Legislation day highlights
Back in 2016, the government announced that it was moving to a single fiscal event, to be held in autumn so that tax changes would be announced well in advance of taking effect and more time was available to scrutinise draft tax legislation. The new process started well in 2017, however Brexit, a general election and the pandemic have hindered the integrity of this ambition. No Budget was held in 2019. And this year, 2020, we are likely to witness two Budgets. While political events have got in the way of the tax policy making process, the government remains committed to publishing draft tax legislation in advance. This level of transparency continues to be welcome in order to provide greater certainty to taxpayers and ensure that legislation reflects stakeholders' responses before it is formally introduced.
On 21 July 2020, the government published a number of draft clauses for technical consultation. The consultation on the draft legislation closes on 15 September 2020 and will, in due course, be laid before Parliament. The government also took the opportunity to publish a series of policy consultations and other policy papers. A selection of highlights from the draft clauses and other measures are detailed below.
Taking income tax draft legislation first, a couple of revisions are proposed to the termination payment rules to remove discrepancies in treatment under existing legislation that arise from certain contractual notice terms or the residency of the individual employee. From April 2021, employees whose notice period is not a round number of months will be able to calculate their post-employment notice pay (PENP) using an alternative calculation. Since October 2019, when the issue was identified, as a matter of practice, HMRC have permitted taxpayers to adopt the alternative calculation. This practice will remain available until the new legislation comes into effect in April 2021. The second change relates to non-UK resident employees and seeks to align the tax treatment such that non-residents will be subject to income tax and National Insurance contributions on their PENP to the extent that they would have worked in the UK during their notice period.
Following the release of explanatory notes in early July, the government has now published draft legislation to introduce a time limited exception for participants in enterprise management incentive (EMI) schemes who are furloughed or who have had their working hours reduced below the current statutory working time requirement (of 25 hours per week or if less, 75% of their working time). If an employee who is with or to be issued with qualifying share options has met or would meet the requirements at the time of grant but for reasons connected to the coronavirus pandemic, the time which they would have spent on the business of the company will count towards their working time. This should mean that EMI scheme participants do not lose tax advantages as a result of furlough, unpaid leave, sick leave or reduced hours due to coronavirus and will prevent participants being forced to exercise their EMI options earlier than planned.
A couple of technical amendments are proposed to the corporate interest restrictions (CIR) rules. The first amendment will ensure that the rules for REITs take into account the changes for UK property businesses of non-resident companies to become within the charge to corporation tax. The second change brings an administrative aspect of the CIR rules in line with those for corporation tax self-assessment. The measure means no penalties will be imposed for the late filing of a CIR return if there is a reasonable excuse for the failure.
As announced in Budget 2018, a SDLT surcharge will be applied to non-residents purchasing residential property in England and Northern Ireland. The surcharge will be set at 2% higher than the rates that would ordinarily apply — a compromise on the 1% rate that was previously consulted on and the 3% proposed by the Conservative Party at the time of the election. Given the recent temporary reduction in the residential rates of SDLT, there may be a flurry of purchases by non-residents eager to complete transactions before the surcharge comes into effect on 1 April 2021.
Anti-avoidance and tax administration
A number of measures have been introduced to strengthen HMRC's ability to tackle promoters of tax avoidance schemes and users of tax avoidance schemes in response to the Morse Review of the loan charge. Earlier stop notices under the promoters of tax avoidance scheme and information notices that can be issued under DOTAS will enable HMRC to obtain necessary information at an earlier stage. Promoters who continue to sidestep the rules will be caught by additional measures to prevent the ability of promoters to move their activity to a new entity. Proposals are also put forward to provide a clear mechanism under the GAAR to enable HMRC to issue a separate GAAR notice to partnerships, given the current legislation makes no specific mention of them. The draft legislation for all of these measures should be read in conjunction with an accompanying consultation document that has been published.
Following the consultation on amending HMRC's civil information powers (published in July 2018), draft legislation is being introduced to allow HMRC to obtain information and documents from financial institutions. HMRC expects the new process to speed up the time it takes to deal with international exchange of information requests, reducing the time from 12 months to the international standard of six months. Under the current regime, access to the information requires the consent of the taxpayer or the approval of a tribunal, which can take some time to secure. At the time of consultation concerns were raised whether HMRC needed additional powers. A number of safeguards have been introduced, one of which requires HMRC to report to Parliament on the use of the measure.
Consultations and other policy measures
Reform of tax administration
The government has set out its ten year strategy for HMRC. The document underlines its desire to move forward with Making Tax Digital, bringing more individuals and businesses within scope. Harnessing these systems is said to minimise opportunities for error and help keep records safe. With more frequent reporting it will also provide the government with opportunity to make better policy responses in future crises. The document also opens up the possibility of a PAYE system for the self-employed, moving from twice yearly payments to real-time payments using intermediaries to withhold at source. Shifting the responsibility for the collection to intermediaries is not a new strategy for HMRC and is likely to deliver for the exchequer.
Tentative steps towards modernisation of stamp duty started in lockdown with the announcement that forms and payment could be made electronically. It was hoped this might pave the way for fundamental reform along with the retirement of the stamping machine. The call for evidence that has now been published is ambitious in its willingness to consider amalgamating stamp duty and SDRT and bring the tax into the 21st century.
Economic crime levy
Hidden in the 2020 Budget was a new hypothecated tax designed to combat money laundering. The economic crime levy will be payable by firms that are subject to the UK Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations, SI 2017/692, and could affect a large number of businesses — some 90,000 entities. The levy would be based on a firm's UK revenues with a flexible rate to raise the targeted amount of £100m per year.
As announced at Budget 2020, the government has launched a consultation to review what costs companies can include in R&D tax credit claims, and whether these need to be updated to ensure the credits remain well-targeted and reflect modern R&D processes. The current definition for tax purposes is taken from the 2010 BEIS guidelines and has not been reviewed in the last decade. The focus of the consultation centres on the use of datasets and leased software, chiefly cloud-computing, but the government is also keen to know of any current eligible costs which do not contribute to genuine innovation to see if relief in those fields can be recycled into more effective areas.
The business rates consultation admits this is not the first review of the business rates system in recent years. This consultation sets the stage for another root and branch review, not only covering aspects of the existing regime such as reliefs, the multiplier, valuation and the appeals process but also setting out alternatives. An online sales tax, to complement the digital services tax which excludes retailers and e-commerce, is proposed although it is not anticipated that it would raise sufficient revenue to replace business rates entirely. Another proposal is a recurrent property tax based on capital values paid by the property owner. Introduction of a new tax would not be a quick fix, and despite the structural changes to the high street accelerated by the pandemic, it is not clear that there has been any material change to the divided opinions that were voiced at the last round of consultation. The government also announced that the next revaluation of business rates would take effect on 1 April 2023 and it will be based on property values as of 1 April 2021.
In response to the Morse Review, the government has published a call for evidence to tackle the continued use of disguised remuneration schemes. Although no solid proposals are put forward, the consultation asks what further action the government and HMRC should take.
Finally, it is worth noting that a number of consultations that were published at Budget 2020 remain live. In light of the pandemic, the government extended the consultation period and has noted that draft legislation for plastic packaging tax, R&D SME tax credit PAYE cap, construction industry scheme abuse, and notification of uncertain tax treatment by large businesses will be published later in the autumn. No news has been reported in relation to the consultations on asset holding companies or hybrid mismatches, suggesting they may be on a different legislative trajectory.
First published in Tax Journal.
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