Finance Bill 2018-19 – tax administration points

Finance Bill 2018-19 – tax administration points

Fri 17 Aug 2018

Included in the draft finance bill legislation issued on 6 July 2018 on those measures affecting tax administration, were provisions relating to extension of offshore time limits for assessing certain taxes, extension of the security deposit regime, and profit fragmentation. HMRC has requested comments on the draft legislation by 31 August 2018.  There were also measures to harmonise interest charged and repaid for VAT, for late submission and payment penalties which are not covered below.

The profit fragmentation measure includes a notification requirement which may also affect those who are not seeking to avoid tax.

For a further discussion of the impact of these new measures, please get in touch with a member of the Mazars tax investigations team.

Extension of offshore time limits for income tax, CGT and IHT

This measure increases the time limit to raise tax assessment for non-deliberate offshore non-compliance to 12 years for Income Tax, Capital Gains Tax and Inheritance Tax. This compares to the existing time limits of 4 years, or 6 where the loss of tax is due to carelessness, after the end of the year of assessment (or date of the chargeable transfer) to which it relates. The measure will not affect income tax and CGT assessments on personal representatives of a deceased person’s estate, where the time limit for raising an assessment remains 4 years.

It is proposed that these amendments will have effect in relation to Income Tax and Capital Gains Tax assessments from 6 April 2019. For these taxes the amendments will therefore affect tax years from 2013-14 in cases where the loss of tax is brought about carelessly, and from 2015-16, and subsequent years, for other cases (where not already subject to the 20 year time limit). The amendments will apply for Inheritance Tax from 1 April 2019 to chargeable transfers taking place on or after 1 April 2013 where the loss of tax is brought about carelessly, and 1 April 2015 for other cases not subject to a longer time limit.

There are no plans to make corresponding changes to the statutory record keeping requirement.

Comment

It is reassuring to see from the consultation response document that the Government has chosen to accept the view of the majority of respondents that the extension of time limits should not apply for corporation tax.   However the Government has chosen to ignore many of the responses pointing out the extended period of uncertainty the proposed changes will create for self-assessment, as finality will only be at 12 years instead of the current 4 years in cases without carelessness.

Extension of security deposit legislation

With effect from 6 April 2019 HMRC will have the power to make provision in regulations requiring a person to give a security in respect of construction industry scheme (CIS) deductions and for corporation tax due to HMRC, where HMRC considers it necessary for the protection of revenue. It will also make failure to provide a security when required to do so an offence, to be penalised by a fine.

Comment

Although this measure is only likely to affect a few taxpayers, it will be important to scrutinise the regulations when issued, to assess how widely the measure can be applied and to what extent the measure could impact insolvency cases.

While the consultation on extending security deposits ended on 8 June, there was also a consultation on tax abuse and insolvency (the consultation period for which ended on 20 June). The tax abuse and insolvency consultation (a stage 1 consultation concerned with setting objectives and identifying options for policy and not expected to be implemented before April 2020) proposed possible extensions to the right to transfer a liability and to the scope of joint and several liability in avoidance cases. As at 20 July there has been no response document published on this area. Our concerns with HMRC’s proposals for tax abuse and insolvency were that they were seeking to effectively restore their position as a preferential creditor in a liquidation.  We also had some concerns about the scope of those who could be caught within the definition of ‘tax avoidance’.  We await the response to this consultation with interest.

Profit fragmentation

With effect for any transfer of value on or after 1 April 2019 for Corporation Tax and 6 April 2019 for Income Tax and Class 4 National Insurance contributions, draft legislation proposes self-assessment counteraction of certain arrangements to divert profits from the UK.  This will apply where the following five conditions are met:

  1. There must be a transfer of value from the UK trader to an offshore entity – this could be a diversion of income to the offshore entity, or payment of expenses to the offshore entity;
  2. The effect of the arrangement must be that a significantly lower level of tax is paid on the profits than would be the case if they were correctly taxed in the UK in accordance with the current law (there is an 80% test to determine whether the tax paid overseas is significantly lower than that which would be paid in the UK);
  3. The proprietor of the business (sole trader or partner), or director and/or shareholder of a company must be able to enjoy the profits that have been diverted (this includes the ability to directly or indirectly control the application of the value transferred).  The scope of those who benefit that must be considered includes persons connected with the individual, with a specific definition of connection for this purpose;
  4. The UK person must have arranged for the profits to be diverted to the offshore entity;
  5. The diversion or payments mentioned in the first condition are not commensurate with the work undertaken by the offshore entity.

Where the first four conditions are met, there will be a requirement to notify HMRC, unless it is reasonable to conclude that transfer pricing, controlled foreign company or diverted profits tax rules would apply. Notification will be required on or before the time that the relevant person is required to submit their tax return for the relevant period.

Comment

The notification provisions will need to be given particular attention. The 80% test means that where the tax paid in the overseas jurisdiction is less than 80% of the tax that would be paid in the UK, this is regarded as a significantly lower level of tax.  This could be considered a stricter test than might apply for determining whether the arrangement has a main purpose of tax avoidance for the purposes of the DOTAS rules.  For those not subject to transfer pricing, the 80% test will operate regardless of whether an arms’ length arrangement is entered into.