Simplifying the tax system, tackling non-compliance and ensuring the tax system remains fit for the modern world. This framed the consultations, calls for evidence and next steps announced on TAM day. ICAEW’s Tax Faculty highlights the key points.
Tax administration and maintenance day (30 November 2021) followed the same approach as Tax Day on 23 March 2021. The government published a series of consultations and tax policy updates, summarised in a command paper, together with a list of documents.
The Government’s 10-year vision for the UK tax system: first signs of a road map
On Tax Day on 23 March 2021, the Government published The Tax Administration Framework: Supporting a 21st Century Tax System.
This call for evidence was a clarion call for input to the government’s vision for the future of tax administration in the UK. In essence, we were about to experience a fundamental review of the legislative framework which underpins our tax system: what did we think about it?
After considerable discussion, ICAEW’s Tax Faculty, along with other professional bodies, businesses and individuals, submitted evidence in the summer. We commented at the time:
“Much of what is in the report is not new, but it does reflect a renewed determination on the part of government and HMRC to press ahead with digitalising the tax system.
“The acknowledgement of the challenges of transition and the need for checks and balances is welcome, suggesting that HMRC has learned from the experiences to date with regard to the pace and sequencing of changes and the need to maintain and build public trust.
“We remain concerned that the estimates of transition and ongoing costs are unrealistic, but we look forward to working with HMRC to help develop better systems and processes; the investment required by government will be very significant.”
It would be easy to believe that digitalisation of tax was just about MTD. It is so much more. Our evidence covered many of the tax processes familiar to our members, including how taxpayers enter and exit the tax system, how tax liabilities are assessed and later paid.
We also commented on what happens when things go wrong and how data could be used to help taxpayers get things right. We also covered what checks would be needed to help taxpayers where things go wrong. We looked at how third-party data could be used and when, but also commented on who would be responsible for that data.
Underlying each chapter was a clear message that the government wanted a tax system for the UK supported by digital systems and populated by data delivered digitally.
With that digital theme in mind, the summary of responses to the tax administration framework review published on TAM day revisits the proposals made and sets out if and when the government intends to take matters forward. It also endeavours to put a time frame to any changes. We are promised a roadmap for future consultation and analysis as the government’s 10-year vision for the tax system unfolds. We can expect more discussion about how we could introduce, for example, single unique, digital identifiers for taxpayers, more about earlier or more frequent payment of tax rules, and more on how to harmonise and reform the late payment and submission penalty rules across the tax system.
There is much which could change in the next decade. In the paragraphs below, we consider some of this in more detail.
Things that are changing
Review of tax administration for large businesses
Following a review carried out in conjunction with various stakeholders, HMRC has identified a number of potential changes it can make to improve the tax administration experience for large businesses. These include:
- improved technical guidance and a programme of new “guidelines for compliance”;
- a clearer and more transparent process to accelerate the resolution of long running tax enquiries, especially transfer pricing which can be particularly difficult;
- greater clarity and transparency on governance processes, including the role of the customer compliance manager (CCM); and
- improved processes for issuing certificates of residence for corporates, including further digitalisation of the process.
Consistency for partnerships on capital gains tax roll-over relief
The government is to amend legislation to expand the scope of capital gains tax roll-over relief to include limited liability partnerships and Scottish partnerships. This was an unintended omission from the Taxation of Chargeable Gains Act 1992; no timetable or effective date is mentioned.
Transfer pricing documentation
The government launched a consultation at the Spring Budget 2021 on whether:
- the largest businesses with a presence in the UK should be required to maintain, and produce upon request, master file and local file documentation per the Organisation for Economic Co-operation and Development’s (OECD’s) standardised approach; and
- all businesses to which transfer pricing apply should prepare an International Dealings Schedule (IDS) to report data about relevant cross border transactions.
In a summary of responses, HMRC has confirmed that the government will consult in 2022 on draft legislation implementing the requirements relating to master file and local file documentation. It will not immediately implement IDS but will keep the issue under review.
Retaining a hybrid rules exemption for regulatory capital
The government is changing the hybrid and other mismatches rules, ensuring it retains an exemption for certain regulatory capital instruments issued by banks after 31 December 2022. Secondary legislation will be laid next year to make this change.
Extending conditionality to licences in Northern Ireland and Scotland
Tax checks for certain licence renewals are to be introduced in England and Wales from April 2022. Following a consultation on extending the regime to Northern Ireland and Scotland, the government intends to go ahead with this extension from April 2023. It will include legislation in the next Finance Bill. A number of stakeholders expressed concerns over the differences in licensing between the administrations. HMRC has pledged to continue to work with stakeholders to implement the requirements. The command paper indicates that the government intends to explore the wider application of tax conditionality.
Small brewers relief (SBR)
HM Treasury has published its response to the technical consultation on SBR from earlier this year. At Autumn Budget 2021, it was announced, as part of a review of alcohol duty, that a new small producer relief would be introduced to supersede SBR. This latest response shows the conclusions in relation to questions raised in the technical consultation to help brewers and other stakeholders respond to the alcohol duty review in more detail.
Improving the administration and operation of insurance premium tax (IPT)
Following previous consultation, the government has published a response document together with plans to explore how the public could be given access to a new register of insurers registered to pay IPT, and a new code of conduct for brokers. Whether such access can be implemented and what form this might take, will depend on the outcome of further engagement with the industry, as with the code of conduct.
Modernising aggregates levy exemptions
HMRC has published its response to the consultation on the tax treatment of aggregate removed during construction works. In light of these responses, legislation is proposed for a future Finance Bill so the levy exclusion for aggregate that is returned to the land at the site where it was won applies only for a purpose connected to the winning of aggregate. It will consider the feasibility of consolidating several exemptions from the levy into one for unavoidable by-product aggregate extracted as part of a construction project.
Definition of an investment bank
Following the Financial Conduct Authority’s (FCA’s) introduction of the new Investment Firm Prudential Regime, the government will update the definition of a bank in the existing bank-specific tax rules to ensure that they continue to operate in line with current policy and intends to lay secondary legislation in the new year.
Taxation of securitisation companies
The government has published its response to the consultation on making changes to clarify or reform certain aspects of the taxation of securitisation companies and the stamp duty loan capital exemption as it applies to securitisations and to insurance-linked securities. As a result of the consultation, the government has published two draft statutory instruments for consultation. These include:
- altering the test of independence;
- altering the note issuance threshold; and
- an exemption from stamp duty and stamp duty reserve tax for the transfer of capital market investments issued as part of capital market arrangements.
The government will also undertake an informal consultation on a range of assets which may be securitised in parallel with continued informal consultation in relation to the implication of holding land within securitisation companies.
Helping to level the playing field for alternative finance arrangements
In 2022, the government will use secondary legislation to widen the scope of the alternative finance rules. This will allow FCA-regulated Home Purchase Plan providers and alternative finance arrangements through FCA-regulated peer-to-peer platforms to access the rules. These products would be treated in the same way as conventional mortgages and loans for tax purposes, contributing towards a level playing field for Islamic and conventional finance products.
Arrangements entered into between 30 November 2021 and the effective date of the secondary legislation will be eligible, but only in relation to events occurring after the effective date.
Matters on which the government is consulting
Raising standards in the tax advice market
The government has decided not to proceed with the proposal for compulsory professional indemnity insurance for those who provide tax advice. Instead, there will be a further consultation that will consider the case for moving further towards statutory regulation. This is in line with our commitment to Lord Morse’s recommendation that the government establishes a more effective system of oversight of the tax advice market. The consultation will consider further options which meet three criteria, namely adoption of minimum standards, transparency and effective enforcement. The new consultation, which the government expects to publish next year, will also test a potential legislative definition of tax advice.
Income tax self assessment registration for the self-employed and landlords
The government has published a call for evidence exploring the case for reforming the law and processes around the self-employed and landlords registering deregistering and notifying liability for income tax self assessment. Currently, a taxpayer has to notify liability by 5 October following the income tax year where a liability arose. The suggestion is that the date when a taxpayer has to notify liability would be brought forward, perhaps by reference to a set period of time after the business started. Given that HMRC currently has a backlog of registrations for self assessment, the fact that it is consulting on bringing this date forward highlights that before any changes are made, HMRC needs to get its own systems and processes in better order.
The call for evidence has four broad themes:
- the most effective methods of raising taxpayer awareness of their obligation to register;
- the timing of the requirement to register, with the suggestion that it might be linked to when the income source starts or exceeds a threshold rather than the end of the tax year. This aspect is likely to be the most controversial;
- the nature of the legal obligation (which currently is to notify income tax liability rather than to register for self assessment); and
- administrative burdens and costs to the taxpayer and HMRC. ICAEW has previously highlighted that the current processes for registering and deregistering for self assessment are outdated, relying as they do, in some cases, on very old s hort forms rather than a well-designed digital service.
Those following tribunal decisions may have noticed an uptick in stamp duty land tax (SDLT) cases. In these cases, post-transaction amendments to SDLT returns are made to claim a repayment on the basis that the property acquired was mixed-property (residential and non-residential) or that multiple dwellings relief applies. To tackle the industry of ‘reclaim agents’ that has grown to take advantage of these rules, the government is consulting on potential changes to both the mixed-property rules and multiple dwellings relief.
The umbrella company market: call for evidence
Umbrella companies facilitate the engagement of temporary workers, employing individuals on behalf of clients and employment businesses. The individuals do not provide services to the umbrella company itself but to clients, typically on a short-term basis. The call for evidence invites views from stakeholders on the role that umbrella companies play in the labour market and how they interact with the tax and employment rights systems. It also sets out concerns raised by some stakeholders, as well as government action already taken to tackle tax non-compliance and improve protection for workers.
Administering low-income trusts and estates
The government intends to enact the concession that removes trustees and personal representatives from income tax, where the only source of income is savings interest, and the tax liability is less than £100. HMRC will consult on the precise scope of the change.
Modernising tax debt collection from non-paying businesses
HMRC has published a call for evidence to help devise an approach to collecting tax debt that is fit for a modern tax system and remains fair and effective to all taxpayers in light of the changing nature of business. It is particularly focussed on a small minority of taxpayers who hold off from paying tax for as long as they can, forcing HMRC to resort to costly and time-consuming enforcement action.
The first part of the call for evidence focusses on businesses adopting new technologies such that they don’t need to have a physical presence or assets in the UK and whether an extension of HMRC’s powers around taking control of goods could be extended to deal with non-compliance by these businesses.
The second part of the call for evidence looks at potential ways of encouraging deliberate non-payers to change their behaviour, such as the use of guarantees and types of prepayment.
Consultation on implementation of OECD’s model mandatory disclosure rules (MDR)
HMRC is consulting on draft regulations that would implement MDR into UK law. The government decided to adopt these rules on the conclusion of the arrangements for the UK to leave the EU. HMRC had been expecting that the UK would adopt DAC6, which are the equivalent rules applicable to EU member states and therefore included guidance in the International Exchange of Information Manual based on DAC6. It therefore intends to take a similar approach to interpretation of MDR as it took for DAC6. Where the model rules differ from DAC6, or where HMRC is giving further consideration to the approach currently set out in the DAC6 guidance in implementing MDR, this is discussed in the consultation document.
Response to accounting changes for insurance contracts (corporation tax)
Insurance companies accounting under international accounting standards will be required to adopt a new accounting standard IFRS 17 (Insurance Contracts) for periods of account beginning on or after 1 January 2023. Many insurers are expected to experience large transitional adjustments on adoption of the new standard. Spreading these adjustments for tax purposes is expected to help with tax cash flow, as well as the regulatory impacts of the accountancy change and consequent volatility in Exchequer receipts.
HMRC has therefore launched a consultation into the potential design of the regulations required to:
- spread the transitional impact of IFRS 17 for tax purposes; and
- revoke the requirement for life insurance companies to spread acquisition expenses over seven years for tax purposes.
The government’s ambition is to achieve zero avoidable waste by 2050. Landfill Tax, introduced in 1996, now only applies in England and Northern Ireland and sits alongside Scottish Landfill Tax and the Landfill Disposals Tax in Wales. The government has issued a call for evidence to seek views on the key design features, including levels of Landfill Tax that apply to different materials and on the circumstances in which exemptions and discounts can be claimed.
R&D tax reliefs
The government has published a summary of responses to the consultation issued in June 2021 on potential amendments to the R&D tax relief regimes. This is included as an annex to a report on the next steps for reform of the regimes. These include:
- the addition of licence payments for datasets and cloud computing costs attributable to computation data processing and software as two new categories of qualifying expenditure;
- restricting relief for the cost of carrying out R&D activity subcontracted to a third party to situations where the work is performed in the UK;
- restricting relief for the cost of employing externally provided workers to situations where the workers are paid through a UK payroll;
- ensuring that all R&D claims must be made digitally and endorsed by a named senior officer of the company. All companies will also need to inform HMRC of R&D tax claims in advance; and
- addressing specific anomalies in the legislation, such as allowing companies to claim research and development expenditure credit if they had previously incorrectly claimed SME relief on the same expenditure.
The government is consulting on the detail of these changes and will be inviting comments on the associated draft legislation which will be published in the summer of 2022, with a view to bringing the changes into effect from April 2023. The report also proposes (at para 2.36) a number of new measures to counter the growing problem of abuse, some of which are reflected above.
The government has also published a report detailing the findings of research carried out to explore how businesses understand and claim R&D tax relief.
Business rates reform
The government is launching a technical consultation on business rates reform. This will set out detailed proposals for delivery of a number of the commitments to reform the business rates system which were in the final report of the review of business rates review which was originally announced in the Budget 2020. It focuses on the move to a more timely and transparent system of three-yearly revaluations, and sets out further technical detail on measures to facilitate this, as announced at Autumn Budget 2021. The consultation also set out further detail on the new improvement relief and changes to support investment in green plant and machinery, and several administrative changes.
Online sales tax
As announced at Autumn Budget 2021, the government confirmed that in the new year it will be publishing a consultation on the pros and cons of a UK-wide online sales tax. Any revenue raised would be used (perhaps another hypothecated tax) to reduce business rates for retailers with properties in England, with the block grants of the Devolved Administrations increased in the usual way.
Individual Savings Accounts (ISAs): compliance and penalties
A call for evidence has been launched to understand whether more could and should be done to enhance compliance by ISA managers. The overall aim is to encourage ISA managers and investors to get things right the first time but also provide HMRC with the ability to apply appropriate and proportionate sanctions where non-compliance is identified.
The background to the call for evidence is the report of the investigation into the collapse of the investment firm London Capital & Finance (LCF) and the FCA’s supervision and regulation of the firm. As a result, in December 2020, the Economic Secretary to the Treasury announced that: “The Treasury is urgently looking at the sufficiency of checks on IF [Innovative Finance] ISA managers and the penalties regime.”
No immediate action for the most part
Government responses to Office of Tax Simplification recommendations
The government has published its response to the Office of Tax Simplification’s (OTS) two-part review of capital gains tax (CGT). Five of the technical recommendations in the OTS’s second report have been accepted and the government will work towards their implementation. These include:
- integrating the different ways of reporting and paying CGT into the single customer account;
- extending the ‘no gain no loss’ window on separation (consultation expected in 2022);
- expanding the rollover relief rules which apply where land and buildings are acquired under a compulsory purchase order (consultation expected ’in due course’); and
- improvements to guidance.
The fifth had already been announced at the Autumn Budget 2021, namely extending the reporting and payment deadline for the UK Property return to 60 days (and included subsequently in the Finance Bill).
Some further recommendations are being kept under review. Others have been rejected outright.
The government also published its response to the OTS’s review of the design of inheritance tax (IHT) and has decided not to proceed with any changes at this stage. The changes, announced in March 2021, which mean that from 1 January 2022 more non-taxpaying estates won’t have to complete IHT returns were in response to the OTS’s first IHT report which covered administration.
The first five-year review of the OTS recommends that the OTS “undertake a project to articulate its approach to and interpretation of ‘tax simplification’, including clarifying its aims as an organisation, and the success measures for assessing its progress”.
Timing of tax payments
The government published a summary of responses to the timely payment call for evidence. It acknowledged that “on balance the majority of respondents felt the challenges of more timely payment of tax currently outweighed the benefits.” The government reaffirmed that the timing of tax payments will not change in this parliament. It will consult further on any future proposals. HMRC is to form a working group with external stakeholders and run a ‘voluntary proof-of-concept pilot’, but no further details are available. In the meantime, work will continue to make improvements to HMRC’s budget payment plan.
Making Tax Digital for Corporation Tax
HMRC has provided a summary of responses to the consultation it launched earlier this year on MTD for corporation tax (CT). As HMRC’s focus is currently on ensuring the success of the VAT and ITSA MTD services, it is unlikely that we will see many immediate developments on CT. However, HMRC is keen to ensure that the lessons from the rollout of the former are taken into account in any future MTD for CT design. HMRC has also committed to providing sufficient notice of implementation following any decision to mandate MTD for CT to allow businesses time to prepare.
New stakeholder forum on tackling offshore tax non-compliance
The government has established an HMRC stakeholder forum with representative bodies (including ICAEW volunteers and staff) and agents to explore ideas to tackle offshore tax non-compliance. This follows the publication of two discussion documents in spring 2021, as part of implementing HMRC’s ‘No Safe Havens’ strategy. The documents sought views on how to help taxpayers reduce offshore non-compliance in relation to non-UK income, gains and assets, and how to reduce and prevent international tax debt.
Use of marketed tax avoidance schemes in the UK
HMRC has issued a report summarising the numbers and characteristics of taxpayers currently using tax avoidance schemes. The purpose of the report is to help inform taxpayers how to avoid being drawn into such schemes and to set out what HMRC is doing to tackle promoters of tax avoidance.
Simplifying VAT on land and property
Following its call for evidence on the land and property VAT exemption, the government has set out its next steps. Although it does not intend to take action on the options previously discounted by the OTS or link VAT treatment to an independent land register, it has committed to work with members of the Land and Property Liaison Group to improve guidance on dilapidations, overages, call options and rights of light. The government is also keen to explore establishing a definition of “short term” or “minor interests” with a view to making such supplies subject to VAT and to further discuss the implications of making most supplies of land subject to VAT with a limited number of exceptions. Discussions are intended to begin at the start of 2022.
Exploring the potential of VAT split payment
The government continues to explore VAT split payment: an alternative method of VAT collection where the tax element of a digital payment could be remitted directly to HMRC. It continues to engage with stakeholders in the payments industry and the Industry Working Group established in 2018.
Deposit return schemes
The government intends to explore and make any necessary changes to the VAT regulations to ensure the effective operation of drinks deposit return schemes across the UK.
Exploring potential VAT challenges posed by the sharing economy
The government continues to work with industry stakeholders and the OECD to develop its understanding of the sharing economy and its implications for VAT. In particular, the government is conducting further engagement with stakeholders on the VAT rules for cross-border services supplied between businesses, as well as the possibilities offered by increased data sharing and how such sharing or reporting would be best achieved.
And finally… Transparency and tax reliefs
Further to a commitment made to the Public Accounts Committee in 2020, the government has published a list of the objectives of non-structural tax reliefs. Non-structural tax reliefs help or encourage particular types of individuals, activities or products in order to achieve economic or social objectives.
The details, which are given in the format of a table, include the policy objectives of each of the reliefs and is actually clear and could be useful reading for those who commentate on tax but do not work with the detail on a daily basis. The list is extensive, but reader beware: it is quite addictive reading.
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