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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 2018 Budget.

Profit fragmentation

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As announced at Autumn Budget 2017, the government will legislate in FB 2018-19 to introduce targeted legislation that aims to prevent UK businesses from avoiding UK tax by arranging for their UK-taxable business profits to accrue to entities resident in territories where significantly lower tax is paid than in the UK. The taxable UK profits will be increased to the actual, commercial level.

Draft legislation was published on 6 July 2018. Following consultation, changes have been made to the draft legislation to remove the duty to notify HMRC of relevant arrangements meeting certain criteria, to clarify the adjustments required to be made under this legislation, and to make a number of small technical changes.

The measure will have effect from 1 April 2019 onwards for corporation tax and 6 April 2019 for income tax and class 4 NIC, and will apply to all profits diverted on or after those date.

There was a consultation which ended in June 2018 to which ICAEW Tax Faculty responded ICAEW Rep 67/18 and expressed considerable concern about the consultation process itself as well as the nature of the proposals.

Diverted profits tax

Diverted profits tax (DPT) was introduced in FA 2015 to counter two types of arrangements used by large groups to artificially divert profits from the UK. Firstly, situations where a company with a UK taxable presence uses arrangements lacking economic substance to artificially divert profits from the UK to low tax jurisdictions. Secondly, situations where a person carries on activities in the UK for a foreign company that are designed to artificially avoid creating a UK permanent establishment, and thereby a UK taxable presence, of that foreign company.

Legislation will be included in FB 2018-19 to make clear that diverted profits will be taxed under either DPT or corporation tax provisions, but not both. The changes will also stop a planning opportunity from amendments being made to a company’s corporation tax return after the review period has ended and the DPT time limit has expired.

In addition, changes will also be made to:

  • extend the review period, the period where HMRC and the taxpayer work together to determine the extent of diverted profits, from 12 months to 15 months;
  • extend a company’s right to amend their corporation tax return to include diverted profits to the first 12 months of the review period; and
  • make clear that diverted profits liable to DPT can be reduced by amendment to the company’s corporation tax return during the first 12 months of the review period.

Reverse charge: building and construction services

A VAT domestic reverse change will come into effect on 1 October 2019 to prevent VAT losses through so-called ‘missing trader’ fraud. This occurs when traders collect VAT on their sales but go missing before passing that VAT on to HMRC. It shifts responsibility for paying VAT along the supply chain to remove the opportunity for it to be stolen by those traders. The change is being introduced following the conclusion of a technical consultation in June 2018, which resulted in changes to legislation by aligning it to payments reported through the construction industry scheme.

VAT: specified supplies order

As previously announced in July 2018, legislation will be introduced to prevent a version of VAT avoidance (known as ‘looping’) that involves UK insurers setting up associates in non-VAT territories and using these associates to supply their UK customers. This allows them to reclaim VAT on costs that UK-based competitors are unable to reclaim.

Electronic sales suppression

A call for evidence is to be published later in the year on electronic sales suppression (ESS). This refers to the misuse of electronic point of sale functions (ie, till systems), which is undertaken by a minority of businesses in order to hide or reduce the value of individual transactions and the corresponding tax liabilities.

Hidden economy: conditionality

The government will consider introducing a tax registration check linked to licence renewal processes for some public sector licences. Applicants would need to provide proof they are correctly registered for tax in order to be granted licences. This would make it more difficult to operate in the hidden economy, helping to level the playing field for compliant businesses.Interest and penalties.

Interest and penalties

Legislation will be introduced in FB 2018-19 to confirm current arrangements for calculating interest on late payments of corporation tax, inheritance tax, stamp duty, stamp duty land tax and penalties for failure to comply with PAYE obligations. The measure will also confirm the current arrangements for interest calculations on payments and repayments of diverted profits tax and extends the interest provisions to penalties charged under the promoters of tax avoidance schemes (POTAS) legislation. 

This measure was originally announced in a written ministerial statement on 19 July 2018 except for the extension to PAYE penalties which was announced at Budget 2018.

Penalties reform

Legislation to introduce new late payment and late submission penalties was expected to be introduced in FB 2018-19 and draft clauses were published for consultation. The government has announced that the reform will go ahead but will be included in a future Finance Bill rather than FB 2018-19. This is to allow for further consideration of the communications plan and suggests that the new regime will be introduced later than the expected implementation date of April 2020. 

Insolvency: HMRC to be preferential creditor

The government is going to change the rules so that HMRC becomes a preferential creditor in business insolvencies.

The change will only apply to taxes that business collects from third parties to pass on to the government: VAT, PAYE income tax, employee national insurance contributions and construction industry scheme deductions. It will not apply to taxes owed by businesses themselves, such as corporation tax and employer national insurance contributions.

It also does not appear to apply to personal insolvencies, although there are some areas that would need clarifying: for example, parents employing a nanny or disabled people employing a carer have to operate PAYE but are not businesses.

HMRC (or rather, its predecessor departments the Inland Revenue and HM Customs & Excise) used to have preferential creditor status but this was largely abolished by the Enterprise Act 2002. The previous rules imposed limits on how much of the debt would be treated as preferential (for example, PAYE arrears for the 12 months and VAT for the six months preceding a bankruptcy) but we do not know if similar terms will apply to the new rules.

The change will apply from 6 April 2020 and legislation will be in FB 2019-20. 

Tax abuse and insolvency

Directors and other persons involved in tax avoidance, evasion or phoenixism will be made jointly and severally liable for company tax liabilities where there is a risk that the company may deliberately enter insolvency. The legislation will be in Finance Bill 2019-20.

Offshore tax compliance strategy

The government will publish an updated offshore tax compliance strategy. This will build on the progress the UK has made in tackling offshore tax evasion and non-compliance since the government’s previous strategy was published in 2014.

International tax enforcement: disclosable arrangements

The government is enacting new legislation to allow the introduction of international disclosure rules about offshore structures that could avoid tax or could be misused to evade tax. The rules in question are the EU mandatory disclosure regime, referred to as ‘DAC6’ because it derives from a sixth amendment to the Directive on Administrative Cooperation, and the OECD’s mandatory disclosure rules. Framework legislation will be in FB 2018-19 and draft regulations giving the detail are expected to be published for consultation in the new year.