How should tax policy for the City change post-Brexit?
‘There is clearly a real risk that banks could relocate London operations as a result of Brexit. This won’t just be about tax, but ending the fiscal punishment of the banks might remove a further incentive to scarper. There were signs of the government relenting with the prospective changes to the calculation of the bank levy but the quid pro quo was the bank surcharge, and the screws were tightened again with the latest corporate loss reform proposals. HMRC’s failure to engage with concerns about the interest barrier will not have helped.
‘Banks aside, the UK is a relatively low tax environment for corporates with broadly sensible exemptions for UK holding companies, especially when the proposed changes to the substantial shareholdings exemption are taken into account. Even though the UK tax code is too complex and unwieldy (admittedly not a bad thing for our business), and despite the fact that the evangelical fervour with which the UK has embraced BEPS is unlikely to have endeared it to the taxpaying community, my sense is this is not a real deterrent. London-based and paying tax at only 17% by 2020 is a pretty attractive proposition.’ Helen Lethaby, partner at Freshfields Bruckhaus Deringer
If you could make one change to tax law or practice, what would it be?
‘I would remove the limitation on the First-tier Tax Tribunal’s jurisdiction, so that it has a supervisory, as well as an appellate jurisdiction. I have always found it difficult to understand how the FTT’s overriding objective ‘to deal with cases fairly and justly’ sits with the inability of the FTT to entertain appeals relating to public law matters, such as fairness and legitimate expectation. This goes against the idea that the FTT is accessible to all, and it creates an obstacle for taxpayers wishing to challenge HMRC’s behaviour but who may not have the means to pursue judicial review proceedings.’ Charlotte Brown, barrister and founder of Northgate Tax Chambers
‘I would ask HMRC to bring back the post transaction valuation check (PTVC). The PTVC enabled taxpayers to determine their exposure to income tax (and NICs) under the employment-related securities legislation. If a company cannot use tax favoured equity incentives due to its structure, then any non-tax favoured incentives need some form of valuation, which can be provided by an external valuer but does not have the certainty of the PTVC.’ Ann Casey, head of incentives at Taylor Wessing
Is there a recent case that has caught your eye?
‘The recent Glencore Energy UK Ltd case relating to the diverted profits tax. The case itself is on a narrow procedural point, but looking at the background facts, it suggests that HMRC considers the diverted profits tax to be a real weapon, and not merely a deterrent, even where the issue seems to be a fairly straightforward transfer pricing dispute. I hadn’t expected that, nor had I anticipated the type of taxpayers against whom it would initially be used.’ Jeremy Cape, partner at Squire Patton Boggs
‘The recent Upper Tribunal decision in Coal Staff Superannuation Scheme Trustees v HMRC [2017] UKUT 137. The case is particularly topical as it involves the question of how to manage on-going access to the CJEU in the light of Brexit. The underlying tax issue was the application of EU law, in particular the freedom of movement of capital, to the manufactured overseas dividend regime. The FTT had decided that freedom of movement of capital was not engaged, and even if it were, the regime would be justified. The taxpayer was thus appealing to the UT. In essence, and for a number of reasons (practical and legal), the UT was urged to make a reference immediately (and before hearing the substantive appeal from the FTT) since access to the CJEU might well become impossible if the case needed to be referred after the substantive hearing. The UT was not prepared to take this step. Whilst acknowledging that future access to the CJEU was at best uncertain, this did not justify a pre-emptive reference; it was still necessary to address the question of whether a reference would involve a question of ‘general importance’ where a ruling would be likely to ‘promote the uniform application of law throughout the EU’ (the Court of Appeal’s Trinity Mirror Plc test). The UT did not consider it possible to address this absence a substantive hearing.’ Mark Whitehouse, joint head of tax litigation at PwC Legal
The non-dom provisions were dropped from the Finance Bill. What are you advising clients?
‘Some clients have, of course, already acted in advance of 5 April. To them, the message is generally: “Don’t worry, let’s just see what happens. There is a good chance the legislation will still be implemented as proposed.” Clearly, though, those clients may already be assessing the consequences of the actions they have taken moving forward, and considering Hastings-Bass applications and the like, or even judicial review. There are others who have not yet acted; for example, the disposal of offshore assets, which have putatively been rebased on 5 April, on becoming deemed domiciled under the proposed new rules. For these clients, the safe advice is obviously, if at all possible commercially, to wait until there is some certainty when the proposed new rules have been implemented.’ Rosamond McDowell, partner at Payne Hicks Beach
On hybrids: is there a better way of combating the ‘mischief’ at which the rules are aimed?
‘I’m not sure there is a worse way. Many corporates are wondering if the hybrid rules apply to their external debt. On any sane view it shouldn’t. But the broadness of the ‘related party’ test means that one often can’t say for sure without a complete picture of their shareholders, bondholders, and the relationship between them. For many large businesses you will only get that picture if you have a psychic on your payroll. That puts me in the worst possible position for an adviser: I have to tell clients there’s an obscure technical problem which they weren’t previously aware of, with potentially dire consequences, and for which I have no practical solution. It is unclear to me how that’s in the interests of UK plc.
There’s a more general point about the modern style of related party test – it seems to me to deliberately create complexity and uncertainty in a rather paranoid attempt to catch all potential taxpayer tricks. It would be preferable to have a simple test focused on ‘real’ parent/subsidiary relationships, with special rules for particular cases of concern (e.g. partnerships) and a TAAR to prevent naughtiness.’ Dan Neidle, partner at Clifford Chance
Are there any proposed tax measures that are of particular concern?
‘The government has, fortunately, recognised that the disguised remuneration close companies’ gateway proposal remains insufficiently targeted at disguised remuneration schemes, despite the addition of the close company ‘relevant transaction’ filter alongside the ‘excluded transaction’ exemption in the draft of the Finance Bill released last year. It is probably unrealistic to hope that the proposal will be scrapped altogether, so I welcomed the announcement, at Budget, to delay the implementation of this measure until April 2018. It remains to be seen whether further consultation on the targeting of this measure, which is expected later this year, will better exclude arrangements from scope which do not intend to incentivise employees or directors and which are entered into for purely commercial reasons.’ Simon Skinner, head of tax at Travers Smith
What can the government do to make the public realise that increasing expenditure on public services requires increased taxes for everyone?
‘The absence of a direct linkage between public expenditure and taxation could be remedied by greater use of hypothecated taxes. In 2002, the Labour government announced an increase in NICs to pay the UK’s biggest ever increase in health spending. It was accused of breaking a manifesto pledge not to increase income tax, but the measure appeared to enjoy public support and the Labour party went on to win the next election. Hypothecated taxation promotes transparency. It could be used to provide additional funding for increased spending on the NHS and care for the elderly.’ Sam Mitha CBE, former head of HMRC’s Central Tax Policy Group
On US tax reform: how will the deemed repatriation of corporate offshore earnings work?
‘Most observers expect that any such legislation will generally provide that prior years’ unrepatriated offshore earnings will be subject to a one-time immediate ‘deemed repatriation’ tax (the blueprint would generally impose an 8.75% rate), which would be imposed whether or not the earnings are actually repatriated. The treatment of future offshore earnings remains uncertain, but the blueprint would generally exempt active business foreign earnings from US tax. Moving to a territorial system for future offshore earnings would be significant, but more profound changes would arise from the enactment of the destination based corporate tax, which would (in theory) make the location of production irrelevant in determining the tax liability of a US business group; for example, goods sold to non-US customers would not be subject to US tax, irrespective of whether they were produced in the US and exported, or were produced by a non-US affiliate of the group.’ Donald V Moorehead, senior tax partner in the Washington DC office of Squire Patton Boggs
What’s your view on the outsourcing of tax work?
‘There’s lots in the press on this at the moment and I’m afraid much of it is poorly drafted and incorrect. Outsourcing some routine processes can sometimes be beneficial, but every large corporate should have an in-house tax resource, fullstop. CFOs would not be able to manage SAO and risk without this and implementation of tax advice simply wouldn’t happen properly. It’s dangerous to outsource tax completely, it’s usually not cost effective, and the CFO can become removed from understanding the tax impact of transactions. The optimum structure is very clearly to have an in-house tax team with some excellent advisers that can be called upon when required.’ Lee Holloway, group head of tax at Next Plc
How do you think the tax profession has been affected by recent coverage of tax disputes?
‘The image of the profession has undeniably been tarnished by the actions of a fringe of promoters, individuals and corporates who have behaved in a way that was out of step with the public mood. To a degree, this was an inevitable consequence of the lack of effective regulation of the tax industry (not all of which fits the term profession). The profession needs to regain public trust by leading the debate on proper standards of practice and professional regulation. If the profession does not seize this challenge we are in danger of seeing a slide where not only the boundary of tax evasion and tax avoidance is further blurred, but there are increased attempts by HMRC to paint differences of interpretation as boundary pushing, depicted as a subset of tax avoidance, to create an environment wherein the court of public opinion dissuades taxpayers from exercising their rights and undermining our democratic legal process.’ Nick Skerrett, head of the contentious tax practice, Simmons & Simmons
How should tax policy for the City change post-Brexit?
‘There is clearly a real risk that banks could relocate London operations as a result of Brexit. This won’t just be about tax, but ending the fiscal punishment of the banks might remove a further incentive to scarper. There were signs of the government relenting with the prospective changes to the calculation of the bank levy but the quid pro quo was the bank surcharge, and the screws were tightened again with the latest corporate loss reform proposals. HMRC’s failure to engage with concerns about the interest barrier will not have helped.
‘Banks aside, the UK is a relatively low tax environment for corporates with broadly sensible exemptions for UK holding companies, especially when the proposed changes to the substantial shareholdings exemption are taken into account. Even though the UK tax code is too complex and unwieldy (admittedly not a bad thing for our business), and despite the fact that the evangelical fervour with which the UK has embraced BEPS is unlikely to have endeared it to the taxpaying community, my sense is this is not a real deterrent. London-based and paying tax at only 17% by 2020 is a pretty attractive proposition.’ Helen Lethaby, partner at Freshfields Bruckhaus Deringer
If you could make one change to tax law or practice, what would it be?
‘I would remove the limitation on the First-tier Tax Tribunal’s jurisdiction, so that it has a supervisory, as well as an appellate jurisdiction. I have always found it difficult to understand how the FTT’s overriding objective ‘to deal with cases fairly and justly’ sits with the inability of the FTT to entertain appeals relating to public law matters, such as fairness and legitimate expectation. This goes against the idea that the FTT is accessible to all, and it creates an obstacle for taxpayers wishing to challenge HMRC’s behaviour but who may not have the means to pursue judicial review proceedings.’ Charlotte Brown, barrister and founder of Northgate Tax Chambers
‘I would ask HMRC to bring back the post transaction valuation check (PTVC). The PTVC enabled taxpayers to determine their exposure to income tax (and NICs) under the employment-related securities legislation. If a company cannot use tax favoured equity incentives due to its structure, then any non-tax favoured incentives need some form of valuation, which can be provided by an external valuer but does not have the certainty of the PTVC.’ Ann Casey, head of incentives at Taylor Wessing
Is there a recent case that has caught your eye?
‘The recent Glencore Energy UK Ltd case relating to the diverted profits tax. The case itself is on a narrow procedural point, but looking at the background facts, it suggests that HMRC considers the diverted profits tax to be a real weapon, and not merely a deterrent, even where the issue seems to be a fairly straightforward transfer pricing dispute. I hadn’t expected that, nor had I anticipated the type of taxpayers against whom it would initially be used.’ Jeremy Cape, partner at Squire Patton Boggs
‘The recent Upper Tribunal decision in Coal Staff Superannuation Scheme Trustees v HMRC [2017] UKUT 137. The case is particularly topical as it involves the question of how to manage on-going access to the CJEU in the light of Brexit. The underlying tax issue was the application of EU law, in particular the freedom of movement of capital, to the manufactured overseas dividend regime. The FTT had decided that freedom of movement of capital was not engaged, and even if it were, the regime would be justified. The taxpayer was thus appealing to the UT. In essence, and for a number of reasons (practical and legal), the UT was urged to make a reference immediately (and before hearing the substantive appeal from the FTT) since access to the CJEU might well become impossible if the case needed to be referred after the substantive hearing. The UT was not prepared to take this step. Whilst acknowledging that future access to the CJEU was at best uncertain, this did not justify a pre-emptive reference; it was still necessary to address the question of whether a reference would involve a question of ‘general importance’ where a ruling would be likely to ‘promote the uniform application of law throughout the EU’ (the Court of Appeal’s Trinity Mirror Plc test). The UT did not consider it possible to address this absence a substantive hearing.’ Mark Whitehouse, joint head of tax litigation at PwC Legal
The non-dom provisions were dropped from the Finance Bill. What are you advising clients?
‘Some clients have, of course, already acted in advance of 5 April. To them, the message is generally: “Don’t worry, let’s just see what happens. There is a good chance the legislation will still be implemented as proposed.” Clearly, though, those clients may already be assessing the consequences of the actions they have taken moving forward, and considering Hastings-Bass applications and the like, or even judicial review. There are others who have not yet acted; for example, the disposal of offshore assets, which have putatively been rebased on 5 April, on becoming deemed domiciled under the proposed new rules. For these clients, the safe advice is obviously, if at all possible commercially, to wait until there is some certainty when the proposed new rules have been implemented.’ Rosamond McDowell, partner at Payne Hicks Beach
On hybrids: is there a better way of combating the ‘mischief’ at which the rules are aimed?
‘I’m not sure there is a worse way. Many corporates are wondering if the hybrid rules apply to their external debt. On any sane view it shouldn’t. But the broadness of the ‘related party’ test means that one often can’t say for sure without a complete picture of their shareholders, bondholders, and the relationship between them. For many large businesses you will only get that picture if you have a psychic on your payroll. That puts me in the worst possible position for an adviser: I have to tell clients there’s an obscure technical problem which they weren’t previously aware of, with potentially dire consequences, and for which I have no practical solution. It is unclear to me how that’s in the interests of UK plc.
There’s a more general point about the modern style of related party test – it seems to me to deliberately create complexity and uncertainty in a rather paranoid attempt to catch all potential taxpayer tricks. It would be preferable to have a simple test focused on ‘real’ parent/subsidiary relationships, with special rules for particular cases of concern (e.g. partnerships) and a TAAR to prevent naughtiness.’ Dan Neidle, partner at Clifford Chance
Are there any proposed tax measures that are of particular concern?
‘The government has, fortunately, recognised that the disguised remuneration close companies’ gateway proposal remains insufficiently targeted at disguised remuneration schemes, despite the addition of the close company ‘relevant transaction’ filter alongside the ‘excluded transaction’ exemption in the draft of the Finance Bill released last year. It is probably unrealistic to hope that the proposal will be scrapped altogether, so I welcomed the announcement, at Budget, to delay the implementation of this measure until April 2018. It remains to be seen whether further consultation on the targeting of this measure, which is expected later this year, will better exclude arrangements from scope which do not intend to incentivise employees or directors and which are entered into for purely commercial reasons.’ Simon Skinner, head of tax at Travers Smith
What can the government do to make the public realise that increasing expenditure on public services requires increased taxes for everyone?
‘The absence of a direct linkage between public expenditure and taxation could be remedied by greater use of hypothecated taxes. In 2002, the Labour government announced an increase in NICs to pay the UK’s biggest ever increase in health spending. It was accused of breaking a manifesto pledge not to increase income tax, but the measure appeared to enjoy public support and the Labour party went on to win the next election. Hypothecated taxation promotes transparency. It could be used to provide additional funding for increased spending on the NHS and care for the elderly.’ Sam Mitha CBE, former head of HMRC’s Central Tax Policy Group
On US tax reform: how will the deemed repatriation of corporate offshore earnings work?
‘Most observers expect that any such legislation will generally provide that prior years’ unrepatriated offshore earnings will be subject to a one-time immediate ‘deemed repatriation’ tax (the blueprint would generally impose an 8.75% rate), which would be imposed whether or not the earnings are actually repatriated. The treatment of future offshore earnings remains uncertain, but the blueprint would generally exempt active business foreign earnings from US tax. Moving to a territorial system for future offshore earnings would be significant, but more profound changes would arise from the enactment of the destination based corporate tax, which would (in theory) make the location of production irrelevant in determining the tax liability of a US business group; for example, goods sold to non-US customers would not be subject to US tax, irrespective of whether they were produced in the US and exported, or were produced by a non-US affiliate of the group.’ Donald V Moorehead, senior tax partner in the Washington DC office of Squire Patton Boggs
What’s your view on the outsourcing of tax work?
‘There’s lots in the press on this at the moment and I’m afraid much of it is poorly drafted and incorrect. Outsourcing some routine processes can sometimes be beneficial, but every large corporate should have an in-house tax resource, fullstop. CFOs would not be able to manage SAO and risk without this and implementation of tax advice simply wouldn’t happen properly. It’s dangerous to outsource tax completely, it’s usually not cost effective, and the CFO can become removed from understanding the tax impact of transactions. The optimum structure is very clearly to have an in-house tax team with some excellent advisers that can be called upon when required.’ Lee Holloway, group head of tax at Next Plc
How do you think the tax profession has been affected by recent coverage of tax disputes?
‘The image of the profession has undeniably been tarnished by the actions of a fringe of promoters, individuals and corporates who have behaved in a way that was out of step with the public mood. To a degree, this was an inevitable consequence of the lack of effective regulation of the tax industry (not all of which fits the term profession). The profession needs to regain public trust by leading the debate on proper standards of practice and professional regulation. If the profession does not seize this challenge we are in danger of seeing a slide where not only the boundary of tax evasion and tax avoidance is further blurred, but there are increased attempts by HMRC to paint differences of interpretation as boundary pushing, depicted as a subset of tax avoidance, to create an environment wherein the court of public opinion dissuades taxpayers from exercising their rights and undermining our democratic legal process.’ Nick Skerrett, head of the contentious tax practice, Simmons & Simmons
