The compliance and enforcement measures in the Autumn Budget are a ragbag of measures announced previously which have not quite made it yet onto the statute book and what look like a couple of instances of ‘sour grapes’ where HMRC has lost a case in the tribunal and so the government is legislating to ‘ensure the legislation functions as intended’. In contrast to previous Budgets, the ‘Red Book’ mentions ‘tax avoidance’ only four times and that is in relation to one (previously announced) further measure to clamp down on promoters of tax avoidance schemes.
However, HMRC will be given an additional £292m across three years for more resources to tackle the tax gap. As previously announced, it will also get £55m next year to continue to pursue those who have abused the government’s furlough and other covid-19 support schemes.
As expected, the government is going ahead with its new regime to require large businesses to notify HMRC where they have adopted an uncertain tax treatment. However, there will only be two criteria for treatment to be uncertain. These are that:
The measure was first announced in the March 2020 Budget and since then HMRC has been trying to get the proposals into something that is workable. There was considerable criticism that the test of uncertainty in the original proposals was too subjective because it required a business to decide whether a tax position was one that HMRC may challenge or was likely to challenge. The government delayed the introduction of the new rules from April 2021 to April 2022 to reconsider the proposals and a second consultation was issued in March 2021. This set out seven ‘triggers’ for uncertain tax treatment, including where the underlying transaction is novel, where the tax treatment differs from that in a previous return and where contradictory professional advice has been obtained. By the time draft legislation was published in July, the seven triggers had been reduced to three. The third trigger – where there is a substantial possibility that a tribunal or court would find the taxpayer’s position to be incorrect – appears to have been removed. However, this may only be temporary as the policy paper states that the government is committed to further consideration of this as a future third trigger.
The regime is controversial because, although there is an exemption where HMRC are already aware of the uncertain tax treatment adopted by the large business, the new rules will still result in added compliance costs for businesses which are already open and transparent with HMRC. The regime is intended to help in closing the legal interpretation tax gap, of which HMRC estimates £3.2bn for 2019/20 is attributable to large businesses. However, the amounts the regime is projected to raise are relatively modest with the highest projection being £35m in 2023/24. Although this is less than the £50m originally projected for 2023/24 (as adjusted for the delay in introducing the rules), so it seems businesses were wise to be concerned about the scope of the original proposals.
The government has acted quickly to neutralise the decision of the First-tier Tribunal in Vitol Aviation UK Ltd v HMRC [2021] UKFTT 353 (TC) which was only published a month ago. In that case, the FTT decided that it was not reasonable for HMRC to refuse to issue a closure notice because a diverted profits tax (DPT) review period was ongoing. The taxpayers did not agree with HMRC’s transfer pricing analysis but wanted HMRC to issue corporation tax closure notices so that they could be appealed, essentially meaning that when the dispute was resolved corporation tax would be payable rather than DPT, which given the rate differential (19% corporation tax versus 25% DPT on current rates) would be more favourable to the taxpayer.
The legislation currently provides that the taxpayer can amend their corporation tax return to make a transfer pricing adjustment during the first 12 months of the 15 month DPT review period and this will mean that the DPT liability is discharged. However, if the taxpayer amends the return themselves there is no right of appeal and so this only works for a group which is happy to settle its dispute on HMRC’s terms.
The change means that HMRC will not be able to close a corporation tax enquiry into profits subject to a DPT charge until after the DPT review period ends – and so they cannot be directed to do so by the FTT. The change came into force immediately on Budget day and applies to any application for a corporation tax closure notice made on or after 27 September 2021 (the date of the Vitol decision). This measure ensures that once a DPT review period is underway there remains a strong incentive for the taxpayer to make a transfer pricing adjustment and settle their dispute, rather than continuing to fight.
Another change is favourable to taxpayers and changes the time when the taxpayer can make a voluntary amendment to their corporation tax return from the first 12 months of the 15 month DPT review period to anytime in that period except the last 30 days.
Another provision to reverse a tax tribunal decision relates to the power to issue discovery assessments under TMA 1970 s 29 in relation to the high-income child benefit charge. In June in HMRC v Wilkes [2021] UKUT 150 (TCC), the Upper Tribunal decided that HMRC did not have the power to issue a discovery assessment where an individual had failed to report their liability to the high income child benefit charge to HMRC and failed to file a tax return.
Although HMRC is appealing the Wilkes decision to the Court of Appeal, the change ensures that whatever the outcome of the appeal, HMRC can use discovery assessments in relation to the high-income child benefit charge. The change also applies to clawbacks of gift aid where a donor has paid insufficient tax in a tax year to cover a donation and various tax charges in relation to pensions including unauthorised payment charges.
In a welcome measure, from budget day the deadline for UK residents and non-residents to report and pay CGT after selling UK residential property will increase from 30 days after the completion date to 60 days. This change was recommended by the Office of Tax Simplification which found that around a third of returns were being filed late because the time limit for filing the return and funding the tax was just too short.
Another set of changes which seem to have taken a long time to reach the statute book are yet more measures designed to target those who promote and market tax avoidance schemes. They were first announced in November 2020 and then consulted upon in March 2021 and included in the draft Finance Bill legislation published in July. The proposals are targeted at the ‘most persistent and determined promoters and enablers of tax avoidance’, who must surely be the only ones left in this market.
The changes include measures to allow HMRC to freeze a promoter’s assets where penalties have not been paid. One of the problems with UK measures has always been the concern that it is difficult to penalise offshore promoters. One of the measures is designed to partially address this issue by introducing a new penalty on UK entities that support offshore promoters. Another measure allows HMRC to present winding up petitions in relation to companies and partnerships involved in or associated with the promotion of tax avoidance that are operating against the public interest. HMRC will also get wider powers to name promoters, details of the way they promote tax avoidance, and the schemes they promote, at an earlier stage to deter taxpayers from getting involved and to help those who have used schemes.
New legislation is being introduced to tackle tax evasion by way of electronic sales suppression (ESS). This is the digital equivalent of having a separate set of books for HMRC – which is harder in the digital age. It involves deliberately manipulating electronic sales records to hide or reduce the value of individual transactions – either by using software deliberately created for tax evasion or regularly using ‘training mode’ on your till. There will be a new criminal offence of possession of, making, supplying or promoting ESS software or hardware.
There will also be new information powers which will allow HMRC to obtain details of those involved in the supply of ESS software and hardware and allow HMRC to obtain details of ESS software developers’ source code and the structure of data within an EPOS system. The measures have not been consulted upon but there was a call for evidence back in December 2018 for the government to find out more about the problem.
The complex basis period rules for income tax trading income are being reformed so that rather than being taxed on the profits of the accounting period ending in the tax year, traders are taxed on the profit or loss arising in the tax year itself, regardless of their accounting date. This removes the advantage for professional partnerships of choosing an accounting date of 30 April to get the maximum tax deferral. It will only affect those who do not draw up accounts to 5 April or 31 March.
The measure will be introduced with effect from the tax year 2024 to 2025, but there will be transitional rules. For businesses with higher profits in 2023 to 2024 due to the change in basis, the transitional period additional profits will be automatically spread over a period of five years, subject to an opt out. Further changes have also been made to the draft legislation previously published, but we will need to wait for the Finance Bill to be published to see exactly what has changed. The measure is estimated to bring forward £820m of tax revenue for 2024/25.
As announced in September, to align with the delays in the roll out of making tax digital the new regime of penalties for the late filing and late payment of tax for income tax self-assessment will now come into effect on 6 April 2024 for those taxpayers required to submit digital quarterly updates through making tax digital, and 6 April 2025 for all other ITSA taxpayers.
However, the new regime of penalties for VAT will come into effect for VAT taxpayers from periods starting on or after 1 April 2022. This is the regime which replaces the default surcharge rules with a points-based system for late submission and for late payment a penalty regime based on a percentage of the tax outstanding which looks more closely at how late the payment is and is meant to encourage engaging with HMRC regarding seeking time to pay.
One compliance announcement which was anticipated but did not materialise was a consultation on the replacement rules for the mandatory disclosure of tax avoidance schemes. Just before Brexit, the government changed the implementing regulations for the EU’s DAC 6 in order to restrict of the scope of the regime to the minimum required to meet its obligations under the Trade and Cooperation Agreement. It said it would consult on replacing them with a set of rules which meet the OECD’s model mandatory disclosure rules.
However, the Red Book (para 5.75) says that the government ‘will bring forward a further set of tax administration and maintenance announcements later in the autumn’. This suggests it may follow the procedure at the March budget of issuing some consultation documents separately to the budget documents. There may therefore be more to come.
The compliance and enforcement measures in the Autumn Budget are a ragbag of measures announced previously which have not quite made it yet onto the statute book and what look like a couple of instances of ‘sour grapes’ where HMRC has lost a case in the tribunal and so the government is legislating to ‘ensure the legislation functions as intended’. In contrast to previous Budgets, the ‘Red Book’ mentions ‘tax avoidance’ only four times and that is in relation to one (previously announced) further measure to clamp down on promoters of tax avoidance schemes.
However, HMRC will be given an additional £292m across three years for more resources to tackle the tax gap. As previously announced, it will also get £55m next year to continue to pursue those who have abused the government’s furlough and other covid-19 support schemes.
As expected, the government is going ahead with its new regime to require large businesses to notify HMRC where they have adopted an uncertain tax treatment. However, there will only be two criteria for treatment to be uncertain. These are that:
The measure was first announced in the March 2020 Budget and since then HMRC has been trying to get the proposals into something that is workable. There was considerable criticism that the test of uncertainty in the original proposals was too subjective because it required a business to decide whether a tax position was one that HMRC may challenge or was likely to challenge. The government delayed the introduction of the new rules from April 2021 to April 2022 to reconsider the proposals and a second consultation was issued in March 2021. This set out seven ‘triggers’ for uncertain tax treatment, including where the underlying transaction is novel, where the tax treatment differs from that in a previous return and where contradictory professional advice has been obtained. By the time draft legislation was published in July, the seven triggers had been reduced to three. The third trigger – where there is a substantial possibility that a tribunal or court would find the taxpayer’s position to be incorrect – appears to have been removed. However, this may only be temporary as the policy paper states that the government is committed to further consideration of this as a future third trigger.
The regime is controversial because, although there is an exemption where HMRC are already aware of the uncertain tax treatment adopted by the large business, the new rules will still result in added compliance costs for businesses which are already open and transparent with HMRC. The regime is intended to help in closing the legal interpretation tax gap, of which HMRC estimates £3.2bn for 2019/20 is attributable to large businesses. However, the amounts the regime is projected to raise are relatively modest with the highest projection being £35m in 2023/24. Although this is less than the £50m originally projected for 2023/24 (as adjusted for the delay in introducing the rules), so it seems businesses were wise to be concerned about the scope of the original proposals.
The government has acted quickly to neutralise the decision of the First-tier Tribunal in Vitol Aviation UK Ltd v HMRC [2021] UKFTT 353 (TC) which was only published a month ago. In that case, the FTT decided that it was not reasonable for HMRC to refuse to issue a closure notice because a diverted profits tax (DPT) review period was ongoing. The taxpayers did not agree with HMRC’s transfer pricing analysis but wanted HMRC to issue corporation tax closure notices so that they could be appealed, essentially meaning that when the dispute was resolved corporation tax would be payable rather than DPT, which given the rate differential (19% corporation tax versus 25% DPT on current rates) would be more favourable to the taxpayer.
The legislation currently provides that the taxpayer can amend their corporation tax return to make a transfer pricing adjustment during the first 12 months of the 15 month DPT review period and this will mean that the DPT liability is discharged. However, if the taxpayer amends the return themselves there is no right of appeal and so this only works for a group which is happy to settle its dispute on HMRC’s terms.
The change means that HMRC will not be able to close a corporation tax enquiry into profits subject to a DPT charge until after the DPT review period ends – and so they cannot be directed to do so by the FTT. The change came into force immediately on Budget day and applies to any application for a corporation tax closure notice made on or after 27 September 2021 (the date of the Vitol decision). This measure ensures that once a DPT review period is underway there remains a strong incentive for the taxpayer to make a transfer pricing adjustment and settle their dispute, rather than continuing to fight.
Another change is favourable to taxpayers and changes the time when the taxpayer can make a voluntary amendment to their corporation tax return from the first 12 months of the 15 month DPT review period to anytime in that period except the last 30 days.
Another provision to reverse a tax tribunal decision relates to the power to issue discovery assessments under TMA 1970 s 29 in relation to the high-income child benefit charge. In June in HMRC v Wilkes [2021] UKUT 150 (TCC), the Upper Tribunal decided that HMRC did not have the power to issue a discovery assessment where an individual had failed to report their liability to the high income child benefit charge to HMRC and failed to file a tax return.
Although HMRC is appealing the Wilkes decision to the Court of Appeal, the change ensures that whatever the outcome of the appeal, HMRC can use discovery assessments in relation to the high-income child benefit charge. The change also applies to clawbacks of gift aid where a donor has paid insufficient tax in a tax year to cover a donation and various tax charges in relation to pensions including unauthorised payment charges.
In a welcome measure, from budget day the deadline for UK residents and non-residents to report and pay CGT after selling UK residential property will increase from 30 days after the completion date to 60 days. This change was recommended by the Office of Tax Simplification which found that around a third of returns were being filed late because the time limit for filing the return and funding the tax was just too short.
Another set of changes which seem to have taken a long time to reach the statute book are yet more measures designed to target those who promote and market tax avoidance schemes. They were first announced in November 2020 and then consulted upon in March 2021 and included in the draft Finance Bill legislation published in July. The proposals are targeted at the ‘most persistent and determined promoters and enablers of tax avoidance’, who must surely be the only ones left in this market.
The changes include measures to allow HMRC to freeze a promoter’s assets where penalties have not been paid. One of the problems with UK measures has always been the concern that it is difficult to penalise offshore promoters. One of the measures is designed to partially address this issue by introducing a new penalty on UK entities that support offshore promoters. Another measure allows HMRC to present winding up petitions in relation to companies and partnerships involved in or associated with the promotion of tax avoidance that are operating against the public interest. HMRC will also get wider powers to name promoters, details of the way they promote tax avoidance, and the schemes they promote, at an earlier stage to deter taxpayers from getting involved and to help those who have used schemes.
New legislation is being introduced to tackle tax evasion by way of electronic sales suppression (ESS). This is the digital equivalent of having a separate set of books for HMRC – which is harder in the digital age. It involves deliberately manipulating electronic sales records to hide or reduce the value of individual transactions – either by using software deliberately created for tax evasion or regularly using ‘training mode’ on your till. There will be a new criminal offence of possession of, making, supplying or promoting ESS software or hardware.
There will also be new information powers which will allow HMRC to obtain details of those involved in the supply of ESS software and hardware and allow HMRC to obtain details of ESS software developers’ source code and the structure of data within an EPOS system. The measures have not been consulted upon but there was a call for evidence back in December 2018 for the government to find out more about the problem.
The complex basis period rules for income tax trading income are being reformed so that rather than being taxed on the profits of the accounting period ending in the tax year, traders are taxed on the profit or loss arising in the tax year itself, regardless of their accounting date. This removes the advantage for professional partnerships of choosing an accounting date of 30 April to get the maximum tax deferral. It will only affect those who do not draw up accounts to 5 April or 31 March.
The measure will be introduced with effect from the tax year 2024 to 2025, but there will be transitional rules. For businesses with higher profits in 2023 to 2024 due to the change in basis, the transitional period additional profits will be automatically spread over a period of five years, subject to an opt out. Further changes have also been made to the draft legislation previously published, but we will need to wait for the Finance Bill to be published to see exactly what has changed. The measure is estimated to bring forward £820m of tax revenue for 2024/25.
As announced in September, to align with the delays in the roll out of making tax digital the new regime of penalties for the late filing and late payment of tax for income tax self-assessment will now come into effect on 6 April 2024 for those taxpayers required to submit digital quarterly updates through making tax digital, and 6 April 2025 for all other ITSA taxpayers.
However, the new regime of penalties for VAT will come into effect for VAT taxpayers from periods starting on or after 1 April 2022. This is the regime which replaces the default surcharge rules with a points-based system for late submission and for late payment a penalty regime based on a percentage of the tax outstanding which looks more closely at how late the payment is and is meant to encourage engaging with HMRC regarding seeking time to pay.
One compliance announcement which was anticipated but did not materialise was a consultation on the replacement rules for the mandatory disclosure of tax avoidance schemes. Just before Brexit, the government changed the implementing regulations for the EU’s DAC 6 in order to restrict of the scope of the regime to the minimum required to meet its obligations under the Trade and Cooperation Agreement. It said it would consult on replacing them with a set of rules which meet the OECD’s model mandatory disclosure rules.
However, the Red Book (para 5.75) says that the government ‘will bring forward a further set of tax administration and maintenance announcements later in the autumn’. This suggests it may follow the procedure at the March budget of issuing some consultation documents separately to the budget documents. There may therefore be more to come.
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