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  • Current tax issues facing banks in 2019: what can you do now?
Article:

Current tax issues facing banks in 2019: what can you do now?

09 August 2019

In our work with leading banks, our clients consistently describe several issues they see impacting their businesses today. With so much focus on the preparation of a deal/no-deal Brexit it is important to retain sight of additional areas requiring attention. Here we highlight additional common issues that we are hearing in the market and that need to remain on your agenda. The below offers actionable insight into what you can be doing now to prepare and ensure any potential value for your business is realised at the earliest point.

1. EU Directive 2018/822 (DAC 6)

DAC 6, the new EU reporting requirement is already live having come into force on 25 June 2018. After failing to meet their initial target of publishing by the end of June, HMRC released their draft regulations for consultation on 22 July 2019. Alongside the regulations, HMRC published a consultation document, which will run until 11 October 2019, setting out their current thinking and approach to interpreting DAC 6 and which will form the basis for guidance to be published later in the year.

It’s highly likely that banks will be within scope of the directive based on the current definition of an intermediary, in particular, as a “Service Provider” and similar to existing tax reporting regimes (e.g. FATCA and CRS) will have to compile a backlog of transactional data in time for the initial one-off reporting deadline in August 2020 for arrangements implemented between 25 June 2018 and 1 July 2020. From then onwards a 30-day rolling window for reporting new arrangements will apply.

What should I be doing?

At this stage, we are seeing some clients adopt a ‘wait & see’ approach until further legislation and guidance is released by HMRC and other EU tax authorities. However, with each EU member state required to introduce domestic legislation by 31 Dec 2019 it is possible that, similar to existing tax reporting regimes (e.g. FATCA, CRS and CbCR), member states may implement their own interpretation of the directive, which may result in scope creep/deviation from the Directive. For example, as with Poland, countries may decide to broaden the scope of reportable transactions, widen the definition of taxes covered or bring forward their reporting dates, which could result in multiple filings or different processes.

Due to the challenges that many banks experienced with retrospective reporting under FATCA and CRS, we recommend that, if not done so already, you should be reviewing the EU directive alongside HRMC’s draft regulations and closely monitor the implementation of any domestic legislation if you have EU operations. You should undertake an initial risk assessment to determine if transactions are reportable and assess systems and IT solutions. Perhaps you may conclude that your reportable population is smaller than for existing tax reporting regimes but you should not forget to establish stable processes and controls to identify reportable outliers and document the non-reportable status and rationale for audit purposes. Awareness of the impending reporting obligations to key stakeholders should also be raised internally to ensure that resources are in place in order to comply with yet another reporting requirement.  

2. Off payroll working (IR35)

Draft legislation was published on 11 July 2019 outlining greater detail on the IR35 changes, which are expected to widely impact the banking sector due to the general nature of its workforce.

The IR35 changes come into force in the private sector next April and require all end engagers to assess ‘deemed employment status’ for all individuals providing services directly or indirectly via a PSC (can be an LLP or Partnership) in their supply chain. Where IR35 applies the bank may have to operate payroll taxes (ER NIC & Apprentice levy) on any payments made under the contract. For further information read our latest guide or watch our recent webinar recording

What should I be doing?

To reduce the number of bank programmes and projects possibly being at risk due to the loss of key personal with excellent knowledge of how the bank’s systems work then we recommend that you start reviewing supply chain processes, consider compliance obligations, update contracts and implement new contingent labour procurement procedures now.

3. Corporate Criminal Offence (CCO)

CCO legislation has been in place for nearly two years now and is very high on HMRC’s agenda. The expectation is that businesses have been compliant since day one – and we are now seeing increased HMRC activity in this area. In their approach to CCO compliance we are seeing HMRC ask businesses some of the following questions.

  • What are your CCO processes and procedures?
  • Have you carried out a CCO specific risk assessment, rather than simply relying on existing processes?
  • How are you monitoring and reviewing your CCO risks and, importantly, how are you testing your processes?
  • How are you embedding CCO into BAU?
  • Are you confident that all relevant employees are aware of the CCO legislation and have they received CCO specific training?
  • What changes as a consequence of CCO are you delivering?
  • What do you think your CCO risk classification is (low, medium, high) and why?

Further details on our CCO can be read in our guide.

What should I be doing?

As the cost of non-compliance could be significant (unlimited fines, reputational damage and the likelihood of regulatory sanction) then we recommend that you review the above questions in light of your CCO policies and procedures and remediate where necessary. Furthermore, you may also wish to consider the questions in light of HMRC’s Business Risk Review as adherence to CCO legislation will help influence HMRC’s risk assessment in relation to governance under the updated BRR to be introduced later in the year.

4. LIBOR discontinuation

In July 2017, the United Kingdom’s Financial Conduct Authority (FCA) announced that after 2021, international banks will not be required to submit interest rates required to calculate the LIBOR. As a result, the LIBOR, which serves as a globally accepted benchmark for interbank interest rates and is a common base rate for floating rate lending arrangements, will no longer be available. With LIBOR set to phase out in 2021 and the transition to alternative benchmarks, the changing interest rates may substantially increase or decrease the debt obligations of the borrower and the expected returns of the lender.

Careful consideration should be given as to the tax treatment of the change. For banks, where the change impacts assets or liabilities falling within the loan relationship regime then tax should follow the accounting treatment. However, does this have a cash tax impact for you as the profit/loss will undoubtedly be different to that under LIBOR.

Consideration should also be given as to whether all assets/liabilities fall within the definition of a loan relationship. If they do not, tax may not follow the accounting treatment i.e. could they be treated as a disposal for capital gains tax purposes?

Any switch in rates will also need to be considered from a transfer pricing perspective to ensure that replacement rates are arm’s length in respect of any related party contracts.

What should I be doing?

Banks should already be focusing on this topic with a working group established. This would include performing a risk assessment and taking stock of all of the current LIBOR-based instruments in their portfolio, performing an assessment or impact analysis to understand any potential exposures, formulating a transition plan to be implemented and establishing policies and procedures to address the process going forward.

Tax should be represented at the working group and raising awareness of the implications on the phase out of LIBOR from a tax compliance and reporting perspective. It is likely that bank’s counterparties are also considering similar issues on the transition to alternative benchmarks and consideration should be given as to how this will impact their pricing.

It is not just LIBOR that is changing as all overseas references to IBOR (e.g. USD LIBOR, EURIBOR) are also impacted and so the overseas tax position should also be considered.

5. R&D

R&D tax credits should not be underestimated by banks and it is very likely that recent banking projects (e.g. IFRS 9, MiFid II, GDPR and the MAR) would qualify for R&D relief, which you could claim either as a reduction in the tax payable or a tax credit where no tax is payable.

What should I be doing?

Obtain an understanding of what activities can qualify for tax relief through the R&D scheme – this is often much more than companies assume. To assist with this, BDO has a very impressive R&D unit with a team of approx. 75 individuals, (many of whom are either software developers by background or have first-hand experience of the banking sector having worked in the industry), who would be happy to help you navigate through the grey areas.

6. VAT grouping and fixed establishment

Banks are facing regulatory change as a result of Brexit, which has resulted in an increase in restructuring projects taking place. In particular, we are seeing HMRC scrutinising applications to form UK VAT groups which include the UK branch of an EU bank and UK resident subsidiaries of the EU bank, in order to determine whether the UK branch can meet the requirements to be considered a Fixed Establishment for VAT. (“VAT FE”). A VAT FE must have sufficient human and technical resources to be able to make and receive supplies on an independent basis, and these human and technical resources must have a sufficient degree of permanence in the UK. If the requirements are not met, and no VAT FE exists, then the UK branch will not be permitted to join an existing VAT group or to be part of any newly formed VAT group. HMRC typically send a detailed questionnaire to confirm whether a VAT FE exists, as follows:

  • How many staff are present in the UK, how permanent are their roles, do any secondees have a clear role that is dedicated to branch activities;
  • Does the UK branch supply goods or services to separate entities (if services are only provided to its Head Office, it will not be regarded as a VAT FE);
  • Is the UK branch able to provide services in the UK without heavy reliance on its head office?  Note that the supplies made by the UK Branch should not be merely preparatory or auxiliary to those made by the head office.

HMRC can refuse VAT grouping or remove an existing VAT group member where they consider this necessary for the protection of the revenue.

What should I be doing?

Where it is intended to make an application to include a UK branch in a VAT group, we recommend that information is gathered in support of the application to demonstrate that there are human and technical resources present in the UK. Ideally this information should be provided to HMRC at the time of application (and HMRC have provided a dedicated e-mail address for these types of scenarios). Proactively addressing HMRC’s likely questions upfront should save a lot of time and prevent delays in adding to an existing VAT group or forming a new VAT group.

Our banking specialists’ help clients anticipate challenges and keep ahead of the curve across regulatory reform, technological advancements and increasingly complex tax legislation, should you wish to discuss any issues you are facing speak to our specialist team opposite.