The OECD reviews the Common Reporting Standard

Emily Deane TEPHM Revenue & Customs (HMRC) invited some of the UK’s financial industry experts, including STEP, to join an overview of the OECD’s current review of the Common Reporting Standard (CRS).

The OECD will launch a consultation later this year, but has requested early input from industry experts on the improvements and changes that they would like to see. The purpose of the review is to enhance the general efficiency and operation of the CRS, and especially the quality and usability of its data.

In recent years there has been increasing use of innovative financial products that were not envisaged when the CRS was originally implemented. Some gaps and ambiguities in the legislation have been identified, and the OECD believes the time is now right to review and consolidate it. HMRC intends to consult the crypto-asset industry on technical changes and improvements and e-money industry experts, an area which was previously excluded, but some countries have called for it to be included in order to reach a single and consistent view.

HMRC also discussed some trust related issues for consultation, including:

Rules on reporting of joint accounts

While each joint account holder is required to report specific information, the schema does not recognise the number of account holders. HMRC suggests developing an indicator or flag to identify each individual account holder.

Controlling persons of passive non-financial entities (NFEs)

The schema is currently unable to assess the identity of the controlling person (ie settlor, protector) making the data less useful for tax risk purposes. HMRC suggests introducing  a mandatory field to specify the role of the controlling person.

Account holder where a trust is a financial institution (FI)

HMRC suggests the schema should be able to identify the type of equity interest the account holder has for risk assessment purposes.

Other trust-related issues that will be addressed in more detail include:

  • the treatment of reporting in relation to trustees, protectors and controllers;
  • inconsistent value reporting on the value of trust accounts;
  • reporting of trust loans as payments and potential avoidance issues;
  • consistency over reporting of issues on protectors and other ‘controllers’ who have no financial interests in the trust;
  • cross-over issues on reporting controllers – AML principles and FATF guidance;
  • reporting on ownership of corporate trustees in the context of controlling persons/equity interest holders;
  • relevance of cash as an asset in the context of classifying entities, particularly in the financial institution/passive NFE distinction.

HMRC has confirmed that it will form a focus group to look at the CRS and specific trust aspects, and we will keep members updated as the consultation progresses. In the meantime if members have any additional trust-related feedback please email the policy team at [email protected] by 1 February 2021.

Emily Deane TEP, STEP Technical Counsel

The UK replaces DAC6 with the OECD’s model Mandatory Disclosure Rules (MDR) post-Brexit

Emily Deane TEPThe disclosure of cross-border tax planning arrangements under Council Directive (EU) 2018/822 (DAC6) came into force on 1 July 2020 and requires reporting of any persons involved in cross-border arrangements, including loan agreements, payments from a resident of one country to a resident of another, or putting funds in an offshore trust, if one of the hallmarks apply.

Following the conclusion of negotiations between the UK and the EU on a Free Trade Agreement (FTA), HMRC confirms that only arrangements that meet hallmarks under category D of DAC6 need to be reported in the UK, in accordance with the OECD’s Mandatory Disclosure Rules (MDR).

The regulations have been amended and laid before Parliament to ensure the rules work correctly post-Brexit, including ensuring that references to EU member States refer to the UK or an EU member State after the end of the transition period. The rules will now only apply to two types of arrangements captured within the category D hallmarks:

  • Hallmark D1 is any ‘arrangement which may have the effect of undermining the reporting obligation under the laws implementing Union legislation or any equivalent agreements on the automatic exchange of Financial Account information, including agreements with third countries, or which takes advantage of the absence of such legislation or agreements’.
  • Hallmark D2 applies to an arrangement involving a ‘non-transparent legal or beneficial ownership chain’ with the use of persons, legal arrangements or structures:
    • that do not carry on a substantive economic activity supported by adequate staff, equipment, assets and premises; and
    • are incorporated, managed, resident, controlled or established in any jurisdiction other than the jurisdiction of residence of one or more of the beneficial owners of the assets held by such persons, legal arrangements or structures;
    • where the beneficial owners of such persons, legal arrangements or structures, as defined in Directive (EU) 2015/849, are made unidentifiable.

The replacement of DAC6 will significantly reduce reporting requirements although the disclosure of tax avoidance schemes (DOTAS) will continue to apply in the UK. It is also clear that under the terms of the FTA, the UK must not reduce the level of protection in its legislation below the level of protection afforded by the OECD’s MDR. While the UK has not implemented MDR in its domestic legislation the rules provide a ‘level of protection’ which in certain respects is equivalent to that in the OECD’s MDR, and in other respects goes beyond it.

The government will begin to repeal the legislation implementing DAC6 in the UK and will implement the OECD’s MDR as soon as practicable, in order to replace DAC6 and transition from European to international standards on tax transparency. The government intends to consult on draft legislation to introduce MDR, and STEP will keep members apprised of the situation accordingly.

Update 6 January 2021: HMRC has confirmed to STEP that only arrangements which meet the hallmarks under Category D will now need to be reported, therefore historic reporting (for arrangements up to 31 December 2020) in respect of the other hallmarks will no longer be required.

Emily Deane TEP, STEP Technical Counsel

FATF holds consultative forum to inform review of beneficial ownership system

On 24 November, the Financial Action Task Force (FATF) held its private sector consultative forum on beneficial ownership of legal persons, which focused on Recommendation 24 Transparency and beneficial ownership of legal persons of the FATF Recommendations. FATF stated that it is undergoing a major review of this area, which may lead to a comprehensive overhaul of the system of beneficial ownership to address issues such as inconsistencies across many countries, privacy concerns, centralised registries, legitimate purposes for access, and how information should be verified.

The forum was divided into two sessions with the first being chaired by Jennie Haslett and featuring Maira Martini, Transparency International; Jason Sharman, University of Cambridge; and John Cusack, the Global Coalition to Fight Financial Crime. The panel gave a third-party view with the aim of defining and understanding the nature and scale of problem. The following challenges were identified by the panel:

  • the quality of the information and how it is being verified;
  • the importance of flexibility and adapting requirements to the risk of the jurisdiction (as it was stated that a one-size-fits-all approach does not work);
  • that rather than implementing new laws, existing ones should be properly enforced; and
  • the need for increased collaboration between all players.

The second panel was chaired by Alexandra Kadet and featured Young Led, Department of Treasury, USA; Michela Maggi, European Commission; and Mariano Garcia Fresno, Ministry of Justice, Spain. The panel shared its views on the effectiveness of the measures being implemented and the potential problems and solutions. The discussion focused on who should have access to beneficial ownership information, the balance between what needs to stay private and what can be made available, the challenge faced when involving legal entities outside of the EU, and the need to have it centralised.

The overarching consensus from the forum was that this is a very challenging issue with no perfect solutions. FATF confirmed that a number of significant challenges were identified that needed to be addressed, such as complacency among some gatekeepers, the need for discrepancy reporting to make sure registers don’t work in isolation, consequences for non-compliance, and the need for consistency of global standards and practice.

Robert Carington is Policy Executive at STEP

Modernising Lasting Powers of Attorneys in England and Wales

The Ministry of Justice (MoJ) and the Office of the Public Guardian (OPG) have jointly initiated a project to modernise the process of making and registering lasting powers of attorney (LPAs), which may include an element of digitisation. They will be collaborating on a series of scoping events, roundtables and surveys to obtain research that will culminate in the publication of a consultation in spring 2021 to gather evidence and inform the future of the LPA service.

On 19 November the MoJ and OPG invited STEP to attend a virtual roundtable, which was introduced by Alex Chalk MP, Parliamentary under Secretary of State in the MoJ and hosted by Nick Goodwin, Public Guardian and Chief Executive of the OPG. During the roundtable, discussions were held on two specific areas of the research and engagement so far.

Improving safeguards for the donor in relation to identity checks

There was general consensus that there need to be more advanced identity checks for donors, which would consequently improve safeguards. It is a prevalent concern of the industry that identity fraud and theft are fairly accessible particularly if someone has access to a Health & Welfare LPA and the donor is incapacitated or vulnerable. It was also flagged that ID verification online may be technologically robust but there will be a small demographic, usually the more elderly, that do not have access to a computer or smartphone for verification. It was also reinforced that it is essential that any new online system is securely piloted within the industry before it is implemented.

The importance of the role of witnesses

It was recognised by attendees that the process of obtaining witnesses for LPA signing can add some gravitas and formality to the process, which in turn also gives the donor time to consider the importance of the legal document that is being created. It was also considered that it might be more appropriate to introduce digital signatures for the witnesses but to retain the obligation of the physical signature for the donor. On 9 November, STEP’s UK Industry News Digest covered highlights of the results of the first survey that has been undertaken, which showed that more than 90 per cent of 410 solicitors surveyed in England and Wales want to retain the rule requiring LPAs to be physically signed by the donor rather than by electronic means to prevent fraud.

We were informed that these areas have been marked for more extensive research under this initiative and will be discussed further.

The MoJ and OPG have stressed that empowering and protecting the individuals acting as donors in the LPA process is of paramount importance and amendments to the legislation will only be made if modernisation will provide the same level of protection or preferably enhance it. However, it is clear that the world is becoming more digital and we have seen accelerated evolution on the digital platform due to the COVID pandemic this year.

The MoJ and OPG intend to carry out extensive engagement within the industry, alongside the consultation next year, and will gather a wide range of evidence and expertise to understand user needs and challenges. STEP will continue to engage with the MoJ and OPG and monitor the progress of this initiative.

Emily Deane TEP, STEP Technical Counsel

STEP launches Thought Leadership webinar series with a look at remote witnessing of wills, and asks whether it’s here to stay

Robert CaringtonLast week, STEP held the first of its Thought Leadership webinar series which examined the issue of remote witnessing of wills, and whether it would continue after COVID-19-related social distancing measures are lifted.

Emily Deane TEP, Technical Counsel at STEP, was joined on the panel by Peter Glowacki, Partner at BLG; and Anatol Dutta, Professor of private law at LMU Munich, with the event moderated by Shelley Rhoads Perry TEP, CEO Senior Advocacy Group.

The panel reviewed what measures their respective governments had taken.

In the UK the government laid a statutory instrument (SI) before parliament on 7 Sep, to come into force on 28 Sep, and while lasting until 31 Jan 2022, would be backdated to 31 Jan 2020. This SI allows someone to make a safe and valid will through remote witnessing, if no other options are available.

Inevitably this approach has led to a number of concerns: how do you assess the testator’s capacity and see if undue influence is being wielded? What if the will is lost in the post? Supposing the testator dies before the process is complete? While there has been no test case yet, STEP is urging extreme caution to members using this method, and recommends only using it as a last resort.

However the panel recognised that the current Wills Act is antiquated and that wider reform is on the horizon. It also discussed whether financial institutions would allow a will, if the need for a notary as a witness was dropped. The European Union is exploring a certificate of succession, which expands on the documents used in civil law jurisdictions which allow a bank to release funds to the beneficiary.

In Canada, different regions have implemented remote witnessing at different speeds and levels. Ontario was one of the first, releasing an order to allow the electronic execution of wills with witnesses. British Colombia has gone the furthest by allowing the video execution of wills, and has adopted legislation to make this permanent. It allows for electronic signatures and electronic wills and eliminates the need for notaries/lawyers as witnesses. It has noted such practical issues as the use of different platforms and users’ varying degrees of technological experience.

Most civil law jurisdictions allow public wills, instead of a witnessed will recognised by a notary, and some countries allow this to be done remotely. Germany, for instance, has not made many changes, as holographic wills which can be made without witnesses are already recognised.

The panel discussed the need for a notary/ lawyer to be a witness, and believe that this is likely to be retained in most jurisdictions.

The panel concluded that legislation can, and is, adapting to accept technological advances. While change is inevitable, the main challenge faced by governments will be to balance technical opportunities with robust safeguards.

Robert Carington is Policy Executive at STEP.

STEP’s upcoming Thought Leadership Series: expert perspectives on today’s big issues

Tony Pitcher TEPOne of the most exciting things set to happen in STEP this year was to be our fourth Global Congress, which would have brought together leading experts in Dublin to exchange insight and expertise with delegates from all over the world. Sadly, the COVID-19 pandemic has meant the event has had to be postponed, but we are looking forward to holding it in June 2021 instead.

The agenda for next year’s Global Congress will remain focused on the big issues impacting the industry both now and in the future, with the wide variety of topics being discussed highlighting the breadth of expertise represented across STEP’s membership.

The world does not stop though, and while we look forward to Dublin we have some very pressing matters to discuss in the meantime. As Chair of the Congress panel, I was asked, alongside fellow STEP board members, in the wake of the COVID-19 pandemic, to review what those matters might be for our industry and the short and long-term impact.

As a result, STEP has launched the Thought Leadership webinar series, kindly sponsored by Rawlinson & Hunter, bringing you some of the more topical elements of the Congress agenda over the next six months. The sessions will include a look at what the tax landscape may look like post-COVID; the risks to vulnerable people when making financial decisions; issues arising for those caught in jurisdictions during the pandemic and how we, as STEP, can rejuvenate the reputation of trusts worldwide.

We’re also delighted to welcome Professor Jason Sharman to the series. Jason will be talking about the findings of his study over lockdown, co-authored with Michael Findley and Daniel Nielson, which involved soliciting offers from 5,000 banks and 7,000 corporate service providers to test know-your-customer standards. The results will be of huge interest to our industry.

The series kicks off with the highly topical subject of video-witnessing of wills, given the changes that have happened in a number of jurisdictions during the pandemic. The panelists will not just look at what has changed but whether the changes are here to stay.

We hope you’ll join us throughout this series, as we showcase the breadth of interests of STEP’s membership and provide up-to-date knowledge on the subjects that matter to our industry. For more information, head to the STEP website.

Tony Pitcher TEP is Director at LGL Trustees and a member of the STEP Board.

Law Society issues guidance to solicitors advising on tax

Emily Deane TEPThe England and Wales Law Society has issued guidance to solicitors who advise on tax, drawing out their obligations within the Solicitors Regulation Authority (SRA) rules and regulations.

The new guidance acknowledges the Professional Conduct in Relation to Taxation (PCRT), which has been developed and published by several UK accounting and tax professional bodies, including STEP, and sets out the principles and standards of behaviour expected of all members. Compliance is mandatory for STEP members advising on UK tax matters and failure to comply may result in disciplinary action.

The Law Society explains that it has not adopted the PCRT because the obligations of the solicitors’ profession as a whole are already set out by the law and the relevant regulatory rules governing solicitors. These rules have been formulated over centuries, and they comprehensively describe the relationship between solicitors and their clients. They draw the right balance for the solicitors’ profession by combining the protection of the interests of the client, the interests of the public and the rule of law, while ensuring that access to legal advice is preserved and backed up by an independent regulator.

However, solicitors advising on tax matters are encouraged to be familiar with the content of the PCRT, which overlaps with many of the existing professional obligations on solicitors. For example, the five core principles of the PCRT (integrity, objectivity, professional competence and due care, confidentiality and professional behaviour) are consistent with the legal and regulatory framework that already applies to solicitors.

The PCRT expressly provides that it is not to be interpreted so as to be in conflict with any other professional duties of solicitors. Solicitors that are subject to the PCRT because they are members of one of the signatory professional bodies should therefore comply with the obligations and duties required by the SRA and covered in this guidance in priority over the PCRT.

HMRC also produces standards that set out its expectations of tax advisors. HMRC published a Standard for Agents which sets out its expectations of individuals and businesses that professionally represent or advise taxpayers. Where relevant, solicitors may wish to consider the contents of this or any other HMRC standards, but those standards do not form part of a solicitor’s professional obligations.

Emily Deane TEP, STEP Technical Counsel

Practitioner perspective: We need to work together to help vulnerable clients

Robin Melley TEPVulnerability is not synonymous with poverty or age, it can happen to anyone, at any time.

While I have been interested in vulnerability for many years, it was the development of my firm’s corporate social responsibility (CSR) policy, with the theme, ‘vulnerability and combating financial abuse,’ that really crystallised my desire to develop my technical knowledge.

The issue was highlighted for me when I started working with NS&I Premium Bond winners, who had each scooped a GPB1 million jackpot. You might not think such a group are people to be concerned about, but I discovered there are sometimes substantial difficulties faced by those who come into ‘sudden wealth’, particularly vulnerable minors and elderly people who have lost mental capacity.

For me, it highlighted the fact that we, as professional advisors, should not try and pigeonhole people as vulnerable, but look at a person’s overall circumstances and make sure we consider potential vulnerabilities for all clients.

Everyone is potentially vulnerable

Importantly for financial planners such as myself, and, I’d think, most STEP members, dealing professionally with vulnerability should be at the core of our work. It is too important an issue to be relegated to a compliance tick-box exercise. The Financial Conduct Authority (FCA) is in the middle of a consultation on vulnerability; and the risk is that advisors fall into the trap of viewing ‘vulnerable clients’ as a defined group of people and focus on complying with a set of regulatory requirements.

In real life, everyone is potentially vulnerable, and the signs of vulnerability are often not immediately obvious. Consequently, the issue of vulnerability has to be embedded in the advice process for all clients.

I believe it’s also vital for chartered financial planners, lawyers, and other professionals to work together. For example, when there is an application to the Court of Protection for gifts to be made, the legal advisor usually needs to demonstrate that the attorneys are acting in the donor’s best interests and fully meeting their obligations under the Mental Capacity Act 2005. A chartered financial planner can provide support by undertaking detailed analysis, incorporating a lifetime cashflow forecast to demonstrate the long-term financial consequences of making gifts at the levels proposed.

Helping our fellow human beings is a basic human instinct and, like many STEP members, I have spent my career helping clients solve some of their problems to satisfy their aspirations for themselves and their families. It has been very gratifying to help them, often supporting them with issues not normally considered part of the financial planner’s responsibilities, and it’s a special feeling to give a safe pair of hands to a client who particularly needs help.

Watch out for abuse

Financial planners who adopt a holistic approach with clients can often spot problems because of the nature of the long-term (and often lifelong) relationship they have with clients, where they are meeting on a regular basis. He or she is well placed to pick up on any cues of possible financial abuse. I have, for instance, become aware of an adult child attempting to persuade an elderly parent to make gifts to them to the detriment of the parent; and have been able to intervene to guide and support the client in what is often an emotional situation.

Why I took the STEP Diploma

I realised I could better help others by deepening my understanding and achieving a higher level of technical competence. The STEP Diploma in Advising Vulnerable Clients offered the most comprehensive professional qualification in this area. I certainly found it a challenge finding the time over the last three years to study, but it has been hugely worthwhile. I have learned so much and it has enabled me to adapt our approach to financial planning to be more closely aligned with the needs of those who find themselves in vulnerable circumstances.

Examples of the improvements include the provision of detailed information and guidance to the parents of minors, to ensure they are clear on their fiduciary duties and obligations, and improving the way in which we refer to and collaborate with legal advisors.

Put simply, I believe that I am a better financial planner because of what I have learned through the attainment of the STEP Diploma and becoming a Full Member of STEP. The biggest beneficiaries are, of course, our clients.

Robin Melley FPFS TEP is a Chartered Financial Planner, at Matrix Capital in Shropshire.

STEP welcomes UK government response to Fifth Anti-Money Laundering Directive consultation

Emily Deane TEPUpdate 11 August 2020: It remains unclear exactly when the proposed Money Laundering and Terrorist Financing (Amendment) (EU Exit) Regulations 2020 will come into force as this is being created by way of a Statutory Instrument, which is subject to the sifting procedure in Parliament. This is a special procedure for EU legislation, and the date on which the regulations will come into force will only become clear once the procedure has been completed.

HM Revenue & Customs (HMRC) has confirmed that the date from which new business relationships and acquisitions of land have to be considered as part of the registration requirements under the regulations will be 21 days after the Statutory Instrument has been laid (see para 1(2) of the regulations).

The UK Parliament website shows the regulations as ‘laid’ on 15 July for the purpose of the sifting procedure, however this does not mean they have been ‘laid’ for the purposes of the commencement provisions in para 1(2) of the regulations. This can only happen after the sifting procedure has been completed. We will keep members updated once it is clear when the regulations will come into force.

Original blog: HMRC and HM Treasury (HMT) have published a response to the technical consultation ‘Fifth Money Laundering Directive and Trust Registration Service’. The consultation ran from January to February 2020 and sought views on how the Fifth Money Laundering Directive (5AMLD) should be transposed, and how certain processes could work for the expanded Trust Registration Service (TRS).

STEP submitted a consultation response and has held numerous meetings with HMRC and HMT over the last 18 months, on various issues related to the implementation of 5AMLD.

One of STEP’s outstanding concerns has been in relation to the interpretation of the business relationship point, which could have had an incredibly damaging effect on the use of UK professional service providers if interpreted in the same way as 4AMLD. We have been advising the government on the negative impact that a wide interpretation of the directive could have on the industry, and we are delighted to see that our recommendation has been accepted.

Para 2.15 of the consultation confirms that, ‘the government has opted to take a measured approach and will only require non-UK trusts to register on entering a business relationship with a UK obliged entity if the trust has at least one UK resident trustee. This means that non-UK trusts will not be required to register if their only link to the UK is through a business relationship with a UK based adviser.’

There is also a significant expansion of the categories of trust that will not need to be reported, which will ease the reporting burden on our members, although we were disappointed to note that bare trusts have not been exempted from registration as we would have liked. The government has also recognised that it would not be appropriate to require trusts created by will to register on the TRS if they are wound up within two years of death.

STEP also had concerns over the ‘legitimate interest’ application process, and the consultation confirms that it will aim to ensure that each request will be reviewed on its own merits, and access will be given only where there is evidence of money laundering or terrorist activity. We will continue to engage with the government on this issue.

The government has set a deadline of 10 March 2022 for existing trusts to register on the TRS, or to update their records if they have already done so. A 30-day deadline will be imposed for new trust registrations and updates. The regulations to implement the provisions have now been laid before Parliament for consideration.

We are very pleased that our discussions and papers have been taken into consideration so comprehensively, and we will continue to engage with the government on the remaining policy issues and assist with the development of the guidance.

 

Emily Deane TEP, STEP Technical Counsel

 

STEP’s first Virtual UK Annual Tax Conference

Robert CaringtonThe first STEP Virtual STEP UK Annual Tax Conference was held on 26 June with over 800 people attending online. The day was a radical departure for STEP, with conventional meetings postponed or cancelled due to COVID-19. While it did include some glitches, attendees have the opportunity to catch up on any material they missed, with presentations available for a full year.

The day saw some outstanding STEP members speaking on topical matters, and we were delighted to host Emma Chamberlain OBE TEP, Robert Jamieson TEP, John Barnett TEP, Dawn Register TEP, Katherine Bullock TEP, John Woolley TEP and Deborah Clark TEP.

Emma Chamberlain presented the first session, giving an update on inheritance tax (IHT), which covered the Barclays Wealth case and the resulting legislation on excluded property settlements; and the definition of charity in IHT after the Routier case and its implications. She noted the work done by the Office of Tax Simplification and the All-Party Parliamentary Group for Inheritance & Intergenerational Fairness (APPG) on IHT reform was something to watch.

Robert Jamieson TEP covered capital gains tax (CGT) main residence relief and the statutory changes in the Finance Bill 2020 relating to residency, in a comprehensive presentation.

John Barnett TEP gave an informative update on Agricultural Property Relief (APR) and Business Property Relief (BPR), covering their structure, key cases such as Gill and Brander; and finishing with predictions on their reform; he noted that the CGT uplift was the most likely to be reformed by any government in the near future.

The afternoon session started with Dawn Register TEP giving advice on dealing with HMRC, covering areas such as its No Safe Havens 2019 programme to ensure offshore tax compliance and its risk assessment process. She also explained changes made due to the COVID-19 pandemic, including the relaxation of some deadlines.

Katherine Bullock TEP followed with a practical session focused on such IHT calculations as chargeable lifetime gifts, how to arrange settlements and when grossing up is necessary.

John Woolley TEP was next with an update on pension transfers and lump sum IHT plans following the Staverley decision in the Supreme Court in May 2019. John covered the advantages and disadvantages of death benefits being paid through either flexi access drawdown or by-pass trusts the protection of funds on divorce or insolvency; and dealing with the valuation issues of the ten-year periodic charge and their impact on loan trusts and discounted gift trusts, as well as any problems that may arise.

The final presentation of the day was from Deborah Clark TEP who spoke on family investment companies and their use. Her presentation covered their structure and funding and asset protection as well as how they were treated by income tax.

  • Our thanks to the event’s sponsors: James’s Place, Fraser and Fraser, National Philanthropic Trust, Octopus Investments, and Remember a Charity.

Robert Carington is Policy Executive at STEP