Not all tax announcements are made in the Budget. The government now publishes many longer term and administrative proposals several weeks later and on 30 November 2021 it released a large batch of documents on changes to the UK tax system.
While many of the documents and proposals are at an early stage, if you are interested in how much tax you pay, when you have to pay it and how much paperwork HMRC requires you to provide, then it is worth reviewing the key updates below.
UK Transfer pricing documentation – changes following consultation
Following its recent public consultation on transfer pricing documentation, the UK government has announced that it intends to introduce legislation for a requirement for the largest companies (those meeting the requirement for Country-by-country Reporting) to maintain, and provide on request, master file and local file documentation. It is the first time that TP documentation in a prescribed format (ie following the OECD Transfer Pricing guidance) will be legally mandatory for the UK.
Master and local files
The government also specifically acknowledges that the master file and local file approach is representative of ‘best practice’ transfer pricing documentation, and it intends to encourage all taxpayers which are required to apply transfer pricing to take this approach to documentation. The only conclusion to be drawn from this is that the OECD format of TP documentation should be seen as best practice for all but in a narrow set of circumstances.
Where HMRC requests them, the new UK approach will allow a 30-day timescale for the provision of master files and local files which the government expects ‘would be required to be prepared routinely in support of customers’ filed transfer pricing positions’. Clearly, one reason for this is to encourage taxpayers to prepare and maintain suitable documentation contemporaneously.
In a very welcome response to comments raised in the consultation, the government intends to introduce a ‘reporting threshold’ to exclude international related party transactions that are immaterial. It will publish ‘clear guidance’ on this point, with ‘practical examples as well as key principles to help guide customers in borderline cases’. In all but those cases where ‘there is a material UK tax risk’ it will not be necessary to include UK:UK transactions in the master and local files. It follows that, where a taxpayer self-assesses that all of its international related party transactions are immaterial, it will not be required to complete a local file or make an annual declaration. However, in such cases, it will be expected ‘to keep a record of any analysis undertaken to support that self-assessed position, and to provide that analysis upon request within the same 30-day timescale as for documentation’. This is a simplification measure that lightens the compliance burden of very many taxpayers.
Related party transactions/dealings reporting
The government will not implement, or consult further, on the introduction of an ‘International Dealings Schedule’ (IDS) at the present time, but it will keep the issue under review “in view of the potential benefits to both HMRC and customers”. Any future consultation will focus on ‘how the right balance can be achieved, between costs and administrative burdens for customers and the benefits in terms of improved compliance’. The prospect of an IDS has clearly not gone away, and we think that it is sensible to assume that something of this nature will find its way into UK law at some point in the not-too-distant future. Therefore, it will continue to be a factor that businesses will need to consider when upgrading their existing reporting systems.
Simpler evidence logging
The government has also decided not to include a requirement for a detailed evidence log in UK local files as originally proposed, but it does intend to include a more limited requirement in the form of a ‘Summary Audit Trail’ (SAT). This new legislative requirement will be accompanied by supporting guidance.
It is expected that the SAT will be a short, concise document summarising the work already undertaken by the taxpayer in arriving at the conclusions in its transfer pricing documentation. The SAT is intended to:
- Encourage businesses to ‘undertake sufficient work to support transfer pricing policies’, and
- Enable HMRC to ‘undertake high level quality assurance on the transfer pricing documentation’ with a view to providing ‘better focus on higher risk areas during enquiries’.
The introduction of the SAT reflects the overall direction of travel of HMRC’s compliance strategy already seen in UK reporting obligations such as the Senior Accounting Officer rules. It is clear the SAT will draw upon lessons learnt from the operation of the Profit Diversion Compliance Facility and is designed to encourage more thorough risk assessment. We will wait with interest to see what the legislation says!
MTD for corporation tax - much work to be done
HMRC’s first Making Tax Digital (MTD) for Corporation Tax (CT) consultation received considerable public input, and it is clear from HMRC’s commentary on the responses that there are still quite a few areas under discussion. We do appreciate HMRC’s statement and commitment to work with stakeholders to get this right, and that it has committed itself to “provide sufficient notice ahead of implementation following any decision to mandate MTD for CT”.
However, what is not up for debate is that the government sees digital transformation of the corporate tax system as the way forward.
The document makes clear that the scope of MTD for CT needs to include all entities within the CT charge. Therefore, the government does not propose to introduce income-based exemptions within the design for MTD for CT, but says that if specific businesses are already exempt, then they should also be treated as exempt for MTD for CT. Input from the charity sector was heavily represented in this consultation document, but HMRC would prefer this sector to be in scope.
The government’s expectation is that companies will be able to use more than one software program to meet the totality of the MTD requirements. All entities within the charge to CT will keep digital records of their transactions held on the MTD-compatible software.
The government will consider offering flexibility within design to reflect the complexity of grouping arrangements. HMRC will further explore the possibility to allow the keeping of digital records at group level, or even the use of a mixed approach within one group. The government remains interested in collecting better data on group structures.
There was little support for annual company tax returns being submitted for groups of companies at a group level, but HMRC is considering whether quarterly updates should be submitted at that group level.
On the subject of the type of data currently maintained, many respondents pointed out the increased administrative burden that was likely as a result of MTD. The government’s response was that it would explore how other countries approached this issue, as well as develop a better understanding of how data flows between group companies. It suggests that introducing a unique identifier for a group will help to identify who should supply data.
Tagging of transactional level data was another popular topic. There was recognition of the difficulty tagging at this level would cause, but HMRC needs a way to help understand how the return figures are derived. It is exploring this with the software vendors to look at transparency and traceability of transactions from the point they are captured in software through to submission.
A review of XBRL is also underway with Companies House, to consider how that can be improved.
Filing frequency and timing
Understandably, the increased frequency of submissions under MTD was a popular topic, but HMRC believes that quarterly updates underpin its real time vision and reduce errors. It claims the increase in frequency will help it ‘nudge’ businesses in the right direction in real time. It was, however, clear that more work is needed on what quarterly reporting will look like.
It is worth noting that quarterly submissions aren’t just going to be about expenditure and income - this is a chance to provide a business update on structure, etc.
It has been whispered about for some time, but we have finally seen HMRC publish the possibility that the current CT600 as we know and love it could go altogether, in favour of a more dynamic return.
One of the most significant points from the first document relating to the timing of statutory submissions - namely, submitting CT returns at the same time as financial statements - got a resounding thumbs down from respondents. HMRC has taken this away for further consideration but would still like to explore ways to shorten the time between filing statutory accounts and submitting tax returns – possible to as little as one month for small entities.
In summary, it would appear businesses did engage with this process and their views have been considered. Whilst we have some clarity on the minor points, there are still a significant number of open questions, but it is pleasing to see how HMRC is looking to be collaborative about the design of MTD for CT.
Addressing the tax implications of adopting IFRS 17 Insurance Contracts
As expected, HMRC has now released a consultation on how the tax rules will apply for accounting changes to insurance contracts triggered by adoption of IFRS 17 Insurance Contracts. The consultation closes on 22 February 2022, with legislation (by way of regulations) expected to apply from 1 January 2023.
Of particular interest, HMRC has suggested the following on transitional adjustments:
- For life assurance companies, any transitional adjustment will be spread, albeit that the timeframe is still to be determined. However, it is expected that the timeframe will be a fixed period, applying automatically (i.e. it will not be optional), with no de-minimis.
- For general insurers, it is still to be decided whether any transitional adjustment will be spread.
- For any non-insurers holding insurance contracts, the normal change in accounting rules will apply for transitional adjustments.
The government is also consulting on a wide range of other aspects of the rules, including:
- The impact of any changes in accounting standards (e.g. from UK GAAP to IFRS, or vice versa),
- The impact of changes in accounting for reinsurance,
- Whether insurance finance income / expenses should come into the I – E computation (for life assurers writing BLAGAB), and
- The treatment of insurance finance income / expenses that go to OCI but may not be recycled to the income statement.
The consultation also proposes the repeal of section 79 FA 2012, relating to the spread of acquisition expenses for companies writing BLAGAB over a period of 7 years in the I – E computation. The proposal would be for acquisition expenses to follow the accounts, and will apply to all life assurers writing BLAGAB (i.e. not just those under IFRS)
Insurers should consider carefully how the new accounting standard might impact them, with life assurers (in particular) paying particular regard to any transitional adjustment. Many insurers will need to undertake significant systems development to capture and store the data required to comply with the new risk measurement, financial and regulatory reporting, and disclosure requirements.
For tax accounting purposes, the changes will not be substantively enacted by 31 December 2021, so for those with December year-ends, no impact will need to be applied at that point to deferred tax balances for accounts under IFRS or for Solvency II.
For the proposed repeal of section 79 FA 2012, the change to follow the accounts for acquisition expenses would also apply from 1 January 2023. In particular, the transition from the fixed 7-year spreading to following the accounts will need to be carefully considered to ensure no double counting or restricted relief.
Defining a bank
The government has opened a technical consultation on draft regulations which will amend the definition of a bank for bank-specific taxes, which include the Bank Levy, the Bank Corporation Tax surcharge, the Code of Practice on Taxation for Banks, the bank loss relief restriction and the restriction on tax relief for banks’ compensation payments.
Broadly speaking, a firm currently falls within the banking tax rules if:
1. It has regulatory permissions to accept deposits from the Prudential Regulatory Authority (PRA) ie it is a deposit taker, or
2. It has regulatory permissions from the Financial Conduct Authority (FCA), meets the “investment banking” condition, and the entity’s activities consist wholly or mainly of any of the regulated activities defined in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (SI 2001/544).
The ‘investment banking’ condition requires that a firm has to be both an ‘IFPRU 730k firm’, which refers to the highest capital requirements the FCA imposes on an investment firm, and an ‘IFPRU full scope investment firm’, which relates to the activities the FCA allowed the firm to undertake – both of these terms are defined in the FCA Handbook. However, with effect from 1 January 2022, these terms will cease to apply, following the introduction of the FCA’s new Investment Firm Prudential Regime (IFRP) and, therefore, the banking tax rules need to be updated to ensure that the rules continue to include firms in these categories.
Consequently, the government intends to lay secondary legislation in the new year, which will have retrospective effect from 1 January 2022, to update the definition of a bank in the existing bank-specific tax rules: the new definitions will be based on an FCA investment firm and on terms used in the updated FCA Handbook. No changes will be made to the banking tax rules concerning deposit-takers or designated investment firms that are regulated by the PRA.
As previously mentioned, in addition to being regulated by the PRA or FCA, a firm needs to be carrying on certain regulated activities, including accepting deposits or dealing in investments as principal. These activities are contained in a list of ‘relevant regulated activities’ in each of the banking tax definitions and defined in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (SI 2001/544). This order was amended in 2017 to add the regulated activity of ‘operating an organised trading facility’ but had not been added to the lists of relevant regulated activities in the banking tax rules. Therefore, the secondary legislation that the government intends to lay in the new year will also update the list of regulated activities to include operating an organised trading facility, which may bring new entities within the scope of the banking tax rules. This part of the legislation will take effect 21 days after the day on which the legislation is laid.
The consultation on the draft regulation closes on 14 January 2022.
These are clearly ‘housekeeping’ style legislative changes. Nonetheless, our experience suggests that with the ongoing complexity of the various UK bank-specific regimes and the changes to Bank Corporation Tax surcharge that are due to come into effect once the Finance Bill 2021/22 is substantively enacted (expected in the early part of 2022), financial institutions should carefully consider if there will be any collateral impact on their business.
Improving tax administration for large businesses
A review of large businesses’ experiences of UK tax administration, launched at the Spring 2021 Budget, considered the existing challenges and areas for improvement. The review had a particular focus on mitigating tax risk and uncertainty, long-running enquiries and disputes, and the co-operative compliance and Customer Compliance Manager (CCM) model. Following the review, HMRC has now announced action in three key areas to improve tax administration for large businesses:
1. Higher or lower risk - new Guidelines for Compliance
Recognising the need for more consistent treatment, HMRC is to work with stakeholders to develop a programme of new ‘Guidelines for Compliance’ which will aim to provide practical guidance and greater transparency on the approaches that HMRC regards as higher or lower risk.
HMRC also intends to invest in improving technical guidance, and again will work with stakeholders to identify priority areas for improvement. We welcome the fact that HMRC intends this approach to support and align with work on the large business notification of uncertain tax treatment proposals: we can expect to see HMRC outcomes in mid-late 2022.
2. Changes to help address long-running enquiries
HMRC recognises that long-running disputes can create uncertainty for large businesses and, in particular, acknowledges that transfer pricing enquiries can be difficult. HMRC intends to work with businesses and advisors to establish new objective indicators of long-running enquiries and a clearer and more collaborative process for accelerating resolution. Work is to take place in early 2022.
3. Improving co-operative compliance
Recognising the need for consistency of treatment and approach, HMRC plans to work with businesses to explore how co-operative compliance can be delivered more consistently, with particular focus on:
• Clarity and transparency around governance processes
• Planning in relation to enquiries, and
• The role of CCMs in dealing with business questions and resolving disputes.
This is likely to be a longer-term development process to continually improve large businesses’ experience. However, we note that for those large businesses that do not have a CCM, HMRC will continue to provide support through the Mid-sized Business Directorate’s Customer Engagement and Support Team. It is not yet clear what this will look like in practice, and we hope that HMRC will consider further and communicate plans to provide clearer support for such businesses.
Overall, the review and actions outlined are welcome, and signal HMRC’s commitment to improving large businesses’ experience of tax administration.
HMRC has published a call for evidence on umbrella companies, principally from businesses engaging with umbrella companies to fulfil their resourcing needs. In particular, HMRC is seeking to gather information on:
• To what extent businesses engage with umbrella companies
• Their rationale for doing so
• How businesses choose which umbrella companies to work with
• Any challenges faced, and
• For those businesses that have used umbrella companies for a long time, how the engagement with umbrella companies has changed over time.
This forms part of increasing HMRC focus on this area of worker engagement, as evidenced by the recent appointment of the Director of labour market enforcement and updated HMRC guidance on the use of umbrella companies.
Due diligence to protect your business
HMRC recognises that as alternative labour supply models, from agencies to umbrella companies and platforms in the gig economy, have proliferated in recent years, so the risk of businesses failing to meet their compliance obligations has increased rapidly. The call for evidence asks questions around what labour supply chain due diligence is carried out by businesses.
Businesses wishing to contribute to the call for evidence have until 22 February 2022, and can read the full document here.
Capital gains tax simplification – some OTS proposals adopted
On 30 November 2021, the Chancellor confirmed that the government will implement some of the recommendations for simplifying capital gains tax (CGT) that the Office of Tax Simplification (OTS) put forward in its second review. The more fundamental reforms discussed in the OTS first review (including the idea of aligning capital gains and income tax rates) will not be pursued although, as you would expect, The Government will continue to keep the tax system under constant review to ensure it is simple and efficient;.
Progress on simplification
As well as directing HMRC to improve its CGT guidance to taxpayers, the Chancellor has tasked HMRC with implementing reforms to:
- Increase the filing deadline for the standalone CGT return on residential property gains from 30 days to 60 days (announced in the Autumn Budget 2021)
- Extend the time window for no gain/no loss transfers of assets between separating/divorcing individuals by a year (there will be a consultation on this)
- Expand CGT Rollover Relief to cover reinvestment in the form of enhancing land already owned (there will be a consultation on this)
- Consider integrating the different ways of reporting and paying CGT into the ‘Single Customer Account’ that HMRC is developing.
In addition to accepting these recommendations from the OTS, HM Treasury is still considering:
- The idea of a standalone CGT return system online (rather than the current combined income tax and CGT Self-Assessment return)
- Treating individuals holding the same share or unit trust unit in more than one portfolio as holding them in separate share pools for CGT purposes (which would make calculations simpler and potentially facilitate automated online filing).
- A review of the practical operation of Private Residence Relief nominations by taxpayers, and raising awareness of how the rules operate
- The way CGT exemptions for corporate bonds work
- The rules for Enterprise Investment Schemes to remove procedural or administrative issues that prevent their practical operation (in fact HM Treasury may carry out a much wider review of these reliefs).
What is not changing
There is to be no change to the CGT treatment of a disposal where proceeds are deferred, nor any change to the complex way that gains on foreign assets are calculated (converting values to sterling at each relevant date will continue). The treatment of housing developments in a taxpayer’s garden will not change, nor will the treatment of a freeholder extending a lease.
Future CGT changes?
The Chancellor has made it pretty clear in his response to the OTS that any simplification proposals from the OTS that stray into what he regards as policy areas (e.g. tax rates/bands/reliefs) are not likely to be adopted. However, some genuine simplifications will be introduced, and the work of the OTS will go on for many years to come.
It remains to be seen what policy changes the Chancellor will impose in future Budgets - in particular, whether the rates of CGT will stay low.
Read more on Personal Tax Planning
SDLT – Mixed Property and Multiple Dwellings reliefs
‘Granny flats’ relief under threat
HMRC has published a consultation document seeking views on ways to prevent abuse of the Stamp Duty Land Tax (SDLT) legislation for ‘mixed-property’ transactions and ‘Multiple Dwellings Relief’ (MDR). HMRC is concerned over the growing number of incorrect or abusive mixed property and MDR claims and, in particular, over “an industry of ‘reclaim agents’ that has grown up simply to take advantage of these rules”.
Mixed property purchases
Purchases of mixed property are currently wholly charged to the non-residential rates of SDLT, which are lower than the residential rates, even where only a small proportion of the property is non-residential. The differential incentivises some purchasers to structure purchases so that they do not have to pay the residential rates of SDLT, including where the property they are buying is their own home, for example, by including token amounts of non-residential property.
The government is considering introducing either:
• A requirement to apportion the consideration for a mixed property purchase, so that the residential portion would be taxed as residential property, and the non-residential portion would be taxed as non-residential property (although purchases of six or more dwellings would continue to pay tax at the non-residential property rates on the whole of the purchase), or
• A threshold whereby a purchase is only treated as mixed property if the non-residential element is more than a certain proportion of the consideration, for example more than half.
The government is aware that for some types of business, such as pubs, corner shops, and bed and breakfast businesses, mixed property purchases are required, and it would welcome responses as to the impact of a change on these situations, and whether an option for a threshold is needed in such circumstances.
Multiple dwellings relief
Under the MDR rules, a purchaser can choose to have the rate of SDLT determined by the average value of the dwellings purchased, rather than their combined value. Currently, MDR is available where at least two dwellings are purchased in a single transaction, or as part of a series of linked transactions between the same vendor and purchaser.
Most incorrect claims to MDR involve purchasers wrongly claiming that a single dwelling includes an additional separate dwelling (typically a ‘granny flat’) on very questionable grounds, for example, that an en-suite bedroom was suitable for use as a separate dwelling.
The consultation document outlines four possible options to change MDR:
1. Allow MDR only where all the dwellings are purchased for a ‘qualifying business use’, such as for development, redevelopment and resale, or as a source of rental income
2. Allow MDR only in respect of the dwellings purchased for a ‘qualifying business use’
3. Restrict MDR by introducing a ‘subsidiary dwelling’ rule, so that part of a building, or a building within the grounds of another dwelling, would not count as a separate dwelling for the purposes of MDR unless its value is a third or more of the total price attributable to the property as a whole
4. Allow MDR only for purchases of three or more dwellings.
Where six or more dwellings are purchased in a single transaction, or in linked transactions, purchasers would still be able to choose whether to apply the six or more rule to the transaction, and so pay the non-residential rates of SDLT, or claim MDR.
Each option could affect genuine purchases of properties with ‘granny flats’. The government states that it does not wish to discourage arrangements that provide separate self-contained residential accommodation on the same site as the family home (due to the benefits of intergenerational living). Along with other comments, it is specifically seeking feedback on implications for these households triggered by the proposals.
Read the Consultation document
To discuss the impact of these changes on you or your business please contact your local BDO contact or get in touch here.