weekly tax matters
TRANSCRIPT
Weekly Tax Matters
3 July 2015
kpmg.co.uk
contents
TAX POLICY
• Summer Budget 2015 • Supreme Court overturns Court of Appeal
in George Anson case
CORPORATE TAX
• Patent Box – an update
INDIRECT TAX
• North of England Zoological Society – First-tier Tribunal Decision
EMPLOYMENT TAX
• Staatssecretaris van Financiën v Kieback • Discovery: when should you seek
additional information?
INTERNATIONAL STORIES
• Tax Journal – International briefing for
June • International round up
OTHER NEWS IN BRIEF
TAX POLICY
Summer Budget 2015
The Summer Budget will be presented next week on 8 July 2015. So, what should we expect to see in next week’s Budget? With reducing the deficit still at the top of the agenda, we should probably expect some revenue-raising measures alongside spending cuts. With the main rates locked (corporation tax is not included in the income tax/VAT/NIC triple lock, but the Government has committed to maintaining “the most competitive business tax regime in the G20”), where can the Chancellor look to generate revenue? Clearly, changes to rates not included in the lock are a possibility: however, so would be the removal or restriction of some of the reliefs currently available to widen the tax base on which the locked rates are charged. The Budget may give an important indication of the direction the Chancellor is likely to take over the coming Parliament. There is, of course, another strand to revenue-raising: further measures to combat evasion and avoidance – and this is one area where the Government has been clear that we should expect to hear more on 8 July. Away from revenue-raising, we also expect more detail on the promised expanded remit of the Office of Tax Simplification. In last week’s Weekly Tax Matters we gave our view on what we think should be included; this week, Treasury Select Committee chair Andrew Tyrie has published an open letter supporting the permanent establishment of the OTS and giving his take on its remit, which should, in his view, include the core function of “[improving] the efficiency of the tax system by simplification” to provide “a more direct link between the OTS’s aims and the task of improving overall economic performance”. The final form of the OTS will be another significant indicator of the direction policy might take over the next five years (and potentially beyond).
To make sure you’re ready for the Summer Budget, visit our dedicated Budget webpage, which has our Tax ‘Wishlist’ and predictions, and will be updated both in the run up to the Budget and on the day with all of the key measures for you and your business. We will also be running our Summer Budget web briefing on 9 July – click here to register.
Following the Budget, the Summer Finance Bill will be published on 15 July – we will bring you more details on the Summer Finance Bill clauses in that week’s edition of Weekly Tax Matters. It is likely that the measures will be debated in Parliament before the summer recess begins on 21 July, with Royal Assent expected some time after Parliament returns on 7 September, although the precise timing is uncertain.
Supreme Court overturns Court of Appeal in George Anson case
The Supreme Court has held that Mr Anson was entitled to double taxation relief on his share of profits from a US LLC remitted to the UK.
In 2010, the First Tier Tribunal (FTT) decided that the profits of a US Limited Liability Company (LLC) belonged to individual members as they arose and the UK member should be taxed accordingly. Since he was thereby taxed on the same income in both countries, he was entitled to double tax relief (DTR) for US tax paid on his share of the LLC’s profit. This decision was then overturned at the Upper Tribunal and Court of Appeal. However, on 1 July 2015, the Supreme Court reinstated the FTT decision when it gave its judgment in Anson v Revenue and Customs [2015] UKSC 44.
Chris Morgan
T: +44 (0)20 7694 1714 E: [email protected]
Alison Hobbs
T: +44 (0)20 7311 2819 E: [email protected]
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This decision is potentially significant for corporate groups with US LLCs within their structure. Although not explicitly stated, the implication from the judgment is that US LLCs, with the same characteristics as the one in this case, should be treated as transparent for UK tax purposes. This goes against the longstanding general practice of HM Revenue & Customs (HMRC) to tax a UK resident member of an LLC on the profits of the LLC only if and when those profits are distributed by the LLC to its members, i.e. to treat LLCs as opaque entities. However, Delaware law provides considerable flexibility to vary the characteristics of an LLC through its operating agreement and the UK tax treatment of any particular LLC will depend on the terms contained within this agreement. If you have an LLC in your group currently treated as opaque for UK tax purposes please speak to your usual Tax contact for further advice. For individuals holding investments in US LLCs (with the same characteristics as the one in this case), the decision is good news and confirms that they are entitled to double tax relief for US tax paid on their share of the LLC’s profits in calculating their UK income tax liability. If you have received income from a US LLC and have previously been refused DTR, please speak to your usual Tax contact for advice on whether you can amend your tax returns.
James Magrath
T: +44 (0)118 964 2090 E: [email protected]
Graeme Whitfield
T: +44 (0)191 401 3732 E: [email protected]
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CORPORATE TAX
Patent Box – an update
A high level announcement on changes to the UK Patent Box from July 2016 is expected at the Summer Budget. In November 2014 the Government announced that it had agreed a joint proposal with Germany to advance negotiations on new rules for preferential intellectual property (IP) regimes within the G20/OECD BEPS Project. The proposal was for the adoption of a ‘modified Nexus approach’ which would mean all R&D activity has to be undertaken by the Patent Box company in order for the company to receive the maximum benefits of the UK Patent Box regime. There has been recent speculation that the details of the changes to be made to the Patent Box regime will be announced by the Chancellor in the Summer Budget on 8 July. However, what is much more likely is that there will be a high level announcement that changes will be made to incorporate the ‘modified Nexus approach’ from 1 July 2016. If this is the case then we are most likely to see draft legislation in the autumn, possibly when the draft clauses for Finance Bill 2016 are published. This timing would also allow the OECD Committee of Fiscal Affairs to meet and finalise the text of the principles that are being agreed for IP regimes before the UK Patent Box changes are published.
Carol Johnson
T: +44 (0)20 7311 5629 E: [email protected]
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INDIRECT TAX
North of England Zoological Society – First-tier Tribunal Decision
The FTT supports the taxpayer’s argument that animal costs have a link to taxable catering and retail sales.
The taxpayer operates Chester Zoo. The issue stems from the Zoological Society of London (C-267/00) judgment, following which the Zoo’s admission charges were VAT exempt. The input tax at the centre of the dispute was that incurred on keeping and maintaining the animals, as well as improving existing buildings and building new animal habitats. The taxpayer argued that the standard method was fair and reasonable, as the animal related costs are a cost component of taxable supplies, including catering and retail, as well as exempt admission. Whilst accepting there was a link to some taxable supplies, such as animal encounters, adoptions and keeper for a day, HM Revenue & Customs (HMRC) argued that there was no link to the catering and retail revenues. On this basis, HMRC considered that the standard method was not fair and reasonable and a standard method override should be applied. HMRC argued that the Zoo’s charitable objects around the keeping of animals excluded the possibility of a link between the animal costs and the catering and retail supplies. The First-tier Tribunal (FTT) rejected this, stating the fact that there is a non-economic charitable purpose was irrelevant and the Zoo was carrying out an economic activity. The FTT highlighted the extent of integration experienced by visitors, observing the animals and enjoying the catering and retail offerings was a relevant factor. The FTT concluded that the core of the zoo’s commercial proposition is the animals, but there was a strong economic link to between the catering and retail outlets and the animals. It was clear to the FTT that, on analysing the terms and features of the zoo, increasing a customer’s dwell time was not only to improve the customer’s educational experience, but to increase all revenues including catering and retail. The FTT therefore concluded there was a link between the animal costs and catering retail supplies and allowed the taxpayer’s appeal. To read the decision click here.
Steve Powell
T: +44 (0)20 7311 2746 E: [email protected]
Karen Killington
T: +44 (0)20 7694 4685 E: [email protected]
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EMPLOYMENT TAX
Staatssecretaris van Financiën v Kieback
A recent CJEU decision looked at the appropriate period to use when determining whether an individual receives all or almost all of their income in a particular Member State. The CJEU has, in a recent preliminary ruling, decided that when considering whether an individual receives all or almost all of their income in a Member State, the entire tax year needs to be considered and not just a part of it. This decision may be of relevance when considering the appropriate tax treatment of amounts in a year in which an individual’s tax residence changes. The case deals with specific Dutch rules which (broadly) allow “negative income” relating to a dwelling to be offset against employment income. The taxpayer was a German national who lived in Germany but worked for the first part of the year in question in the Netherlands. Part way through the year he moved to the US. The majority of his income for the period in which he was German resident arose in the Netherlands, but, when looked at as a whole, the majority of his income for the year arose in the US. The Dutch authorities had denied a deduction for “negative earnings” (the mortgage interest on the taxpayer’s German property) on the basis that the taxpayer had received the majority of his income outside the Netherlands. In considering the issue, the Dutch courts referred to the CJEU the general question of whether the relevant period when determining whether relief is available should be just the part of the year in which income arose in the Netherlands, or the tax year as a whole. The CJEU decision highlights previous case law which has decided that differences in treatment between residents and non-residents are not of themselves discriminatory, as it is “additionally necessary…that, due to that non-resident’s receiving the major part of his income in the Member State of employment, the Member State of residence is not in a position to grant him the advantages which follow from taking into account his aggregate income and his personal and family circumstances”. The appropriate period over which to determine whether the state of residence can grant any such advantages was, the Court decided, “the financial year in question in its entirety” as that is the period generally used when determining the basis for charging tax. The fact that the taxpayer had moved to the US (ie not to another EU Member State) made no difference to this analysis.
Discovery: when should you seek additional information?
A recent tribunal case considered when both taxpayers and HMRC should actively seek more information. On the face of it the recent case of Norman v HMRC considered whether the exercise of a share option fell to be taxed: a point which the First Tier Tribunal (FTT) resolved quickly, finding that the options were granted “by reason of [the taxpayer’s] employment” and upholding HMRC’s assessment of the income tax. The FTT’s findings on the validity of HMRC’s discovery assessment are worth an examination, though. Broadly, HMRC can only make a discovery assessment where there is careless or deliberate action by the taxpayer, or a HMRC officer could not reasonably have been expected to be aware of an insufficiency the normal time limits for an enquiry. A key issue for the FTT when considering both of these was the extent to which either the taxpayer or HMRC should actively seek additional information. The FTT concluded that although the treatment adopted by the taxpayer was, as a matter of law, wrong, this was not enough to mean that he should have taken further steps to identify the correct position. The only information available was a transaction record showing the sale of the shares acquired under the option (which had happened immediately after exercise); this had been correctly identified as a capital gain and included as such on the tax
Steve Wade
T: +44 (0)20 7311 2220 E: [email protected]
Alison Hobbs
T: +44 (0)20 7311 2819 E: [email protected]
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return (albeit, as it failed to take into account the effect of an income tax charge on exercise, the gain was wrongly calculated). Taking this into account, HMRC had not proved carelessness. Turning to HMRC, the only information deemed to be available to the (hypothetical) HMRC officer under the discovery provisions was the Self Assessment return. Although the information from the employer’s P14 (which ultimately triggered the discovery assessment) would have been on HMRC’s systems during the normal enquiry window, HMRC should not be expected to have proactively interrogated the systems to find a discrepancy. The FTT distinguished this from a situation where particular information on a return – the example used being a DOTAS number – would act as a prompt to assume that further information would be available elsewhere. As nothing on the return itself pointed to an insufficiency, HMRC had satisfied the requirements to make a discovery assessment.
Steve Wade
T: +44 (0)20 7311 2220 E: [email protected]
Alison Hobbs
T: +44 (0)20 7311 2819 E: [email protected]
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INTERNATIONAL STORIES
Tax Journal – International briefing for June
Chris Morgan’s latest summary of international developments. In the latest of his regular articles for Tax Journal1, Chris Morgan (Head of Tax Policy and of the EU tax group at KPMG in the UK) rounds up recent international developments. This month’s article looks at:
• The OECD’s discussion draft on base erosion and profit shifting (BEPS) Action 6 (preventing treaty abuse); • The implementation package for BEPS Action 13 (Country by country reporting); • The Court of Justice of the European Union (CJEU) decision in the X AB case concerning Swedish rules on
foreign exchange losses on share disposals; • The Advocate General’s opinion in the Groupe Steria case on French group dividend taxation; • The EC’s action plan on corporate taxation; • The European Parliament’s adoption of proposals for EU company ownership registers; and • The EC’s investigation of tax ruling practices of member states.
1 First published in Tax Journal on 26 June 2015. Reproduced with permission.
International round up
This week: Pakistan 2015 Budget tax measures take effect; more details on changes to property sales taxation in New Zealand; Singapore expands benefits for investment funds; Hong Kong publishes anti-money laundering guidance; KPMG Australia publishes reports on a variety of tax developments; English guidance on Japanese consumption tax on digital services; new Vietnamese corporate income tax guidance for 2015; Advocate General’s opinion in the joined cases Miljoen, X, and Société Générale; Germany publishes draft revised corporate tax guidelines on mergers and tax groups; WCO guide on customs valuation and transfer pricing; and Indian transfer pricing case on appropriate comparables.
Every week, KPMG member firms around the world publish updates on developments in their country. In Weekly Tax Matters we’ll highlight a selection that may be of interest to our readers.
Asia Pacific Pakistan – Tax measures in the 2015 Budget are effective from 1 July 2015. New Zealand – The tax authorities have published more information on the property sales taxation changes announced in the 2015 Budget. Singapore - Expanded tax benefits for investment funds have been announced. Hong Kong - Anti-money laundering guidance has been issued to address the risk of tax evasion. Australia – KPMG in Australia have prepared a number of reports covering employee migration rule changes, R&D tax incentives, and new employee share scheme rules. Japan - The tax authorities have released an official English version of guidance on consumption tax treatment of cross-border supplies of digital services.
Chris Morgan
T: +44 (0)20 7694 1714 E: [email protected]
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Vietnam - New corporate income tax guidance for 2015 has been issued. More TaxNewsFlash – Asia Pacific can be found here. Europe EU – The Advocate General’s opinion has been given in the joined cases Miljoen (C-10/14), X (14/14) and Société Générale (C-17/14), concluding that withholding tax imposed on a non-resident may not exceed the individual income tax burden of a resident taxpayer. Germany – Draft revised corporate tax guidelines on mergers and tax groups have been published, as highlighted in this month’s German Tax Monthly prepared by KPMG in Germany. More TaxNewsFlash – Europe can be found here.
Transfer Pricing WCO - The World Customs Organisation (WCO) has issued a guide on customs valuation and transfer pricing. India – A recent transfer pricing case ruled that certain companies could be appropriate comparables provided that they are functionally similar; they need not be identical. More TaxNewsFlash – Transfer Pricing can be found here.
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OTHER NEWS IN BRIEF
A round up of other news this week
This week: The Court of Appeal rules that retrospective SDLT anti-avoidance legislation does not contravene the European Convention on Human Rights; regulations published amending cultural tests for television tax relief; briefing on UK business immigration; HMRC publish revised QROPS list; tax-free childcare to launch in 2017; July’s edition of the Weekly Tax Matters consultation tracker; and KPMG publish report on the UK Liability Driven Investment market.
The Court of Appeal has decided that anti-avoidance legislation targeting SDLT avoidance schemes which was introduced with retrospective effect by FA 2013 does not contravene the European Convention on Human Rights - APVCO 19 Ltd & Ors, R (on the application of) v HM Treasury & Anor [2015] EWCA Civ 648. On 1 July, regulations were published amending the cultural tests which must be passed to qualify for corporation tax relief for television production development. The cultural test for drama and documentary programmes will be brought into line with the cultural test for films and a new cultural test for children's television programmes will be introduced following the new relief brought in by Finance Act 2015. The regulations take effect from 23 July 2015. We will be holding a briefing on UK business immigration and illegal working, including the practical implications regarding right to work of migrants and illegal working issues, from 8:30 to 12:00 on Friday 28 August 2015 at our offices at 15 Canada Square, London. Please get in touch with your usual KPMG contact for more information. Following the earlier suspension of the Qualifying Recognised Overseas Pension Schemes (QROPS) list (which we previously reported), HMRC have now published an updated (and significantly shorter) list of qualifying schemes. We will consider the implications of this in more detail in next week’s Weekly Tax Matters. HMRC have confirmed that the new tax-free childcare regime is likely to launch in early 2017. They have also confirmed that “The existing Employer-Supported Childcare scheme will remain open to new entrants until Tax-Free Childcare is launched.” July’s edition of the Weekly Tax Matters consultation tracker can be found here. The UK Liability Driven Investment market continues to grow significantly, with hedged liabilities increasing 29 per cent to £657bn last year, according to a report published by KPMG in the UK.
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