On 23 March 2021, billed as “Tax Day”, the government launched a range of tax consultations to help implement its 10 year plan to make the UK tax system fit for the digital future. Although the consultations do not include direct revenue-raising measures (as some had feared), many of the proposals will have a significant impact on UK businesses and individuals in future years.
Transfer Pricing documentation – new requirements
HMRC’s consultation seeks views on options for updating UK transfer pricing documentation requirements: the introduction of specific documentation requirements would be a significant policy change on transfer pricing compliance. The clarity provided by the proposed change could be welcomed by some MNEs - although others may consider such a change unduly burdensome, given the level of their business in the UK. The key proposals are:
Master and Local file expanding on the OECD standard
The consultation proposes a new mandatory requirement for MNEs within country-by-country reporting groups to prepare an OECD-format ‘Master file’ and to keep a ‘Local file’. Businesses would have to submit these within 30 days of a request from HMRC.
For the Local file, the consultation suggests additional documentation requirements (exceeding the OECD standardised approach) such as a formal ‘evidence log’ (the intention of this being to enable HMRC to ‘distinguish facts from technical analysis and opinion’ to ‘support more focused compliance interventions’). However, it does specifically ask whether a requirement for MNEs within CbC reporting groups to produce a local file is proportionate – for example, where the UK presence of some MNEs is restricted to a few staff only.
International Dealings Schedule
For all UK businesses within the scope of UK transfer pricing legislation, the consultation considers a new annual requirement to file an ‘International Dealings Schedule’ (IDS) providing details about cross-border, intragroup transactions where the counterparty is in another territory. Having scaled back on cross-border ‘arrangements’ reporting post-Brexit, it seems that HMRC wants to collect wider data on cross-border transactions, although those small and medium sized businesses that qualify for exemption from UK transfer pricing requirements would not need to file an IDS.
The consultation runs until 1 June 2021.
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Uncertain tax treatment reporting from 2022
In 2020, HMRC launched a consultation designed to improve its ability to identify issues where businesses take a view on a tax treatment included in a return – see our summary. Subsequently, the start date for reporting was deferred, and HMRC has now published a second consultation aimed at developing the proposals before they come into effect from April 2022.
HMRC intends that the requirement to notify will help it identify and reduce tax losses caused by delays in identifying and resolving disagreements in how tax law should be interpreted. Such differences in legal interpretation are not necessarily due to avoidance or evasion, and HMRC accepts that its interpretation is not always correct.
One of the most widespread concerns raised in responses to the initial consultation was that the definition of an “uncertain tax treatment” was not clear enough to make it straightforward for businesses to identify reportable ‘uncertainties’. The initial de-minimis limit for the tax at stake of £1m was also seen as too low by many respondents.
In the latest consultation, HMRC is seeking views on seven criteria that could be used to define an ‘uncertain tax treatment’. Whilst these would provide a comprehensive set of tests, it remains to be seen how many will be adopted or adapted before April 2022. Fortunately, HMRC is now proposing the uncertain tax treatments should be reported where the tax at stake is £5m or more, so it is perhaps reasonable for all parties to take the time required to consider such detailed definitions.
The consultation clarifies that reporting rules will only apply for VAT, income tax (including PAYE) and corporation tax, ie not all taxes subject to senior accounting officer (SAO) reporting, and notification will have to be made for each relevant tax return (not when the SAO notification is submitted). There will be a penalty for failure to notify a tax uncertainty, but this will fall on the entity, not on any individual.
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A 21st century tax system
HMRC is planning to update the tax administration framework that underpins the UK tax system as part of its long 10-year plan to implement the government’s vision for the UK’s future tax administration system (as outlined in its July 2020 publication).
HMRC recognises that the current tax administration framework has developed over many years and will need to change radically in order to allow it to deliver new digital services (i.e. Making Tax Digital), collect “the right amount of tax”, tackle tax avoidance, and make repayments in a rapidly changing world. The consultation asks fundamental questions about tax administration and other parts of HMRC’s strategy, to inform and shape a long-term policy.
Therefore, the new call for evidence is a first step towards a new framework and the new legislation required to create it, considering simplification of current rules and harmonisation across taxes. HMRC seeks input on the objectives for the tax framework as well as ideas for reforming broad aspects of the tax system, including:
- Taxpayer registration
- Assessment and calculation of tax
- “Using data and information [from third parties] to make tax compliance effortless for the majority”
- Tax payments and repayments
- “Building in effective methods of verification, sanctions and safeguards to promote compliance”.
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Tax payment dates
As part of the government’s 10-year strategy to build a trusted, modern tax administration system this call for evidence considers the benefits and challenges of the current tax payment timings. Its primary focus is Income Tax Self-Assessment (ITSA) and Corporation Tax for companies outside the quarterly instalment regime.
HMRC already offers a voluntary Budget Payment Plan (BPP) for ITSA taxpayers who are up-to-date with their self-assessment payments and who wish to make regular weekly or monthly payments (of an amount they choose) towards their next tax bill via their HMRC online account. This is separate from ‘Time to Pay’ arrangements, where tax already due is paid over a longer period.
The government is requesting evidence to help it consider the appropriate frequency and timing of tax payments in more detail. It may, after the end of this Parliament, bring the payment of tax closer into line with the increasingly real-time tax reporting (via Making Tax Digital) so that tax is paid sooner after the income or profit arises.
In the meantime, HMRC will invest in the BPP during 2021/22, making the plan easier to find and sign-up to, increasing payment flexibility and providing guidance to taxpayers that is easier to understand. HMRC will also promote the BPP via taxpayers’ tax accounts, on first registration and to taxpayers reaching the end of a Time to Pay Arrangement. HMRC will use the insights gained from this work to inform changes to the timing of tax payments.
Expanding the use of HMRC’s BPP is clearly intended to make the eventual switch over to in-year or real-time tax payments less controversial and problematic for all parties.
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Partially exempt businesses – administrative changes now and larger changes to follow
Businesses with taxable and exempt income are unable to reclaim all of their VAT and are required to use what is called a ‘standard’ method, or agree a bespoke ‘special method’ to determine the VAT recoverable. There are further issues for such businesses when building, altering or buying certain capital goods, typically property, as adjustments to reflect the ongoing use are required for up to 10 years. The issues involved and the administration are complex for taxpayers and HMRC alike and, in 2019, the government launched a ‘call for evidence’ on potential simplifications.
The government has now released the feedback gathered from stakeholders, including BDO. The feedback highlights the current issues and the difficulties faced but, at this stage, the government has only announced small alterations to the rules, as follows:
- There will in future be a centralised application point for applications for ‘special methods’
- A standardised approach to making applications, involving the use of a form to help applicants include all relevant information for HMRC
- A review and updating of guidance to businesses by HMRC.
However, the Government does plan to undertake further engagement with stakeholders on longer-term changes to the rules, and BDO will take part in that process.
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VAT Grouping – no immediate changes
There was an announcement by the government regarding the call for evidence on VAT Grouping, which concluded in late 2020. Following the submissions, including by BDO, the government held a number of stakeholder meetings to further understand the issues around VAT grouping, including issues surrounding VAT groups and branch structures. This was with a view to publishing the responses and announcing amendments.
However, while a summary of the responses has been published the government has now decided to publish a further call for evidence on VAT grouping before the summer, and has announced it will make no immediate changes.
This was a surprise announcement, but may be indicative of a general policy in government of leaving the current EU-based VAT system largely intact for a while. However, there are a number of recent and pending court judgments involving VAT grouping that are likely to impact on UK VAT groups, and so changes are almost inevitable in due course.
VAT land exemption – call for evidence and potential changes ahead
Most supplies of land are VAT-exempt, but there are a number of exclusions, and the rules in the area are complex and often confusing. The government has announced it will shortly publish a call for evidence on land exemption to explore options to make the exemption simpler and clearer.
There have been a number of changes made in recent years to remove the land exemption, for example from self-storage and wedding related supplies, and, in general, HMRC’s approach has been to see the exemption apply to an increasingly narrow set of circumstances. Therefore, it should be expected that any proposed changes will follow this approach, rather than widen the exemption.
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Inheritance tax and the taxation of trusts
The Office of Tax Simplification produced separate reports for HM Treasury in November 2018 and July 2019 which discuss the potential simplification of Inheritance Tax (IHT). As a partial response to the first report, the Treasury has confirmed that it is looking to introduce regulation from 1 January 2022 to ensure that over 90% of non-taxpaying estates do not have to complete IHT forms for Probate purposes. It also intends to ease some administrative burdens by developing a fully integrated digital system with the ability to submit IHT forms electronically, together with the introduction of a direct link between HMRC and the Probate office to streamline processes.
The Treasury is still considering a number of remaining recommendations from the first report, and has promised to respond to the second report in due course. These proposals confirm the Treasury’s commitment to the modernisation of IHT and are perhaps an indication that more fundamental changes are in the pipeline.
Alongside this, it is notable that HMRC has now concluded its review of the taxation of trusts which commenced in November 2018. Aside from minor comments about issues surrounding the IHT treatment of transfers into trusts and the gifts with reservation provisions, there is no intention to fundamentally reform trust taxation at this stage. However, if IHT is modernised as expected, we anticipate that some changes to the taxation of trusts will be necessary to support the new IHT regime.
Social Investment Tax Relief
In recognition of the unique challenges brought about by Covid 19, Social Investment Tax Relief will continue to be available for debt and equity investments into qualifying entities or funds until April 2023. The tax benefits of these investments are broadly a 30% income tax benefit for the value of your investment, capital gains tax deferral, tax free gains, and loss relief (potentially against income) if the investment is not successful.
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Helping taxpayers get offshore tax right
Part of HMRC’s ‘No Safe Havens’ strategy to tackle offshore tax non-compliance focuses on preventing mistakes by helping taxpayers submit the correct figures on their tax returns and using data to identify cases for HMRC to focus its compliance efforts on soon after mistakes are made.
A discussion document seeks new ideas on how HMRC can ‘help’ taxpayers submit correct returns in relation to their offshore tax affairs, with the aim of reducing non-compliance caused by both carelessness and mistakes despite the taxpayer taking reasonable care.
HMRC wants to improve its understanding of:
- The causes of offshore tax non-compliance
- Possible approaches to help taxpayers submit correct returns first time, including ways that HMRC can use data to help taxpayers
- Other ideas to improve offshore tax compliance, including further support HMRC could offer taxpayers
- How HMRC can work with agents and intermediaries to help promote offshore tax compliance amongst taxpayers.
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Preventing and collecting international tax debt
HMRC defines an ‘international tax debt’ as a debt which arose because of the non-payment of UK tax, where the taxpayer and/or their assets are outside of the UK. This includes:
- UK tax-resident individuals with overseas assets that generate a UK tax liability
- Individuals based overseas with a UK-source tax liability
- UK tax-resident individuals who have moved overseas without paying the tax owed.
HMRC is considering how to make better use of data, including Common Reporting Standard data from other countries, to help it tackle these debts or prevent them from occurring. It is also concerned that offshore companies can be wound up while owing UK tax to HMRC. The discussion document also seeks views on:
- How to improve and raise awareness of its guidance so as to reduce the amount of tax debt and help taxpayers to pay what they owe
- The tax payable by non-UK resident entertainers and sports professionals
- Making the process of paying HMRC easier where taxpayers are not in the UK
- Improving international co-operation to increase debt collection rates
- Inhibiting access to UK markets for deliberate overseas tax evaders.
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Aviation tax reform
The Government has launched a consultation which ends on 14 June 2021, and is considering changes to Air Passenger Duty (APD) to support Union and domestic connectivity, and to align the tax more closely with environmental objectives.
The consultation highlights the reduction of domestic flights in the UK, including journeys between Northern Ireland and Great Britain (even before Covid-19). In order to support greater connectivity, particularly to some of the more remote areas in the UK, the Government is consulting on potential changes to the domestic taxation of flights. The proposals are to either:
- Re-introduce a return leg exemption for APD, which was originally part of the scheme, but was later removed as a result of EU complaints; or
- Introduce a revised domestic APD band (this is the favoured approach, and would also support single journeys in the UK).
For international journeys, the current APD rate is dependent partially on the distances travelled, looking at the distance from London to the destination countries’ Capitals, with a simple banding system of up to 2,000 miles and over 2,000 miles. For example, a journey to any part of the USA or Australia is taxed on a single basis. The consultation looks at potential options involving changes to the banding system, which would increase tax for longer journeys where they consume more CO2. However, the government is not convinced that a ‘frequent flyer’ levy is appropriate, and is seeking views on alternative proposals to help reduce CO2.
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