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Tax Developments: Summer 2018

Helping you plan for change

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Crowe’s tax team reflect on the top tax developments so far in 2018, and the areas that organisations should focus on in the near future.

At the start of the year, we detailed some upcoming tax developments that organisations should address during 2018. Six months later, several trends are developing.

For some time there has been strong emphasis on the processes and controls designed to ensure good tax governance. This emphasis remains, but is being enhanced by technology to create, for the first time in the UK, a ‘digital tax environment’. The government is working to transform HMRC into a world-leading, digital tax authority.

HMRC has also been focusing on the ‘tax gap’ and introducing new measures to increase the amount of tax collected in the UK.

Finally, Brexit must inevitably feature in an organisations’ planning for 2018 and 2019.​

Making Tax Digital for VAT

VAT is at the forefront of HMRC’s Making Tax Digital (MTD) plans. All businesses with a turnover above the VAT registration threshold will now be required to keep their VAT records digitally and submit their VAT data to HMRC through compatible software. This will present a significant change to processes for many businesses and is expected to mean much more than just sharing existing VAT records with HMRC digitally.

As 2018 has progressed we have heard more from HMRC about the detail of their plans and they have confirmed the implementation date of 1 April 2019 will go ahead. This date is looming large but many organisations are either still unaware of the requirements or still developing their implementation plans. HMRC published further guidance at the start of July which included details of software providers that have developed products compliant with the MTD rules.

At the moment, spreadsheets feature heavily in an organisation’s VAT reporting. Under MTD, spreadsheets will be regarded as manual records and while they can still be used, there will need to be compatible software overlaid to create a VAT return and to provide this information to HMRC digitally. In practice, this means that businesses which create VAT returns via spreadsheets using sales and purchase data downloaded from their accounting system will have to make changes to their processes.

Find out more and book onto our webinar on 6 September - Making Tax Digital for VAT.

Recommended action

To understand the MTD requirements and review the actions needed for your VAT compliance processes to comply. MTD is expected to be the most fundamental change to the tax administration system for at least 20 years and organisations should be aware that the VAT changes are just the starting point. It is to be extended to other UK taxes.

Further information can be found in our insight Making Tax Digital for VAT.


Cross-border trade

International trade arrangements rightly continue to feature prominently in the Brexit discussions and much remains uncertain despite many months of debate.

During 2018 the government provided details of their aims for the UK’s future customs relationship with the EU and provisional agreement has been reached for a transitional period running from Brexit day (29 March 2019) to 31 December 2020. This will mean businesses will only have to adjust once to a new set of customs/international trade relationships.

The government has started to negotiate with the EU as to what our future international trade arrangements will be. Various proposals have been set-out but nothing is yet agreed.

A so-called ’hard Brexit’ now appears to be a realistic outcome. Coming out of the EU could mean that the UK will no longer benefit from the EU royalties and interest directive which removed withholding taxes on dividends, royalties and interest coming from EU territories.

Immigration and workforce planning

Whilst a lot of detail of what is to come on the immigration front remains somewhat unclear, we do know that free movement as we know it will end. The key issues for employers are understanding how this will impact their workforce today and in the future.

An immediate area of focus are EU nationals already in the UK workforce. Most organisations will now have complied lists of EU nationals they employee and a key people concern they will have now is their permanent residency status after the UK withdraws from the EU. Some guidance has been published around settled status. A key consideration for employers is how to support these workers with applications.

Going forward, there will be new processes and registration requirements.

Workforce planning is key. If an organisation is able to compare their current EU workforce against future demands taking into account whether those workers will be readily available or indeed even view the UK as attractive place to work and live, then they can start to understand if they have a deficit. If a deficit is expected the question then turns to what can employers do now to influence the future supply of skills and types of workers? For example, what role can apprenticeships play? What role can expatriate tax breaks (that provide reduced tax liabilities for certain non-domiciled individuals) play to increase UK attractiveness as a host for key talent?

Corporate location strategy

Many organisations are already considering and planning moves of functions or teams from the UK to EU locations. For others, there may not be moves of offices or teams but will instead be new patterns of people mobility as teams and key executives respond to where their roles require them to be. 

The relocation of the European Medicine Agency to Amsterdam is just one high profile example. As this thinking develops organisations will need to consider the best way of structuring the movements. Relocations bring a whole host of tax issues for the organisation and its employees. For the organisation there is a need to consider the right corporate set up to facilitate business within the EU whilst remaining cost competitive and compliant. Where certain key personnel are required to relocate it will be necessary to consider payroll, social security and tax set up. There will be a need to consider whether roles should be local or expatriate in nature. A number of countries in Europe have expatriate tax concessions and tax breaks and leveraging these can be key ensure costs and budgets are proactively managed.

Recommended action

  1. For now, assess the parts of your organisations’ activities which may be impacted. It can be difficult to understand all the types of purchases and sales made and the physical and legal flows, but these will all need reviewing to pinpoint the areas that could be impacted. The likely creation of a customs border between the UK and elsewhere will result in a change to the import/export processes for goods and possibly an increase in customs duty and VAT costs.
  2. Review your organisations’ cross border charges and profit repatriation models to understand and plan for any additional tax costs that your organisation may face as a result of applying the Tax Treaty withholding tax rates.
  3. Carry out workforce planning to understand existing and forecast employee needs.
  4. For those considering corporate relocations, to understand the tax implications for both the organisation and its employees for all of the candidate locations being considered.
Off payroll workers

Engagement of off payroll workers has always been a hot topic with HMRC however this last year we have hardly seen a week where it hasn’t been covered in the press.

In recent times a whole myriad of different models of working have developed, further complicating the already murky issue of whether an individual has the status of an employee or a worker, or is a self-employed independent contractor. The problem is that if the engager applies the incorrect treatment then they hold the risk not only from an employment law perspective but importantly any tax and NIC under paid plus interest and penalties.

To further complicate matters the rules are likely to change, on which we should hear more in the coming months. HMRC and the Treasury launched a consultation into the question of off-payroll working in the private sector, which closes on 10 August. The consultation considers ways to ensure better compliance and less tax leakage in circumstances where individuals supply their services to a business through a personal services company (PSC) (see box IR35). The public sector ready has rules covering this which came in April 2017.

Broadly, the public sector changes passed the tax risk from the PSC itself to the ultimate engager. HMRC has stated that this has seen a significant number of public sector engagements to move to the pay-as-you-earn (PAYE) system, either as an employee proper or by the public sector engager operating PAYE on payments to the PSC.

In addition, earlier in 2018 we also saw a number of consultations into the employment status framework following the Taylor review, which made a number of recommendations for increased clarity and transparency in the tests for employment status.

Recommended action

Make sure you have policies and procedures covering off payroll workers and assessing the correct categorisation. Review your purchase ledger to identify those off payroll paid through intermediaries. Keep an eye out for future developments.

Termination payment changes

There was a change in the taxation of termination payment from April 2018, where the legislation has not seen any significant change for around 30 years, and it appears many employers still have not understood what to do.

What are the changes?

From 6 April 2018 the legislation will:

  • effectively treat all payments in lieu of notice as earnings as subject to tax and class 1 NICs
  • ensure that payments for injury to feelings fall outside the exemption for injury payments, except where the injury amounts to a psychiatric injury or any other recognised medical condition
  • abolish foreign service relief (except in relation to seafarers) for UK resident employees
  • permit HM Treasury to vary the £30,000 threshold by regulations.

From 6 April 2019, the legislation will

  • subject all termination payments above the £30,000 threshold to class 1A NICs (employer liability only).

The issue is that it sounds straight forward but it is not and many employers are now incorrectly calculating the tax and NIC. In order to correctly calculate this for terminations, on or after 6 April 2018, employers need to use the formula in the legislation. Failing to deduct tax and NIC can leave the employer liable for the payments plus interest and penalties.

Recommended action

Make sure you have reviewed the new rules and incorporated them into your termination payment procedure so you apply the correct tax and NIC treatment. Further detail and examples can be found in our news article Termination payments.

Watch out for company cars
The benefit in kind rates on company cars continue to escalate, and you may have noticed the impact on your net pay from April this year.

Employers will have submitted their P11D's for the year to 5 April 2018 which gives HMRC a further opportunity to amend tax codes so watch out for any changes this month. This could include the impact of the changes to the optional remuneration rules from April 2017 which mean if you had the option of a cash allowance but took the car and picked a low emission vehicle you might still be taxed on the higher cash allowance figure you gave up! This is the first year affected so take care to make sure any adjustments are correct.

By way of illustration; in the year to 5 April 2018, the car benefit rate for electric cars (or those emitting less than 51g CO2 per km) was 9%, an increase from 5% as recently as the tax year to 5 April 2016. From 6 April 2018, this rate is increasing to 13% and then to 16% from 6 April 2019. Those who are enjoying the use of a Tesla purchased for £80,000 will see the benefit in kind charge increase by £3,200 and £5,600 versus the current position, an increase in tax of £1,440 and £2,520 a year.

On the plus side, the benefit in kind rates on such cars are due to be amended to be based on electric range, which could see the rate drop dramatically - so don't give up on your electric car yet.

Recommended action

Make sure you understand the taxation of your company car and its impact on your tax position over the next few years. See our previous article for more information.

Remuneration planning

As highlighted in our last article, the rates of tax on dividends have changed hugely over the last few years meaning the ‘tax gap’ between salary and dividends has narrowed. This is clearly intentional and is HMRC’s way of reducing the benefit afforded to owner managers when deciding how to draw their income.

We have crunched the numbers many times and in most cases it is still cheaper to pay a dividend rather than a bonus. It is however important that your remuneration strategy is reviewed regularly and all options considered. A few key pointers are:

  • Timing – dividends are taxed in the year of receipt so make the most of the different tax bands and plan your cash flow. If you can defer payment into a later tax year then why not do so if it can postpone your tax liability.
  • Family shareholders – if they are involved in the business then why not bring them in as shareholders. They can then participate in dividends potentially at lower tax rates.
  • Loan interest – if the director has lent money to the business then consider whether a payment of interest might be appropriate. The tax rate on interest for the director is higher than a dividend (45% compared to 38.1%) but the company would get a deduction for corporation tax at 19% once it is paid so the overall result can be cheaper.

Recommended action

Businesses should review their remuneration strategy regularly alongside the management accounts to make sure any payments are as efficient as they can be for the owner manager whilst making sure they are sustainable for the business.

Corporate offence of failure to prevent the criminal facilitation of tax evasion

Although the legislation has been in place since last autumn, organisations may have overlooked its importance and the dire consequences of falling foul to the corporate criminal offence. The rules apply to all businesses, regardless of their size or industry sector.

It is no secret that the government has put huge focus on reducing tax evasion. Instead of targeting tax evaders themselves, these measures criminalise corporates (which includes partnerships and LLPs) that don't do enough to prevent the facilitation of that evasion in the first place.

Criminal liability can be attributed to a firm when its employees or associates are seen to be helping taxpayers evade tax. Examples of scenarios that might be caught include an HR manager classing a new employee as self-employed knowing that it will save on National Insurance, and an employee raising a bill to an individual's company for personal tax return preparation, knowing the VAT will be reclaimed by the company.

There are three key elements under the new offence:

  1. Criminal tax evasion by an individual/legal entity anywhere in the world.
  2. Facilitation of the offence by an employee/person acting on behalf of the firm.
  3. The firm is then automatically considered to have failed to prevent the facilitation of the tax offence, subject to the defence.

Recommended action

Ensure your organisation is fully complying with the rules in order to protect against criminal investigation, an unlimited fine and significant reputational damage. Organisations can plead a defence that it has put in place “reasonable measures, procedures and safeguards” to prevent facilitation of tax evasion. Businesses should take steps immediately to ensure that their processes and controls are robust. This should include an initial risk assessment whereby the business calculates, documents and reviews its exposure to the new offence.

Requirement to correct / Failure to correct

HMRC is urging taxpayers to make disclosures of UK tax due on foreign income and assets in advance of the 30 September 2018 deadline. This coincides with the end date by which time all countries signed up to the common reporting standard will have exchanged financial data.

If taxpayers fail to make adequate disclosures in time, HMRC will assess draconian 'Failure to Correct' penalties. The standard penalty will be 200% of the underpaid tax, which can be reduced to 100% for making a good quality disclosure following HMRC discovering the inaccuracies. There are other penalties based on the value of the asset if, for example, HMRC discovers the taxpayer has moved them to different jurisdictions in the hope of avoiding detection under the CRS.

Recommended action

All taxpayers should review their tax affairs in order to ensure all UK tax liabilities have been settled. The rules apply to anyone with an undeclared UK income tax, capital gains tax and/or inheritance tax liability which is connected to an offshore matter. As a result, individuals, partnerships, Trustees and non-resident landlord companies all need to satisfy themselves the correct UK tax has been paid. Taxpayers who discover inaccuracies need to tell HMRC before 30 September 2018 they intend to make a full disclosure, otherwise they will suffer huge penalties.

Selling remotely into the US
The recent Wayfair Supreme Court decision is leading to a significant change in US Sales Tax rules and could result in non-US companies that sell goods or services into the US having to register and pay local sales taxes in each US State where they have customers. The decision creates an obligation for businesses to consider if they have an 'economic nexus' with each State, rather than a 'physical presence'. Where there is such a link, then US sales tax could become payable together with an obligation to register and render returns. There is also the potential that there will be US state income taxes payable as well. 

Recommended action

It is worth noting that there remains significant uncertainty about the scope of the Sales Tax rule changes, the different criteria for what constitutes an 'economic activity' and whether there may be retrospective effect. Businesses should also be aware that each State sets its own rules, which is likely to lead to inconsistencies and a need to monitor developments. For now, we recommend reviewing in what States you have made sales and monitoring developments in the laws/guidance for those States as to what constitutes an 'economic nexus'.

Continued spotlight on tax avoidance

We predicted that 2018 would see a continued focus on collecting tax through preventing abusive tax avoidance including the use of the General Anti-Abuse Rule (GAAR) for tax schemes.

The GAAR was enacted in 2013 and was designed to "deter (and, where deterrence fails, counteract) contrived and artificial schemes". It works by allowing HMRC to counteract a tax advantage arising from 'abusive' arrangements. This is a wide-ranging power and, to balance it, taxpayer safeguards were also introduced. One of these safeguards is the independent GAAR Advisory Panel, whose role is to consider, review and approve HMRC's guidance on the GAAR, and deliver opinions on individual cases referred to it by HMRC.

The GAAR Advisory Panel has now issued seven rulings. In July 2018 HMRC issued guidance about dealing with an HMRC notice of binding and a bound arrangements opinion notice under the GAAR, including when they will apply penalties - of 60% of the tax avoided. We expect to see the GAAR to continue to be invoked to close down schemes or tax arrangements where the transactions do not constitute a reasonable course of action.

For those organisations that have not entered into any tax planning the GAAR developments could still have an impact as they are a further measure aimed at the governance of tax and links between commercial activities and the tax payable. We are continuing to see a trend of organisations focusing time and budgets on tax risk management, by ensuring they have good tax processes and controls.

Provisions in the recent Finance Bill introducing a points based system for late filing of certain tax returns, and penalties for late payment of taxes also indicate that HMRC will continue to focus their attention on those organisations who are not tax compliant, as well as those they believe are abusing the tax system by using tax schemes.

Recommended action

With public trust in the fairness of the tax system at a low point, and tax revenues needed, expect dogged HMRC scrutiny of any tax schemes or aggressive tax positions. As well as the financial cost of a protracted HMRC enquiry, consider the cost to reputation if the details were to become public. We continue to recommend organisations make sure that they:

  • are on top of their tax payment and filing obligations
  • focus on claiming all the significant tax reliefs that you are entitled to, and
  • close down any aggressive tax planning.
  • Contact us

    Jane Mackay
    Jane Mackay
    Partner, Head of Tax
    Thames Valley