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

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

How will Brexit affect the third sector?

Brexit Puzzle Pieces STEP’s Charities UK and Philanthropy Advisors Special Interest Groups hosted a seminar on Charities and Brexit on 6 September presented by STEP members Ed Powles TEP and Tom Dumont TEP and chaired by Suzanne Reisman TEP, writes Emily Deane.

According to those in the charity sector there was an immediate drop in charitable donations after Brexit, but this proved only temporary before it stabilised. However politicians and economists are struggling to gauge what will be different following Brexit. Ed Powles pointed out: ‘If we invoke Article 50 it will be biggest de-merger in history.’

So what are the main points of concern for those who work in the third sector?

Tax reliefs – UK law is vulnerable to significant legislative change following Brexit. EU law currently makes it possible for British citizens to donate to EU charities and claim tax relief. Likewise EU members can donate to the UK and obtain tax relief. European charities can also use UK tax relief in the form of Gift Aid. It seems very unlikely that this regime will continue and that the EU will extend charitable exemptions to the UK after we leave.

EU funding – UK charities receive up to GBP300 million in donations directly from the EU every year, representing a significant contribution towards vulnerable beneficiaries and vital research. It seems highly unlikely that this will continue. There will inevitably be a decrease in grants available through the European Social Fund (ESF) and the European Regional Development Fund (ERDF).

Economic instability – the uncertainty that people are facing in their jobs and personal investments means that they are far less likely to make donations from their disposable income. In addition, charities that depend upon profit from their investments may have major concerns about how the economy will affect them. Having said that, we have survived recessions before and charities have managed to endure.

Legislative change – it is unclear how Brexit will affect charity law. The UK may be compelled to repeal laws that we were obliged to adopt from the EU. Will we modify the European Union Act, and if so, what will we keep and what will we discard? There could be a serious impact on the UK if we re-visit employment, regulatory and data protection laws. Will there be further, onerous due diligence and money laundering requirements imposed upon charities? It seems almost inevitable.

In these pre-Brexit days it is proving very difficult for tax practitioners to advise their clients regarding charitable gifts, cross border gifts and property across Europe. The future seems precarious for the third sector at this stage and the impact over the next few years is relatively uncertain.

John Low CEO of Charities Aid Foundation comments on the future of charities following Brexit, ‘Britain’s culture of charitable giving and the important work of our international charities are hugely significant to how we are viewed by other nations. As Britain starts a new chapter in our approach to international relations, charities must be given the chance to play a leading role.’

STEP is hosting two relevant Special Interest Group events in the next few weeks, with discounted rates of attendance for SIG Members at both:

 

Emily Deane TEP, STEP Technical Counsel

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

OECD: ‘Public release of taxpayer information is not consistent with the international standards for tax transparency’

George_Hodgson-2016STEP yesterday (14 April) received a letter from Mr Kosie Louw, Chair of the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes, which was sent to all members of the Global Forum.

 

The letter contains the following statement:

‘I want to state that the public release of taxpayer information is not consistent with the international standards for tax transparency. Indeed, a key aspect of our work has been concerned with ensuring that when such information is held by governmental authorities it is shared only with persons authorised in accordance with the standard and the applicable international agreements that give effect to both EOIR and AEOI.’

STEP welcomes this statement, which reinforces our message that while we support international initiatives on transparency and anti-money laundering, families have a right to legitimate confidentiality in their financial affairs and there must be effective safeguards to protect their information from risk of abuse.

We look forward to working with the OECD in the weeks and months ahead to support and inform their efforts in combatting tax evasion and any actions that support criminal activity such as money laundering and terrorist financing, and to rebuild public confidence in the international finance system.

 

George Hodgson, Deputy Chief Executive, STEP

Tax changes your clients may need to know by 6 April

Emily DeaneThe UK government will be making significant changes to both dividend tax relief and entrepreneurs’ relief effective from 6 April 2016. These changes were outlined by Robert Jamieson TEP at a STEP seminar in London on 22 February.

Dividend tax relief

The dividend tax credit will be replaced with a new tax-free dividend allowance of GBP5,000 per year for all taxpayers. The notional 10 per cent tax credit on dividends will be abolished. HM Treasury states in its Budget Report, ‘The current system of tax credits on dividends was designed over 40 years ago when corporation tax was more than 50 per cent and the total tax bill on dividends for some was more than 80 per cent. Since then, tax rates (including corporation tax) have fallen, leaving the dividend tax credit as an arcane and complex feature of the tax system.’

From April 2016 an individual will receive a tax-free allowance on dividend income of GBP5,000 and tax will only become payable on income above the allowance. An individual may also still apply personal reliefs that are applicable. It is worth noting that the GBP5,000 allowance is segregated from the GBP1,000 allowance that is available on savings income and is not applicable to dividends, which will also become effective on 6 April.

Dividend income above GBP5,000 will be taxed at 7.5 per cent (basic rate), 32.5 per cent (higher rate), and 38.1 per cent (additional rate). In addition, basic-rate tax payers who receive dividends of more than GBP5,001 will be required to complete a self-assessment return from 6 April 2016.

The impact of these changes will be keenly felt by small business owners. However, there is still some missing information, such as special rates, which is yet to be announced. This should become available after the Budget on 16 March 2016.

Entrepreneurs’ relief

Entrepreneurs’ relief (ER) changes are also anticipated on 6 April. ER was introduced in 2008 to incentivise people to set up and grow businesses by providing a reduced level of capital gains tax (CGT) on business disposals. ER is available to individuals, rather than companies and it would normally apply to a business person such as a sole trader, a business partner or a limited company shareholder in a trading business. An individual will pay only 10 per cent on the CGT arising from the sale of a qualifying business asset, instead of the usual 18 per cent or 28 per cent.

In order to claim the relief, the applicant must have held the qualifying business asset for at least one year. The relief would typically be applied to a disposal of shares or securities, but it can also be applied to the disposal of other business assets, except this may not be available on property or investment assets.

In December 2015, however, the government issued a policy paper proposing some significant changes to ER, and if these are not amended they will become effective from 6 April. As a result of these changes, ER will no longer be applicable to a shareholder who receives a distribution from a company in liquidation. According to the paper, this applies where the shareholder, ‘continues to be involved with the carrying on of a trade or activity that is similar to that of the trade or activity carried on by the wound up company in two years following the date of distribution.’

It is anticipated that thousands of entrepreneurs will liquidate their companies in the coming month before the April deadline. Liquidating a small business and establishing a new one should not be too disruptive; however the liquidation of a trading business could be more complex. Property developers, among other entrepreneurs, could therefore be seriously affected by the proposed changes.

We have also seen an increase in recent case law involving the application of ER, where the courts have been tested as to the definitions of an ‘employee’ and a ‘director’ for the purposes of the relief.

Useful links:

Emily Deane TEP, Technical Counsel at STEP

HMRC’s digital tax plans under fire

An elderly woman sitting in front of her laptop looking stressed and worried

STEP attended a meeting held by HMRC yesterday (3 March 2016) to obtain feedback from tax related governing bodies regarding its imminent – and mandatory – proposals to make tax returns completely digital.

We were informed that the objective is to modernise the tax system, improve the level of service for the public and reduce cost to the taxpayer.

The synopsis of the meeting was:

  • Tax returns will become completely digital – this will be compulsory
  • There will not be quarterly returns but ‘updates’ to HMRC on a quarterly basis
  • There will be a formal update announced at the Budget on 16 March 2016
  • The objective is to reduce time and costs for businesses and individuals
  • HMRC is aware that digital tools are not accessible to everyone and it is currently researching ways to deal with this sector
  • There will be four more consultations post Budget and the deadline is end of May.

David Gauke MP, Financial Secretary to the Treasury, stated in his December 2015 HMRC paper Making Tax Digital, ‘Individual and business taxpayers will no longer have to wait until the end of each tax year before knowing how much tax they should pay, avoiding any surprises and helping them to plan their financial affairs with more certainty. And taxpayers will be presented with a complete financial picture of their tax affairs in their digital account, [and will be] able to see and manage all of their liabilities and entitlements together for the first time.’

However, many of those present raised concerns over how the less capable sector, for example the elderly or disabled people, will be able to manage their records digitally, especially if they cannot afford a computer or smart phone, or are unable to use one. Many of these people will also be unlikely to be able to afford an accountant four times a year to assist them. HMRC confirmed that it is currently undergoing research in order to provide provisions for this sector to enable them to go digital; however they could not provide any examples of solutions.

The HMRC was also asked what information will be required to be provided four times a year, since the general suspicion is that it will amount to the same information that is required for a tax return. This would therefore amount to the same time and cost as a tax return, but four times a year. Once again, HMRC was unable to answer the question specifically, and promised information would follow ‘in due course’.

There may be an option to ‘pay as you go’ if people would rather make regular contributions to their annual tax return on a monthly or quarterly basis, to minimise the liability at the end of the year. We understand that this option, if available, will not be compulsory.

We will keep you updated on developments in due course.

 

Emily Deane TEP is Technical Counsel at STEP.