The Chancellors Autumn Statement came out this month and in it were several statements about how HMRC are tackling tax avoidance and evasion. Specialists at Matthews & Co provide an overview on some of the specific points raised:
Autumn Statement – Controlled foreign companies: profit shifting
The measure switches off the partial exemption rules for loan relationship credits of a Controlled foreign company that arise from an arrangement with a main purpose of transferring profits from existing intra group lending out of the UK. It also amends the anti-avoidance rule relating to the transfer of external debt to the UK to ensure that the rule works as intended. The first part of the measure will apply to arrangements entered into on or after 5 December 2013 and the second part will have effect for accounting periods beginning on or after 5 December 2013.
Matthews & Co; this addresses the highly publicised tax planning of large corporate firms that have used their global group position, and activities that have happened outside of the UK, to mitigate their tax liability here in the UK. These firms have adapted their business models to take advantage of different tax legislation in different jurisdictions. HMRC have now shut off the partial exemption ruling that allowed a controlled foreign company to make a loan payment, thus reducing UK profits, to a parent company overseas that has a lower tax levy.
Autumn Statement – Partnerships review: partnerships with mixed membership
The first element of the partnerships review measure will affect mixed membership partnerships where partnership profits are allocated to a non-individual partner in circumstances where an individual member may benefit from those profits. The second element will affect cases where partnership losses are allocated to an individual partner, instead of a non-individual partner, to enable the individual to access certain loss reliefs. The changes will take effect from 6 April 2014 with the exception of anti-avoidance rules concerning tax-motivated profit allocations. These rules come into force from 5 December 2013 in order to protect against risks to tax revenue.
Matthews & Co; here HMRC are attempting to restrict an ability to allocate profits or losses within a mixed membership partnership in an attempt to mitigate the level of tax liability that both a non-individual and individual member incur from the profits of the partnership.
So if you are an individual member of a partnership, where another partner is for example, a Ltd company then as of 6th April 2014 you will no longer be able to amend the level of profits / losses attributed to you as an individual or the non-individual that enable the individual to avoid paying tax or receiving loss relief.
Autumn Statement – Avoidance schemes using total return swap
The measure blocks avoidance schemes where deductions are claimed for payments between companies in the same group under derivative contracts which are linked to company profits. It will apply from 5 December 2013 to schemes entered into on any date.
Matthews & Co; HMRC are targeting group companies that utilise financial derivatives such as SWAPs to mitigate their tax position. This amendment takes away the ability to deduct for corporation tax purposes the value of a payment made to another group company using a derivative that equates to, in substance, the profits of the company.
Autumn Statement – Double Taxation Relief: revenue protection
The measure will make two changes to the Double Taxation Relief rules to prevent avoidance. Both changes will have effect from 5 December 2013. It will have effect on non-trading credits for accounting periods beginning on or after 5 December 2013, with transitional provisions where accounting periods straddle this date. The amendment to the rules on refunded tax credits will take account of payments made by the foreign tax authority on or after 5 December 2013.
Matthews & Co; this applies to you if you have an overseas company that is paying tax in another country and you then claim Foreign Tax relief on the level of Corporation Tax here in the UK.
If your company then has an inter-company loan (or an intangible fixed asset) from which your company receives a non-trading credit, then that foreign tax credit received as a result is applied solely to the amount of corporation tax on that non trading credit in the UK.
Generally HMRC are attempting to reduce the credit applied to Corporation Tax here in the UK as a result of foreign tax payments and then repayments of that foreign tax.
Autumn Statement – High risk promoters
A new information disclosure and penalty regime for high risk promoters of avoidance schemes will be introduced. Objective criteria for identifying high risk promoters and a higher standard of reasonable excuse and reasonable care that will then apply to them will also be introduced. Clients of these promoters will also have certain obligations including identifying themselves to HMRC.
Matthews & Co; it is our understanding that HMRC are targeting those tax avoidance promoters that use highly aggressive tax avoidance schemes that create financial structures, use sophisticated derivatives and create artificial losses to avoid the obligation of paying taxation. We understand that this does not affect Trust Based Tax Planning.
Autumn Statement – Follower Penalties: users of failed avoidance schemes
This measure will introduce a new obligation for users of an avoidance scheme that HMRC have defeated in a tribunal or court hearing in another party’s litigation, to concede their position to reflect that decision. When there has been a relevant decision HMRC will issue a notice to all users of the scheme in question requiring them to amend their return or advise HMRC why they believe they should not. A tax-geared penalty would be charged if they failed to amend their return and it was subsequently found that the avoidance scheme they used failed on the same point of law. Taxpayers will be able to appeal against the penalty.
Matthews & Co; at the moment when HMRC investigate a particular tax avoidance scheme they challenge the scheme on a point of law basis. However if a particular case rules against the tax payer it may not mean the scheme itself is at fault, it may have been administered in the wrong way. Therefore, with this measure HMRC are introducing a measure that if a case using a particular scheme is ruled in favour of HMRC then all other uses of the scheme must then concede their position to HMRC reflecting that particular decision. In essence the emphasis is then being placed on the scheme user to declare why their particular case should not be included within the same ruling and why therefore they should not amend their return. Failure to do this, and should HMRC then find the scheme fails on the same point of law in their own individual case, then a penalty will be levied.
Please note that this is only for failed or over turned schemes.
Autumn Statement – Accelerated tax payment in avoidance cases
Legislation will be included in Finance Bill 2014 to require payment of the tax in dispute in a tax avoidance enquiry when an ‘avoidance follower penalty notice’ is issued. This will take effect from Royal Assent which is expected mid July 2014.
At present taxpayers (in most cases) can hold on to the disputed tax while the dispute is being investigated. This can take a number of years, and there is evidence that some taxpayers enter into avoidance schemes primarily for the cash flow benefit.
Matthews & Co; HMRC are attempting to remove the benefit of retaining disputed taxes (a cash flow benefit) from those users of schemes that have been overturned and are awaiting redress. If you are a participant in a scheme that has been overturned by HMRC, you may be waiting some time before your own case is heard and ruled. In this period of time the disputed taxes could be generating additional revenue, income or interest. HMRC are attempting to cut off this benefit by asking for immediate repayment on failed schemes, with the taxpayer being asked to reclaim this money if they can provide that it is a genuine and lawful scheme. Like the previous point it is putting the burden of proof on the user rather than HMRC.
If you have any further questions or comments in respect to the above then please contact us in the first instance. As a firm of tax planning advisors we are able to introduce your business to a range of solutions that can seek to mitigate corporation and personal taxation.