation and Employer Solutions
Stamp Duty Land Tax (SDLT)
Alternative property finance relief widened slightly
Relief from SDLT for alternative finance arrangements is only available if the finance is provided under a Home Purchase Plan. At present only a bank or building society can be an authorised provider of HPPs. HPPs were developed to provide a method of financing a house purchase without the payment of interest in a way considered compatible with Islamic beliefs. They are regulated by the Financial Conduct Authority in a similar way to conventional mortgages.
Without specific relief, financing a house purchase using an HPP would involve more than one charge to SDLT as rather than there being a single purchase, there are two purchases involved which would both be subject to SDLT. Alternative Property Finance Relief tries to ensure that buyers using a HPP will pay the same amount of SDLT that would be paid using a conventional mortgage.
With effect from the date of Royal Assent to the Finance Bill 2015 the availability of the relief will be extended to include any HPP provided by any provider authorised by the Financial Conduct Authority.
For more information contact James Summers, Senior Manager, Glasgow
Next comes the Budget
The date for the 2015 Budget has been announced as 18 March. That timing suggests that the Budget Statement is unlikely to contain many substantive announcements that are not reiterations of policies and changes already trailed in consultations, the Autumn Statement and the draft Finance Bill. Set your electioneering filters to maximum!