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Views on the Autumn Statement

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Enforcement and compliance issues

The message from HMRC looks to be very much ‘no more Mr Nice Guy’, writes James Bullock

The signs were that something big was coming in relation to tax avoidance, notably the number of initiatives that have been announced in recent weeks as being funded from a ‘clampdown on tax avoidance’. This was the ‘signature’ announcement of the Autumn Statement insofar as enforcement and compliance are concerned.

The backdrop is a comprehensive ‘audit’ which estimates that there are 65,000 live avoidance cases awaiting resolution. This is a significant uplift from the previous estimate of 41,000, but it is understood to be a much harder figure. We do not know how much revenue is tied up in these cases but it is presumably very significant.

One of the enticements to taking part in a tax avoidance scheme is the cashflow benefit that such schemes bring. Even if the scheme is found ultimately to fail, a taxpayer undertaking a scheme can (and could until recently even for PAYE and NIC) generally secure the benefit of holding the tax whilst the dispute is determined. With ‘marketed’ schemes the deal was even better, as generally only one taxpayer is litigated – and it is open to so-called ‘follower’ taxpayers to argue that their fact patterns are different – and therefore they have to sit and wait until HMRC gets around to them.

HMRC is now acting to put an end to this particular party. January 2014 will see a comprehensive proposal document with some draft legislation introducing two significant enforcement measures. It is expected that the final proposals will be included in the 2014 Finance Bill.

Follower penalties: Where an avoidance case has been decided in favour of HMRC, it will be open to HMRC to write to all participants in the relevant scheme, inviting them to amend their self-assessments in line with the lead decision and to pay the tax. They will be given a time period in which to take advice and to operate the mechanics. If they fail to do so, their case will be taken to litigation – and if they also lose on determination of their case, HMRC will have the power to impose a penalty (in addition to the tax and interest) on the grounds that they failed to amend their return when given an opportunity to do so.

Pay now’ notices: It will also be open to HMRC at the same time as in (1) to require the participant to pay the tax immediately in accordance with the decided case, even if the participant wishes to continue with litigation and run the risk of a follower penalty. This will have the effect of removing the ‘cash flow advantage’ referred to above.

There are no apparent proposals to accompany this with a more flexible approach to ‘deals’ under the litigation and settlement strategy – and it must accordingly be assumed that this is not on HMRC’s agenda. HMRC is clearly relying on a ‘big stick’ approach. The further details to be published in January will make interesting reading and will hopefully answer some of the myriad of questions which come to mind about how this will operate in practice. One immediate thought is that this could ultimately be extended to all future cases where HMRC alleges tax avoidance, with the practical effect that the disputed tax has to be paid ‘upfront’.

There will also be a ‘Counter-avoidance Directorate’. This will bring together the Anti-avoidance Group with elements of Specialist Investigations and Local Compliance. The focus will be on anti-avoidance policy and on marketed avoidance in particular. It is understood that avoidance by large businesses will continue to be dealt with by the Large Business Service – and avoidance by the very wealthy will continue to be handled by the HNW Unit. But it demonstrates wider focus and a concentration of ‘firepower’ on avoidance. Along with a new information disclosure and penalty regime for high risk promoters of avoidance schemes – with an obligation on the part of clients to identify themselves – the message from HMRC looks to be very much ‘no more Mr Nice Guy’. 

The impact on MNCs

As has now become customary, the chancellor’s statement was an amalgam of new measures and previously trailed changes, writes Tony Beare

Perhaps the most welcome development is the proposal to restrict the rules which limit the carrying forward of losses on a change of ownership. After much lobbying, these rules are to be amended in 2014 in two important respects.

First, the insertion of a new holding company on top of an existing group (a purely technical change of ownership) will no longer constitute a change of ownership. Second, a significant increase in capital (which is capable of triggering the application of the rules in the case of investment companies) will now require an increase of both £1m and 25%.

The proposal to introduce regulations providing certainty to insurers in relation to Solvency II – compliant instruments in advance of agreement to Solvency II is of a similar ilk. In the past year, draft regulations designed to facilitate regulatory capital issues by banks have been produced and this proposal should put insurers in a comparable position.

Following the general review of the partnership rules announced earlier this year, two changes were announced in relation to partnerships and LLPs comprising both individuals and non-individuals. The first change will apply to increase an individual partner’s profit share, where excess profits are allocated to a non-individual partner and the individual partner has the power to enjoy those profits or those profits represent deferred remuneration.

The second change precludes an individual partner from claiming relief for a trading loss where the loss arises in connection with arrangements which have securing that loss as their main purpose or one of their main purposes.

The chancellor also announced two anti-avoidance measures in relation to double tax relief. The first change is designed to prevent the ‘cross-crediting’ of foreign taxes borne on non-trading profits, by applying the existing limit on the availability of relief (the UK corporation tax payable on the profits in question) to each non-trading credit to which the foreign tax relates, instead of the entire pool of non-trading profits. The second change extends the existing rules on refunded foreign taxes to provide that double tax relief is to be reduced not only where the refund is made to the claimant or someone connected with the claimant, but also where the refund is made to any other person ‘directly or indirectly in consequence of a scheme that is being entered into’. This appears to be unduly broad. One might have expected the relevant provision to contain a motive test.

The property sector is unlikely to be pleased with the chancellor’s proposals. Along with changes to the private residence exemption, from April 2015 a capital gains tax charge is to be introduced on disposals of UK residential property by non-UK residents. It remains to be seen whether this regime will be extended to commercial property in due course. It is certainly something of an anomaly that the UK has not hitherto sought to cash in on its valuable real estate.

The private client perspective

This was an Autumn Statement for ‘hard working people’, except those on high incomes, writes Peter Vaines

Well, goodness me – the sun is shining and Mr Osborne is out there fixing the roof. Although by the sound of it, nothing needed fixing. Growth is shooting up unexpectedly and better than practically everywhere else in the world; employment is at an all-time high, the deficit will be gone soon and we will be surplus by 2018.

Can it really be that good? Apparently, the Office of Budget Responsibility says that this is part of the cyclical improvement. Perhaps this means that everything is much better because we have all got on our bike.

Mr Osborne made it clear that he has done so well that he is now able to benefit all hard working people. Well, not all hard working people. Hard working people with high incomes get absolutely nothing.

The chancellor tells us that the top 1% of earners now pay 30% of the tax, so you would think that he might at least be polite. If I had a business where 30% of my income came from 1% of my customers, I think I would be really nice to them. Funny that the Treasury does not see it that way.

There was not very much to get excited about on the private client front although, as widely predicted, capital gains tax is being extended to non-residents to a limited extent. It is proposed that from April 2015, future capital gains on UK residential property in the hands of non-residents will be chargeable to capital gains tax. There is no indication of which non-residents will be affected; individuals and trusts, I expect, because they have already done companies. Whether this refers to gains realised after April 2015 or to increases in value from that date is not clear – and whether there is a £2m threshold (and reliefs for let property) like there is for the ATED and SDLT is not known – but they will be telling us soon. The BBC described this as the ‘oligarchs’ tax’, but I am not sure how many oligarchs would find anything suitable in central London for £2m.

From 2015, there will be a transferable married couple’s allowance of £1,000 but only for those paying tax at the basic rate. I understand that Mr Cameron considers marriage to be a very good thing that needs to be encouraged, but apparently not if you are a higher rate taxpayer.

For some reason, the principal private residence exemption has found its way onto the chancellor’s list of priorities and in particular the continuation of the relief for the last 36 months of ownership after you have moved out – giving a period of grace to sell the property without a charge to capital gains tax. From April 2014, this period is being reduced to only 18 months. I was not aware that this was a matter of any great concern in the corridors of power, but you live and learn.

The hostility towards tax schemes hots up still further, which is entirely understandable, but there is an increasing danger that ordinary and innocent transactions will get caught up in all this as collateral damage. That will be of real concern to those who regard the rule of law as a good thing.

Roll on next March, when I am sure Mr Osborne will have even better news.

The impact on SMEs

Every little helps, writes David Whiscombe

While there is nothing in the Statement to send SMEs into frenzies of delight, there is nothing (in most cases, and with one notable exception) to cause paroxysms of despair either; and a few things which may help out a little. Employers’ NIC is abolished (from April 2015) for workers under 21; but I do wonder, in the light of recent publicity about the poor educational standards of the young, if that will be enough to bribe employers to take on younger workers.

Modest increases in the limits for SIPs and SAYE share schemes (from April 2014) marginally improve the attractiveness of these schemes but are not game-changing, though altruistic SME owners with no younger generation to inherit the business may find some attraction in the three new tax reliefs designed to encourage indirect employee ownership through the medium of employee ownership trusts.

The package of changes to business rates will be especially welcomed by beleaguered high street traders. These include the discount of £1,000 for small retail and catering premises; the 50% re-occupation relief for businesses moving into retail premises which have been vacant for a year or more; and the extension of small business rates relief to qualifying businesses taking on an additional property.

The welcome conclusion of the consultation on close company ‘loans to participators’ is that none of the proposed changes will be adopted in the immediate future. On the other hand, the outcome of the consultation on the taxation of partnerships will be unwelcome: the scope of the draft legislation is unclear but potentially seems to go further than was foreshadowed in the consultative document, extending not only to ‘mixed partnerships’ as expected, but also in some cases to pure ‘corporate partnerships’. Certain aspects of the changes take immediate effect. These changes are bound to affect not only the many professional firms which have introduced companies into their partnership structures, but – perhaps more importantly for the yield to the UK exchequer – a large number of small but highly profitable financial trading and dealing businesses which will now be seriously considering relocating away from London.

Interestingly, the documents issued at the time of the Statement do not seem to refer to the separate proposal in the consultative document to treat certain members of LLPs as if they were employees. It would be too much to hope that that proposal (actually a comparatively sensible one) has been dropped; one assumes that further detail will follow.

The crackdown on avoidance and deferral continues apace. First, a taxpayer who declines to accept that he is bound by the outcome of a ‘test case’ and litigates independently will be at risk of a penalty should he, too, lose; and, flushed with success in the Cotter case ([2013] UKSC 69), the ‘pay now, litigate later’ mantra of HMRC is to be backed by law in avoidance cases. Finally, hot on the heels of its FTT success in Boyle on ‘offshore contractors’, HMRC will be strengthening existing legislation dealing with employment via ‘offshore intermediaries’ (essentially agencies) from April 2014.

Economic view

The chancellor charts a prudent course, writes John Hawksworth

There was plenty of good news in the Autumn Statement, but it all came with heavy caveats attached from the both the chancellor and the Office for Budget Responsibility (OBR).

As expected, the OBR has raised its UK growth forecasts to 1.4% this year and 2.4% next year (see table above), exactly in line with our own projections published last month. But this upgrade is almost entirely due to stronger consumer spending, buoyed by the recent bounce in house prices. In contrast, business investment growth and net exports were revised down in both years compared to the OBR’s March forecasts.

Eventually, the OBR does expect a strong business investment recovery to come through, but not until 2015 and beyond. Meanwhile, continued sluggish growth in the Eurozone remains a drag on our export performance, so we have to rely on domestic demand to drive the recovery.

Notably, the OBR has not increased its estimates of underlying productivity growth at all. It clearly regards recent good news as a short-term cyclical improvement on the consumer demand side that has the effect of using up the spare capacity in the economy faster than expected, rather than implying higher potential output in the long run. The OBR now expects all that spare capacity to be used up by early 2019, two years earlier than it projected back in March.

The OBR has also revised down its estimates of real earnings growth in future years, although this will help to keep employment growing at a healthy rate. As a result, it expects unemployment to come down to the Monetary Policy Committee’s 7% threshold in 2015, suggesting that this may also be the year when official interest rates start to edge up from current record lows.

Headline public borrowing figures are significantly lower than expected in March, with the undershoot increasing from around £9bn this year to around £20bn by 2017/18 (see table). This is largely due to higher projected growth in tax receipts, notably VAT because of stronger consumer spending and stamp duty due to the recent revival in the housing market.

Public spending plans have been fine-tuned but not altered significantly from what was announced in the June Spending Review, although the chancellor made clear his intention to keep bearing down on welfare spending (excluding state pensions) in the medium term.

Critically, however, the OBR judges that this lower path for headline borrowing is a purely cyclical improvement. In fact, the estimated structural budget deficit is projected to be marginally higher than in the OBR’s March projections throughout the forecast period, although it still returns to a small surplus by 2017/18, as required by the government’s fiscal mandate.

The lack of any structural improvement in the economy or the public finances supports the chancellor’s decision to deliver a fiscally neutral package. There were giveaways in areas such as fuel duty, the transferable marriage allowance, small business rates, youth training and energy bills, but these were almost exactly offset by reductions in some departmental spending limits, an increased bank levy and a range of measures aimed at reducing tax avoidance and fraud.

The net impact on the economy will probably be minimal, but the giveaways were focused on helping working households whose average real wages have declined for the past five years, with the extra burdens being borne mostly by banks and other large companies. Small businesses should welcome the limit on rate increases and the help with employers’ national insurance for young workers.

In summary, this was a prudent package based on the view that recent economic improvements may not be sustainable in the long run. The real challenge will be to boost longer term productivity growth, not just short term consumer spending. The chancellor recognised this fact in his longer term plans for infrastructure and skills development, but these will take decades rather than years to deliver.