HMRC consultation on 4AML implementation

Emily Deane TEPHMRC invited STEP to attend a consultation on 30 March regarding the UK’s implementation of the EU Fourth Anti-Money Laundering Directive (4AML), in particular in relation to the requirement to implement a central register of trusts.

The consultation was hosted by HMRC’s Policy Specialist, Tony Zagara, and focused on Article 31 – trust beneficial ownership. The UK trust register will be implemented on 26 June 2017 and will register trusts anywhere in the world with UK assets that generate tax consequences.

Information about the settlors, beneficiaries and trustees will be required to be reported in an annual submission and the information could be exchanged with law enforcement and competent authorities, but not the public. The focus group discussed the following key issues:

New registration system

The old paper registration system will be replaced with an online service for registration, which will be introduced in two tranches in June and September. The June online service will replace Form 41G for registering new trusts. Form 41G will be removed from HMRC’s website later this month.

The second online service will be introduced in September, which will allow users to make amendments to existing trusts online, further replacing the paper system.

Annual reporting

The trustees will need to report on the trust on an annual basis, but only if it generates tax in that tax year. HMRC was unable to clarify whether, once a trust has been registered with a tax consequence, it is still necessary to submit annual updates in the following years if it has been dormant and has not generated any further tax consequences.

The panel agreed that annual reporting would probably not be necessary if there have been no changes since the first registration, however they agreed to check and revert back on this point.

Bare trusts will be excluded from reporting and new guidance will be produced on HMRC’s landing page in due course.

Letters of wishes

HMRC said trustees should report the identities of beneficiaries who are named in letters of wishes. Every person named in a letter of wishes would need to be identified, regardless of whether they have received a payment, unless they are included as a ‘class’ of beneficiary.

Practitioners were quick to point out that this could be an impossible task for trustees.

They explained to the HMRC panel that if beneficiaries have not received payments they cannot be associated with money laundering, and if they do receive a payment they will be reported anyway under the regulations. Letters of wishes can also be changed frequently and, more often than not, without the advisor’s knowledge.

HMRC defended the reporting obligation by suggesting that letters of wishes could be used as a loophole for criminals if they were excluded from the regulations.

The general consensus of the attendees was that the word ‘vested’ should be incorporated into the definition so that default beneficiaries in letter of wishes are excluded from being reported on unless they receive a payment.

HMRC will be feeding back the discussions from the consultation to its legal team to redraft the regulations.

Consultation deadline

HMRC’s consultation paper was published on its website (see below) and the consultation closes on 12 April. HMRC is requesting responses as soon as possible since there is a short time frame following the closing date. If you have any drafting points to be incorporated in STEP’s consultation response, please email Emily.Deane@step.org by 10 April.

Emily Deane TEP is STEP Technical Counsel

HMRC: no more safe havens

Treasure chestThis week STEP hosted a seminar to update members on HMRC’s latest moves to tackle tax evasion and avoidance.

Entitled, ‘An essential update on HMRC’s activity to tackle tax evasion and avoidance, including information exchange, new powers and its impact on professional advisors,’ the seminar took place at BDO LLP’s office in London. Speakers included John Shuker from the HMRC International & Offshore Evasion Team, and Dawn Register TEP of BDO LLP.

The introduction of the Common Reporting Standard (CRS) this year follows a raft of governmental efforts including the Foreign Account Tax Compliance Act (FATCA) and the EU Directive 2003/48/EC (the EU Savings Directive) to improve cross-border tax compliance. The Offshore Evasion Team has focused on clamping down on UK tax evaders, in particular:

• Moving UK gains, income or assets offshore to conceal them from HMRC
• Not declaring taxable income from overseas, or taxable assets kept overseas
• Using complex offshore structures to hide beneficial ownership of assets.

The tax gap for 2014-2015 is estimated to be GBP36 billion, with GBP 5.2 billion attributed to tax evasion.

HMRC launched the campaign ‘No Safe Havens’ in 2013 with the objective of ensuring that there are no jurisdictions where UK taxpayers can hide their income and assets. It also implemented a number of disclosure facilities to give people the incentive to come forward and pay tax voluntarily, before they are detected and sanctioned.

In the last two years, HMRC has vigorously escalated its tax evasion strategy. The Worldwide Disclosure Facility opened last September, in addition to a new requirement for all financial institutions and tax advisers to notify their customers about new automatic exchange of information agreements.

The following further measures are due to be implemented in 2017:

Corporate Criminal Offences of Failure to Prevent Facilitation of Evasion
This will apply to corporations who fail to prevent their agents from criminally facilitating tax evasion (facilitating evasion is already considered a criminal offence). The offences will apply to domestic or overseas corporations whose agents facilitate the evasion of UK taxes, or a domestic corporation which facilitates the evasion of tax overseas.

Tackling Offshore Tax Evasion: A Requirement to Correct
Taxpayers will be obliged to disclose any outstanding UK tax related to offshore investments or assets, or face ‘failure to correct’ penalties. These penalties will be significantly higher than for those who voluntarily put their affairs in order, and will be a minimum of 100%.

STEP’s Technical Committee has submitted responses to a variety of HMRC’s consultation papers relating to tax evasion below:

 

Emily Deane TEP is STEP Technical Counsel

CRS and Charities: January 2017 update

Donations boxHMRC hosted another Charities CRS working group on 16 January. The following issues were on the agenda for discussion:

Anti-Avoidance Rules

HMRC would like to refine its currently broad regulation regarding anti-avoidance. It is scheduled to discuss it with the compliance team shortly. It will also be reviewing the anti-avoidance issues surrounding donations channelled through other charites and some more detailed guidance is expected to be issued shortly thereafter.

Trust Guidance

HMRC is in the process of preparing some guidance with the OECD focusing on some of the grey areas surrounding trusts. STEP has produced a memorandum on the issues of concern on how the CRS is intended to apply to trusts, persons connected with trusts and trust assets. The memorandum sets out our understanding of the application of the CRS in certain circumstances and highlights points of uncertainty in the reporting framework. We have submitted the paper to HMRC and the OECD and hope that it will form part of the additional new OECD guidance.

Human Rights

HMRC has issued new guidance, Charities: Protection on Human Rights Grounds, which will assist charities concerned about the human rights implications associated with information they are required to report under the automatic exchange of information (AEOI) agreements. HMRC recognises that there may be cases where the threat to an individual’s human rights as a result of his or her information being exchanged may justify information being redacted from that transmitted. The guidance covers the redaction of information on human rights grounds; threats to human rights, and safeguards already in place; and how to apply for redaction of information, including the HMRC process and the documentation required.

STEP will continue to attend the periodic working group to discuss ongoing technical issues with HMRC.

 

Emily Deane TEP is STEP Technical Counsel

CRS and Charities October update

Emily Deane TEPHMRC hosted another Charities CRS working group on 12 October. The following issues were on the agenda for discussion:

Human Rights Guidance

  • HMRC has been collecting examples from the working group to increase transparency and address concerns where the exchange of information could put individuals at risk. Its new guidance has addressed some of these concerns.
  • It was pointed out that HMRC has highlighted the absolute rights within the Human Rights Act, but it does not refer to the qualified rights of individuals, and these should also be considered.

Discretionary Management

  • Some discretionary management scenarios were discussed by the group and it was suggested that HMRC provide examples of these in its guidance.

    HMRC noted that it was difficult to provide examples to cover every scenario, because the facts of each individual case will determine whether or not it falls within the scope of CRS. However, it agreed to continue to refine its guidance where possible.

  • HMRC confirmed that simply setting parameters for an investment manager (for example that he/she may only invest in ethical investments) does not mean that discretion is retained by charity trustees.

Communications

  • HMRC will be producing a webinar for charities setting out a basic introduction to CRS, which should be available before December.
  • HMRC was asked to produce a proforma for charities to use when completing the self-certification process. It advised that while this was not possible, some examples on the OECD automatic exchange portal might be useful instead.
  • HMRC has been hosting some CRS Charity events in conjunction with STEP. If you would like more information please contact Emily.Deane@step.org

STEP will continue to attend the periodic working group to discuss ongoing technical issues with HMRC. The next meeting is in January.

 

Emily Deane TEP, STEP Technical Counsel

STEP Annual Tax Conference looks at deemed domiciliaries

aeroplane and departure signSTEP hosted the last in this autumn’s series of Annual Tax Conferences on 21 October in London. Some outstanding STEP members spoke on topical matters including John Barnett TEP, Emma Chamberlain TEP, Robert Jamieson TEP, Edward Stone TEP, Paula Tallon and Chris Whitehouse TEP.

Emma Chamberlain provided a much needed update on deemed domiciliaries – the basic rules and transitional provisions. She raised some pertinent points on the rules of deemed UK domicile for long term UK residents, such as:

  • A taxpayer resident in the UK for 15 out of 20 years will be deemed domiciled for all tax purposes. The individual could also become deemed domiciled in a year when not UK resident, for example, if they moved abroad in their 16th year.
  • Split years count as years of UK residence and count even when the person is a minor.
  • If a taxpayer arrived here in 2002/3 or earlier and has been resident ever since, he or she will become deemed domiciled on 6 April 2017.
  • Once deemed domiciled a taxpayer must spend six tax years abroad to lose deemed domiciled status for income tax and capital gains tax purposes.

Emma went on to explain that the deemed domiciled status can be lost if the taxpayer leaves the UK by April 2018 and is non-resident for six consecutive years. The status will fall away at the start of 2024/25.

If that individual returned in May 2024 he or she would not be deemed domiciled again until 2039/40 after another 15 years of residence.

Emma suggested that the individual in question might be able to retain foreign domicile under general law, but nothing is certain at this stage. In any event, it seems very likely that domicile queries would be raised by HMRC and we strongly suggest that clients and advisors keep accurate domicile records.

STEP has recently submitted responses to HMRC’s reforms to the taxation of non-domiciles consultation paper dated 19 August 2016 which can be found on the STEP consultation tracker:

 

Emily Deane TEP, STEP Technical Counsel

Making Tax Digital update

UK mapSTEP attended a meeting held by HMRC on 11 October to obtain feedback on its plan to make tax returns reportable on a quarterly basis, and completely digital.

HMRC’s stated objective is to improve the level of service for the public, reduce the cost to the taxpayer, and increase the revenue’s compliance and accuracy.

It says the new system will be the most digitally advanced in the world, and will enable a user to check their PAYE status, their State Pension forecast and any tax credits or allowances.

Apparently there are already close to seven million UK personal users, and HMRC is streaming webinars for basic users, as well as more complex tax users such as unincorporated businesses and landlords.

However, we learned during the meeting that many users with more convoluted businesses and multiple income streams, such as farmers, may find the new system challenging.

Although it seems unimaginable that someone would want to submit their tax return on their smart phone, HMRC points out the software will be mobile friendly, for those who do not have access to a computer or a laptop.

STEP has already flagged that the new system may not be accessible to less capable users, including elderly, or digitally excluded and vulnerable people.

Many may be unable to afford the extra burden of professional advice, a computer, laptop or smart phone, or indeed, the software required to comply.

HMRC recognises that there may be some transitional costs and potential cyber security risks, but believes customers will be pleased with the ‘real time’ system to keep taxes up to date, and notes there will be fewer inaccurate calculations.

HMRC’s webpage hosts a collection of consultation papers for all individual and business customers, agents, software developers, employers and all other organisations that need to provide tax information.

If you would like to provide feedback, please contact me at emily.deane@step.org by 3 November.

 

Emily Deane TEP, STEP Technical Counsel

April 2017 changes to the UK’s taxation of long-term resident, non-domiciled individuals

Update on discussions relating to the treatment of trusts

Following the consultation paper issued on 19 August 2016, members of STEP’s UK Technical Committee have been closely involved in discussions with HM Treasury and HM Revenue & Customs in relation to the latest proposals.

The most difficult area is the treatment of offshore trusts set up by non-domiciliaries who become deemed domiciled in the UK as a result of having lived there for 15 years in a 20 year period.

When the changes were announced in the July 2015 budget, much was made of the fact that assets held in trust would be protected from inheritance tax, capital gains tax and income tax (other than in relation to UK source income which would continue to be taxed as it arises). A deemed domiciled settlor would only be taxable on benefits received from the structure or conferred on close family members.

One significant surprise in the August consultation paper therefore was a proposal that a deemed domiciled settlor would be taxed on all of the gains of an offshore trust once the settlor or a close family member has received any benefit from the trust – ie the receipt of the benefit would mean that the capital gains tax protections would be lost for the future.

As part of the consultation discussions, a paper has been prepared by a barrister with input from colleagues from various representative bodies including STEP. The paper is very much in draft form but sets out a potential alternative approach to legislating the trust protections. A copy of the paper can be found below.

We have been asked to make it absolutely clear that the paper was not commissioned by HMRC or HMT. Nor does it represent an approach to trusts preferred either by HMT, HMRC or the government. The paper was prepared to facilitate discussion at a consultation meeting between HMRC/HMT and various representative bodies to consider alternative approaches to how it is best to legislate the protections and it should be read in that context.

Having said this, it is important that STEP members are aware that alternative proposals are being put forward and discussed and that the final proposals may well be different to those made in the 19 August 2016 consultation paper.

We are expecting the government’s position to be announced as part of the Autumn Statement on 23 November 2016 with draft legislation being available by 5 December as part of the draft Finance Bill.

 

STEP UK Technical Committee

International Tax Compliance (Client Notification) Regulations

Emily DeaneThe UK’s International Tax Compliance (Client Notification) Regulations have been amended and will come into force on 30 September 2016.

The regulations create an obligation on financial institutions (banks, building societies, insurers, fund managers, wealth managers and professionals that offer tax or financial advice or services) to notify their clients about the tax information that HMRC will receive about their offshore affairs under international agreements.

Financial institutions are defined in the same way as in the Common Reporting Standard (CRS) and capture trusts that are financial institutions, however all charities are specifically excluded and will not have to notify their grant recipients.

Clients must be notified that:

  • Tax information must be shared with HMRC regarding their overseas assets under the Common Reporting Standard (CRS),
  • There are opportunities for clients to voluntarily disclose information about their overseas tax affairs if they need to; and
  • There are likely to be sanctions for those who do not come forward.

The notifications are targeted at practitioners who provide advice about offshore assets or income which is not disclosed in their clients’ tax returns. The affected clients are UK tax residents for whom the practitioner has provided offshore advice or services for a period of up to one year, or up to three years ending on 6 April 2016 (depending on the nature of the advice given).

While the wording of HMRC’s notifications has not been finalised yet, the notifications must be sent to clients by 31 August 2017 with a covering letter from the practitioner using set wording provided by HMRC.

HMRC has no objection to notifications being sent out to every client in the firm’s database if identifying individuals is too time-consuming or onerous. Failure to do so by 31 August 2017 may result in a £3,000 fine.

STEP will provide an update once further guidance from HMRC is available.

 

Emily Deane TEP, STEP Technical Counsel

HMRC takes aim at inheritance tax planning

Robin VosImagine a client comes to you looking to reduce the inheritance tax bill on his death. He cannot afford to make outright gifts, and so instead you suggest he sets up a trust for his grandchildren and makes an interest free loan to the trust. The trust will invest in a UK authorised investment fund. The client is therefore just giving away the growth in value so that, over time, as the loan is repaid and the money spent, the client’s estate will reduce. Not an uncommon situation.

Under regulations proposed by HMRC, you may well be required to report this sort of planning to HMRC under the ‘Disclosure of Tax Avoidance Schemes’ (DOTAS) rules.

This is a serious matter. Failure to report when required to do so can lead to significant penalties for the ‘promoter’ as well as a range of other possible sanctions for both the promoter and the client.

The DOTAS regime was originally introduced in 2004 to ferret out information about marketed tax avoidance schemes. Arrangements only have to be notified if they fall within certain ‘hallmarks’. These include indicators such as whether the promoter is charging a premium fee or whether they ask clients to sign up to some sort of confidentiality agreement.

The DOTAS rules were first applied to inheritance tax in 2011. Currently they only apply to arrangements designed to get assets into a trust without paying the upfront 20 per cent lifetime inheritance tax charge.

In relation to other taxes, specific hallmarks were introduced to combat schemes in particular areas such as the use of losses, tax avoidance using financial products and attempts to get round the disguised remuneration rules for employment income.

However the proposed new regulations which will apply to inheritance tax are much wider. The starting point is that any planning which gives rise to an inheritance tax advantage will have to be notified if it contains steps which are ‘contrived or abnormal’.

The problem with inheritance tax planning is that much of what is done could be described as contrived or abnormal – ie the steps which are taken are not ones which somebody would normally take, unless they were trying to reduce their inheritance tax bill.

Targeting an entire tax with a filter based only on whether the arrangements are contrived or abnormal is a novel approach.

Whilst HMRC has promised guidance as to what it considers to be acceptable and what is not, the risk is that practitioners will be left not knowing whether what they are doing has to be notified. Many will make notifications just to be on the safe side. HMRC may well be overwhelmed with a deluge of notifications as a result.

The proposals are contained in a consultation paper issued on 20 April 2016. Anybody is free to respond to the consultation. Responses have to be submitted by 13 July 2016.

STEP will be submitting a response suggesting that the same approach should be taken for inheritance tax as with other taxes. This would mean that HMRC should identify specific areas where it sees abuse, and create hallmarks relating to those areas rather than attacking all planning which gives rise to any inheritance tax advantage.

The existing hallmark relating to attempts to get assets into trust, without paying the upfront inheritance tax charge, may not be the only area targeted. Others might include avoiding the reservation of benefit rules without incurring pre-owned assets tax, acquiring interests in excluded property settlements without falling foul of the existing anti-avoidance rules, abuse of agricultural property relief or business property relief and schemes to avoid inheritance tax ten year charges in relation to relevant property trusts.

As demonstrated by the example at the beginning of this article, the proposed regulations have the potential to affect much of the inheritance tax planning which practitioners will be dealing with on a daily basis. It certainly goes much wider than catching only abusive, marketed schemes.

The more responses HMRC receives, the more likely it is that it will understand that the regulations, as currently proposed, go too far.

 

Robin Vos TEP, a solicitor at Macfarlanes LLP in London, is chair of STEP’s UK Technical Committee

HMRC’s timescales for dealing with IHT

Jan WrightAs its June 2015 Newsletter declares, HMRC aims to issue an IHT421 probate summary in ten working days from receipt of an IHT400 Inheritance Tax Account.

However this does depend on the inheritance tax being paid first. If it has not been credited to the HMRC account, your IHT400 goes into a different, and slower-moving, pile of correspondence. This can mean delay, and you may need to chase.

Where you have various financial institutions paying the tax, I’d suggest you get confirmation from all of them that all tax has been paid before submitting the IHT400.

This allows you to keep in control of the process and assists HMRC in keeping to its deadline.

 

Jan Wright TEP is a Director at Harrison Drury, Lancashire, and a member of STEP’s UK Practice Committee