Welcome We hope you will enjoy this issue of our Tax Newsletter. Our purpose is to try and keep you abreast of topical UK tax issues which may affect you, your business and/or your clients. In this issue: Disguised self-employment using intermediaries Proposed restriction of tax benefits under dual contracts Disguised self-employment using intermediaries The UK Government has stated that it strongly supports enterprise and those who choose to work for themselves, but it is taking measures to ensure that employment intermediaries cannot be used to disguise employment as self-employment, thereby avoiding employment taxes and denying employment rights to their workforce. HM Revenue & Customs (HMRC) have already issued draft regulations aimed at countering National Insurance avoidance through the use of intermediaries. The measures are targeted at intermediaries who contract with end-users to supply workers who are argued to have self-employed status, and it is understood that this measure will take effect from April 2014. HMRC are often unaware of the use of these structures as proponents argue such arrangements are not disclosable under the Disclosure of Tax Avoidance Scheme Rules (DOTAS). It is also quite possible that workers under these arrangements may not be aware of the loss of employment rights or fully understand the arrangement they have entered into. We recommend that companies review their labour supply chains to ascertain whether any arrangements involving onshore, or offshore, intermediaries are in use and take professional advice accordingly. Proposed restriction of tax benefits under dual contracts The Finance Bill 2014 will include provisions aimed at preventing the avoidance of income tax by a small number of non-uk domiciled individuals who work under arrangements commonly known as dual contracts. HMRC believe that tax is avoided by creating an artificial division of the duties of one employment between contracts in both the UK and overseas. Non-UK domiciled individuals are then able to take advantage of the remittance basis of taxation relating to that overseas contract whereby income is not subject to UK income tax unless remitted to the UK. This matter has been under HMRC review for several years and it is not currently clear the Double Tax Relief new revenue protection measures Do you have a large pension pot? Do you need to apply for protection? Government strategy for dealing with evasion and fraud Avoidance schemes using total return swaps Changes to the Controlled Foreign Company ( CFC ) finance company exemption Changes to Capital Gains Tax ( CGT ) for non-residents disposing of UK residential property HMRC s Employer Financed Retirement Benefit Schemes resolution opportunity New rules for some Gambling Duties from 1 December 2014 Gibraltar: Not a tax haven Isle of Man: Tax Compliant 1
extent to which any dual contracts will still have tax benefits in the UK going forwards. HMRC have not issued any detailed guidance as to what will be viewed as acceptable and what will be viewed as artificial. Currently, the tax benefits of such an arrangement depend upon no duties being performed in the UK but, in the modern world, the use of email and smart phones has made ensuring no UK duties are performed increasingly difficult. Double Tax Relief new revenue protection measures New anti-avoidance rules will restrict double tax relief (DTR) claims by UKbased companies in two specific situations. The first measure involves the credit allowed, or deduction given, being reduced if a tax repayment is made by a foreign tax authority, and there is a scheme which enables any person to receive the foreign tax repayment directly or indirectly. This measure significantly extends existing rules which already apply if the repayment of foreign tax is made to the claimant company or a connected person. It applies to payments made by a tax authority on or after 5 December 2013 and is intended to stop attempts to circumvent the existing rules. The second measure responds to avoidance schemes that seek to crosscredit foreign tax against UK tax on other income that has not effectively borne foreign tax. It does this by inserting a new, mechanical, rule not dependent upon the existence of a scheme. This means the existing legislation, which identifies the UK measure of profits for credit relief purposes after the deduction of certain reliefs, must now be applied separately to each non-trading credit from a loan relationship or an intangible fixed asset. Therefore, relief for foreign tax arising on such a non-trading credit is limited to the amount of corporation tax on that non-trading credit, after deducting directly related non-trading debits. This includes non-trading debits on amounts treated as loan relationships and on derivative contracts. The new legislation applies to accounting periods beginning on or after 5 December 2013. If an accounting period straddles that date, it is deemed to be split into two separate accounting periods, with the new rules applying to the latter period. Although the new rules are in response to existing tax planning schemes, it is somewhat concerning that HMRC considers yet more double tax relief antiavoidance rules are needed so soon after the introduction of the GAAR, and despite the widely drafted rules contained within the existing legislation. Do you have a large pension pot? Do you need to apply for protection? The UK pensions Lifetime Allowance sets a limit on the amount of tax-free pension saving an individual can make over their lifetime. If an individual s pension savings are worth more than the Lifetime Allowance (currently 1.5m but reducing to 1.25m from 6 April 2014) then, when they draw their benefits, they will have to pay the Lifetime Allowance tax charge on the excess - unless they have some form of Lifetime Allowance protection. Individuals have two protection options: Fixed Protection 2014 an individual who stops building up benefits in registered pension schemes prior to 6 April 2014 can retain the existing Lifetime Allowance of 1.5m. Individual Protection individuals with pension savings valued at more than 1.25m on 5 April 2014 can have an individual Lifetime Allowance of that value (subject to a maximum of 1.5m) and can continue to build up further benefits in registered pension schemes. It is possible to apply for both Fixed and Individual Protection, with Fixed Protection taking precedence. Although individuals have until 6 April 2017 to apply for Individual Protection, they must apply for Fixed Protection before 6 April 2014 so a decision on what to do needs to be made now. An online tool to help individuals decide whether they should apply for Fixed Protection 2014 (FP2014) and/or Individual Protection 2014 is available on HMRC s website. There is an online form that individuals need to complete on or before 5 April 2014 if they want to apply for 2014 fixed protection click here. Government strategy for dealing with evasion and fraud Since Budget 2013 the UK Government has signed automatic tax information exchange agreements with the Crown Dependencies and the Overseas Territories (except for Anguilla). The first information will be exchanged in 2016 (but in relation to the period to 31 December 2014). HMRC already have the ability to name and shame those committing tax fraud, and can charge penalties of up to 200 % of the unpaid tax depending where (ie in which jurisdiction) the undisclosed asset 2
is located. HMRC will shortly be commencing a consultation process on a range of enhanced sanctions to further penalise those who hide undeclared money offshore. It will be interesting to see during the consultation what the proposed sanctions are, over and above those already existing, but the message from HMRC is clear - if a person has unresolved issues in their tax affairs they should bring matters up to date now. As mentioned in previous Tax newsletters, the Isle of Man Disclosure facility ( MDF ) represents an opportunity for individuals with assets or investments held in the Isle of Man to resolve outstanding UK tax matters. The MDF, which will run from 6 April 2013 to 30 September 2016 can be used to make a full disclosure of their UK liabilities to HMRC. Details of the MDF can be found here. Avoidance schemes using total return swaps On 5 December 2013, draft legislation was issued, with immediate effect, to counter what was said to be tax avoidance using total return swaps. The legislation applies whenever a company is party to a derivative contract and makes a payment to another group company of all or part of the profits of a group company. Assuming there is no hedging relationship, the effect of the legislation is that debits and credits relating to the profit transfer are not brought into account. If the conditions are met, then the rule applies regardless of purpose. If obtaining a tax advantage is a main purpose of the arrangements then credits are taxable and debits are non-deductible. HMRC have subsequently explained that their target is deductions which are, in substance, distributions of profit. A distinction has been drawn with legitimate deductions in arriving at profits which should not be affected. For example, it is not envisaged that interest or currency swap contracts would be within the scope of the legislation. HMRC have also now issued guidance on the provisions which includes examples of what is, and what is not, within the scope. Changes to the Controlled Foreign Company ( CFC ) finance company exemption The new CFC rules include a partial or, in certain cases, full exemption for non-trading finance profits arising on a loan to a group company ( qualifying loan relationship or QLR). In order to qualify for the exemption a loan must not fall within any of the exclusions in s371ih TIOPA 2010. Two changes will be introduced by Finance Bill 2014 in relation to these exclusions: A new exclusion will prevent a loan made by a CFC from being a QLR if it arises as a result of any arrangement which has a main purpose of transferring out of the UK profits from a loan made by a UK group company to a non-uk group company. It will apply where such an arrangement is made on or after 5 December 2013. This change is aimed at preventing the reduction of UK profits from existing loans to non-uk group companies using a CFC benefiting from the exemption. An existing exclusion prevents a loan made by a CFC from being a QLR where it is used wholly or mainly to repay external debt of a non-uk group company, and that debt is effectively replaced with a new UK debt, as part of an arrangement which has a main purpose of obtaining a UK tax advantage for any person. The exclusion will now apply where the loan from the CFC is used to any extent, other than a negligible one, to repay the external debt. This change has effect for CFC accounting periods beginning on or after 5 December 2013. Accounting periods which straddle that date must be split into two periods, with the profits arising in the period after 5 December 2013 on a loan which falls within the amended exclusion not benefiting from the exemption. HMRC had considered including such an anti-avoidance provision when they were developing the new CFC rules but, at the time, decided that it would be too difficult to draft and implement. However, faced with the transfer of significant existing loan receivables out of the UK to overseas finance companies since the new CFC rules were introduced, HMRC have now decided that such an anti-avoidance provision is needed and that it would apply with immediate effect. In addition, businesses considering implementing other finance structures (eg Tower structures) using the CFC finance company as a comparator should consider the impact for arbitrage purposes. Changes to Capital Gains Tax ( CGT ) for non-residents disposing of UK residential property Since CGT was introduced in 1965, UK tax rules have encouraged overseas buyers to invest in UK property with the ability to make any gains tax free. The UK is now going to remove residential property from this tax break in 2015, aligning the UK with many other countries. From April 2015, a CGT charge will be introduced on future gains made by non-residents disposing of UK residential property. A consultation on how best to introduce this will be published in early 2014. 3
The announcement in the Autumn Statement provides little detail and does not fully explain the extended scope of the legislation. Whether, for example, non-resident individuals, trustees and companies are all included, how the tax charge will apply and how the changes will interact with existing legislation is unclear. Until the consultation period is closed, and legislation drafted, there will be a period of uncertainty. There is also no specific reference to a "rebasing" election being available to eliminate the element of capital gain accruing prior to the changes from the charge to tax. However, as the announcement referred to future gains, this may offer some hope. These new measures follow the recent changes for high value residential property under which non-uk resident, non-natural persons (broadly companies, partnerships with corporate members and collective investment schemes) disposing of UK residential property with values over 2m were brought within the scope of CGT on disposals post 6 April 2013. Those rules, and the various reliefs agreed, may now be largely redundant after just two years. It is welcome news that non-resident property owners have not become immediately chargeable to CGT on the day of the Autumn Statement. This should allow affected individuals time to review the situation before deciding how to respond to the new rules. HMRC s Employer Financed Retirement Benefit Schemes resolution opportunity HMRC have published a resolution opportunity for employers, who have implemented an Employer-Financed Retirement Benefits Scheme ( EFRBS ) for the benefit of their employees, to settle open enquiries. In summary, this is an opportunity (similar to HMRC s Employee Benefit Trust Settlement Opportunity) allowing employers to settle liabilities (either corporation tax or PAYE/NIC) in respect of EFRBS arrangements first entered into before 6 April 2011. Any settlement would be based on HMRC s technical analysis and would be an alternative to litigation action from HMRC. HMRC had set an initial deadline for responses of 31 December 2013 but we understand it is still possible for approaches to be made. The EFRBS resolution opportunity has two main strands and employers are invited to accept either: Option 1: No deduction is due for Corporation Tax ( CT ) purposes for contributions made to the EFRBS until relevant benefits (ie retirement benefits) are paid out by the EFRBS; or Option 2: PAYE and NIC is payable on the contributions made to the EFRBS. A deduction can then be made from CT profits for contributions made to the EFRBS. Option 1 is aimed at situations where an employer has sought to accelerate a CT deduction for contributions into an EFRBS. Option 2 is primarily for those employers who are willing to accept that either: (i) their arrangement does not meet the statutory definition of an EFRBS, because it was not set up with the intention of providing relevant benefits ; or (ii) it does meet the definition of an EFRBS, but contributions were not made with the intention of providing relevant benefits. An example of this could be an EFRBS arrangement which is used to provide loans prior to retirement. In evaluating the resolution opportunity it is necessary to consider certain other taxes (eg inheritance tax) which may be applicable. There is no indication at present as to whether the resolution opportunity will be opened to those employers whose EFRBS arrangements are not currently under enquiry from HMRC. New rules for some Gambling Duties from 1 December 2014 From 1 December 2014, HMRC is changing the rules for Remote Gaming Duty ( RGD ), General Betting Duty ( GBD ) and Pool Betting Duty ( PBD ). RGD applies to remote gambling, for example casinos and bingo played through the internet. GBD covers more general betting such as fixed-odds betting and pool bets on horse and dog racing. PBD applies to pool betting (other than on horse and dog racing) and non fixedodds betting. Premises based betting and the treatment of spread betting will be unaffected except for some administrative changes. HMRC will publish full guidance on all aspects of the changes before the rules commence. 4
Gibraltar: Not a tax haven The European Commission ( EC ) has received no "well-founded" allegations against Gibraltar regarding failure to cooperate on tax, financial and money-laundering matters, according to Commissioner for Internal Market and Services Michel Barnier. The EC verdict is a blow to Spain, which made accusations that Gibraltar is a tax haven and a centre for money-laundering. This led to the EC launching an investigation into Gibraltar's tax regime to determine whether a corporate tax exemption for passive income contravened European Union state aid rules by favouring certain companies, particularly "offshore" companies. Isle of Man: Tax Compliant The Organisation for Economic Cooperation and Development (OECD) has awarded the Isle of Man a top tax compliance rating. Of the 50 countries reviewed to date by the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes only 18 received the top rating. The rating is based on a peer review assessment by a team of experts working on behalf of the OECD's Global Forum, which covers 120 countries. In October 2013 the Isle of Man also became the first British dependency to sign a FATCA-style agreement with the United Kingdom extending the automatic disclosure of tax information. 5
CONTACTS Contacts - Isle of Man Tax Gregory Jones gregjones@kpmg.co.im Contacts Gibraltar Gregory Jones gregjones@kpmg.gi David Parsons Associate davidparsons@kpmg.co.im Michael Harvey michael.harvey@kpmg.gi Robert Rotherham Senior Tax Manager rrotherham@kpmg.co.im Darren Anton Senior Tax Manager darrenanton@kpmg.gi Harley Richards Tax Manager harleyrichards@kpmg.co.im Contacts - Jersey John Riva Head of Tax, Channel Islands jriva@kpmg.jersey.je Clare Kelly Tax Manager clarekelly@kpmg.co.im Jason Laity jlaity@kpmg.jersey.je VAT Sandra Skuszka Senior VAT Manager sskuszka@kpmg.co.im Contacts - Guernsey Tony Mancini amancini@kpmg.guernsey.gg Paul Cawley VAT Manager pcawley@kpmg.co.im Toby Merrien Senior Tax Manager tmerrien@kpmg.guernsey.gg The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. 6