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Avoidance, evasion and compliance

ICAEW Tax Faculty provides analysis of the announcements relating to tax avoidance, evasion and compliance in the Autumn Budget 2017.

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The government published a document alongside the Budget papers Tackling tax avoidance, evasion and non-compliance setting out its record since 2010 in tackling tax avoidance and evasion and listing the measures that it has introduced over this period. It estimates that these measures have brought in additional revenue of almost £160bn.

The main measures announced in the current Budget are described below and these are estimated to bring in a further £4.8bn (para 3.65 of the Red Book), although the score-card in Table 2.1 estimates that all the avoidance, evasion etc measures will bring in a grand total of £5.57bn.

Tackling avoidance and evasion with additional resources for HMRC

HMRC will receive a further £155m which is forecast in the Red Book to bring in an additional £2.3bn from the measures set out below.

The extra resources, and technology, will allow HMRC to:

  • transform its approach to tackling the hidden economy through new technology;
  • further tackle those who are engaging in marketed tax avoidance schemes;
  • enhance efforts to tackle the enablers of tax fraud and hold intermediaries accountable for the services they provide using the corporate criminal offence;
  • increase its ability to tackle non-compliance among mid-size businesses and wealthy individuals; and
  • recover greater amounts of tax debt including through a new taskforce specifically to tackle tax debts more than nine months old.

Requirement to notify HMRC of offshore structures

The government will publish a consultation response on the proposed requirement for designers of certain offshore structures, that could be misused to evade taxes, to notify HMRC of these structures and the clients using them. This work will be taken forward in conjunction with the OECD and EU, both of which are undertaking work on similar proposals.

Extending offshore time limits

Assessment time limits for non-deliberate offshore tax non-compliance will be extended so that HMRC can always assess at least 12 years of back taxes without needing to establish deliberate non-compliance – in effect, on a ‘strict liability’ basis. The current time limits are four, six or 20 years depending on the behaviour that led to the non-compliance, so this represents a considerable extension of HMRC’s powers and a change in approach. There will be a consultation in spring 2018.

Hidden economy: conditionality

There will be a consultation to determine how to make the provision of some public sector licences conditional on being properly registered for tax. This is in order to make it more difficult to trade in the hidden economy.

Royalties: withholding tax from April 2019

With effect from April 2019, withholding tax will apply to royalty payments, and payments for certain other rights, made to low or no tax jurisdictions in connection with sales to UK customers. The rules will apply regardless of where the payer is located.

The Budget score-card estimates that this will raise £285m in the first year, 2019/20, and £800m over the full four years to 2022/23.

Intangible fixed assets: related party step-up schemes

The intangible fixed assets rules will be updated with immediate effect, so that a licence between a company and a related party in respect of intellectual property is subject to the market value rule, and to ensure that the tax value of any disposal of a company’s intangible assets is correct, even if the consideration is in something other than cash.

This measure is estimated to bring in extra revenue of £240m over the next six years.

Depreciatory transactions

The government will remove the six-year time limit within which companies must adjust for transactions that have reduced the value of shares being disposed of in a group company. This will ensure that any losses claimed are in line with the actual economic loss to the group. This change will take effect for disposals of shares or securities in a company made on or after 22 November 2017.

This measure is estimated to bring in extra revenue of £55m over the next six years.

Permanent establishment losses and double tax relief

There will be a restriction in the amount of credit allowed, or deduction given, for foreign tax where the company has received relief for losses against non-PE (permanent establishment) profits in the foreign jurisdiction. A policy paper Corporation Tax: double taxation relief and permanent establishment lossesexplains what detailed provisions are to be included in FB 2017-18.

The amount of double taxation relief available will instead be determined by reference to the amount of foreign tax suffered by the overseas PE, less the amount of the reduction in foreign tax which results from the PE’s losses being relieved against non-PE profits in a foreign jurisdiction in the same or earlier periods.

Profit fragmentation

The government will consult on the best way to prevent UK traders or professionals from avoiding UK tax by arranging for UK trading income to be transferred to unrelated entities. This will include arrangements where profits accumulate offshore and are not returned to the UK.

Hybrid mismatch rules

FB 2017-18 will introduce some minor technical changes to the hybrids and other mismatches regime to ensure that the rules work as intended. This follows extensive informal consultation with stakeholders. The changes will not affect the amount of tax receipts.

Double tax relief: changes to targeted anti-avoidance rule

HMRC will no longer from 1 April 2018 need to give a counteraction notice before the double tax relief (DTR) targeted anti-avoidance rule (TAAR) applies. The scope of one of the categories of prescribed schemes to which the TAAR applies will be extended to include tax payable by any connected persons. This will come into effect on 22 November 2017.

NIC: employment allowance

Some employers are abusing the employment allowance and this is often done using offshore arrangements. HMRC will in future require upfront security from employers with a history of avoiding paying NICs. The new system will take effect from 2018 and is estimated to increase revenue by £15m a year.

Insolvency: use to escape tax debt

The government will expand existing security deposit legislation to corporation tax and construction industry scheme deductions. These changes will be legislated for in FB 2018-19 and take effect from 6 April 2019. The government will consult on the most effective means of introducing this change.

This measure is estimated to bring in extra revenue of £505m in the four years from 2019/20.

Taxation of carried interest

Legislation was introduced with effect from 8 July 2015 (Finance (No. 2) Act 2015) to determine the taxation of carried interest, which is a form of performance-related reward for investment managers.

There were transitional rules to excluded amounts of carried interest which had been subject to delays in payment for genuine commercial reasons and which were in relation to disposals of partnerships assets before 8 July 2015, or (in other circumstances) before 22 October 2015.

Carried interest will now be taxed if it arises on or after 22 November 2017 irrespective of the timing of connected disposals of partnership assets.

This measure is estimated to bring in extra revenue of £650m in the six years up to and including 2022/23.

Tackling waste crime

From 1 April 2018, operators of illegal waste sites will become liable for landfill tax, and those who continue to flout the rules will face tough civil and criminal sanctions. This follows a positive response to the consultation announced at Spring Budget 2017. In addition, the government is providing £30m extra funding over the next four years to help the Environment Agency tackle waste crime and reduce the harm caused to the environment and to legitimate operators.

This measure is estimated to bring in extra revenue of £215m over the five years from 2018/19 onwards.

Disguised remuneration

FB 2017-18 will include further legislation to tackle existing, and prevent future use of, disguised remuneration tax avoidance schemes. The majority of the changes announced at Budget 2016 have been enacted, including a new charge on loans made after 5 April 1999 through disguised remuneration schemes that remain outstanding on 5 April 2019. Following consultation on draft legislation published on 13 September 2017, the government will legislate in FB 2017-18 to:

  • introduce the close companies’ gateway, to tackle disguised remuneration avoidance schemes used by close companies (ie companies with five or fewer participators) to remunerate their employees, and directors, who have a material interest. This change will have effect on and after 6 April 2017; and
  • require all employees, and self-employed individuals, who have received a disguised remuneration loan to provide information to HMRC by 1 October 2019. This change will have effect on and after Royal Assent of FB 2017-18.

The government will also legislate in FB 2017-18 to:

  • put beyond doubt, with effect from 22 November 2017, that Part 7A of Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) applies regardless of whether contributions to disguised remuneration avoidance schemes should previously have been taxed as employment income. This change will have effect on and after 22 November 2017; and
  • ensure the liabilities arising from the loan charge are collected from the appropriate person where the employer is located offshore. This change will have effect on and after Royal Assent of FB 2017-18.

Further detail on these changes and draft legislation can be found in a policy paper Disguised remuneration: further update published on 22 November 2017.

Off-payroll working: extension to private sector

The government is going to consult on how to tackle non-compliance with the intermediaries legislation (commonly known as IR35) in the private sector. The IR35 legislation is intended to ensure that individuals who effectively work as employees are taxed as employees, even if they choose to structure their work through a company. A possible next step would be to extend the April 2017 public sector off-payroll working reforms to the private sector.

In order to take account of the needs of businesses and individuals who would implement any change, the government in its consultation will draw on the experience of the public sector reforms and external research already commissioned by the government and due to be published in early 2018.