Tax administration and maintenance day highlights
Now in its second outing (the first was held a few weeks after the spring Budget 2021), "tax day" appears to be becoming an established feature of the tax policy making cycle. Separating detailed consultations and other minor tax policy updates from the Budget announcements mitigates any risk the announcements might detract from the core measures that have presentational value or larger impacts. The announcements fall within three categories: tax simplification; tackling non-compliance; and further tax policy announcements that includes taxes fit for the modern world; proposals to level the playing field and transparency measures. Overall, some 38 announcements were made.
On 30 November 2021 the government published a package of tax policy announcements as part of "tax administration and maintenance day" (TAMD).
The announcements are a mixture of new consultations, responses to recent consultations, and smaller measures that do not have a fiscal impact or need Finance Bill legislation.
This is the second time a tax announcement event has followed shortly after a Rishi Sunak Budget – there was a similar publication three weeks after spring Budget 2021 – suggesting "tax day" is going to be a recurring feature of the policy calendar under this chancellor. The government’s objective seems to be to focus the Budget on a core of measures that have presentational value or large impacts, while dealing with the ongoing churn of tax policy development in a lower-key way. The somewhat sterile name "tax administration and maintenance day" sets expectations accordingly, although there are plenty of measures that will interest tax enthusiasts.
There were 38 announcements in total – we’ve summarised the most significant ones below. The number of measures highlights how relaxed the government is announcing tax changes outside of a traditional fiscal event. Although absent from the TAMD publications, the pace needed to introduce the global tax reforms developed by the OECD could see the government move swiftly (and outside of a Budget event) once the model rules are published later this month. Other notable absences include a response to the review of the UK funds review; a much-promised consultation on the VAT treatment of fund management fees; and a response to the call for evidence on enterprise management incentives.
Modernising tax administration
The government is continuing to advance its strategy to reform and modernise tax administration, although progress has been slow. TAMD included responses to several recent consultations on tax administration but none of them featured significant new decisions and in each case the government committed to further engagement with stakeholders:
- The tax administration framework review was a wide- ranging call for evidence that sought stakeholders’ views on fundamental questions about the rules and processes that underpin reporting and assessment of tax. This was always going to be the first step in a lengthy process of reform, and the government has announced that HMRC will now develop a roadmap for further consultation.
- The roll-out of making tax digital (MTD) to corporation tax continues to look a long way off, which is likely to lead to businesses breathing a sigh of relief. The MTD consultation response makes clear that the government’s immediate priority is the successful delivery of MTD for income tax (which, with a target date of April 2024, is still over two years away), and indicates the government wants to consult further and learn lessons from income tax and VAT before extending MTD to corporation tax.
- On timely payment of tax, the government continues to extol the potential benefits of earlier and more frequent payment, aided by digital record keeping, in helping businesses keep track of their liabilities and HMRC manage tax debt. However, for now the proposals are kicked into the long grass: the TAMD announcement contains a firm undertaking not to change payment timings in this parliament, and to carry out further consultation on any future changes.
Review of large business tax administration
At spring Budget 2021 the government quietly announced a review of tax administration for large businesses, aimed at identifying improvements that would support the UK’s competitiveness.
HMRC and HM Treasury held discussions with stakeholders over the summer and the government has now announced the outputs which include:
- investment in improving HMRC’s guidance and rolling out new "guidelines for compliance" that indicate what HMRC would consider high and low risk approaches in practical situations;
- a new process that will allow businesses to flag long- running enquiries that meet certain indicators, so that HMRC can take steps to accelerate their resolution;
- engagement with stakeholders on compliance best practice, building on ongoing dialogue with industry about transfer pricing enquiry effectiveness;
- improvements to the systems and processes for issuing certificates of residence; and
- reviewing how HMRC can engage with foreign authorities through advance pricing agreements and mutual agreement procedures to minimise double taxation and support cross-border trade.
While all of these changes are likely to be welcomed by businesses, they are targeted fine-tuning rather than a "big bang" reset of HMRC’s approach and their impact will depend on how effectively they are implemented. There are some indications that the government considers this announcement to be the first step in a longer-term process of engagement around large business tax administration.
Response to OTS review of IHT and CGT
Expectations around a significant overhaul of CGT and IHT have been high since the chancellor commissioned the OTS to undertake a series of reviews in 2018 and 2020 respectively. Both reviews strayed into policy design, territory normally outside of the remit of the OTS. Admittedly, the chancellor did make life difficult for the OTS by seeking recommendations on areas where these taxes create distortions – an arguably wider brief than simplification.
As such, recommendations were put forward by the OTS to tackle the distortive nature of IHT reliefs such as BPR/APR; highlight inconsistencies with other parts of the UK tax code (such as CGT uplift on death); and although the CGT review stopped short of recommending an alignment of income tax and CGT rates, they did suggest rates could be "more closely" aligned. The government has now responded and stated that it does not intend to take forward any changes to the design of IHT and CGT but has accepted five technical changes around the administration of CGT.
OECD’s model mandatory disclosure rules to tackle non-compliance
Following the UK’s exit from the EU and the repeal of most of DAC 6 from the UK tax code (which saw the removal of reporting under all of the hallmarks other than those in category D (on automatic exchange of information and beneficial ownership)), the government simultaneously announced it would consult on implementation of the OECD’s model mandatory disclosure rules (MDR).
A technical consultation on the draft regulations has now been published to implement the OECD’s rules.
Although the hallmarks under MDR are reduced in scope compared to DAC 6, one of the biggest differences between the regimes is that the rules will apply at a global level rather than an EU level. The headache caused by DAC 6 reporting requirements dating back to June 2018 will be felt even more acutely under the MDR rules as the government is looking at requiring reports of CRS avoidance arrangements entered into some seven years ago (albeit with a number of safeguards and mitigations). For those familiar with DAC 6, some respite might be taken from the fact that much of the HMRC DAC 6 guidance will continue to have application under UK MDR, albeit with further guidance to come.
Improving transfer pricing documentation
It’s old news that transfer pricing is one HMRC’s main areas of focus when it comes to large businesses: HMRC has collected £6bn from TP enquiries in the last five years, and as at 31 March 2021 HMRC’s large business directorate had a further £8.1bn of tax under consideration. The government continues to search for ways to strengthen HMRC’s ability to identify TP risk and challenge taxpayers. In that vein, it consulted in spring 2021 on two new documentation requirements for businesses with revenues above €750m:
- maintaining a transfer pricing master file and UK local file in accordance with the BEPS Action 13 recommendations, together with a supporting "evidence log", and
- submitting an international dealings schedule (IDS) to HMRC containing details of cross-border transactions that would support TP risk
The TAMD announcement is likely to be welcome reading for heads of tax at large groups. While the government is pressing ahead with the (relatively benign) master file/local file requirement, it has replaced the evidence log with a simpler summary audit trail. It has also shelved the IDS proposal in response to industry concerns about the associated admin burden, although HMRC will keep the idea under review.
Consulting on making SDLT reliefs fairer
The government has identified a couple of areas for reform of SDLT following concerns of abuse, or what the consultation document also (more politely) describes as unfair outcomes or incorrect claims. The two areas under consideration are:
- mixed-property transactions consisting of both residential and non-residential property; and
- multiple dwellings relief (MDR).
In the case of the former, the government is looking at introducing an apportionment method or a threshold test rather than the current system where mixed-property transactions are wholly charged to the (lower) non- residential rates of SDLT. The apportionment method will place a greater burden on the taxpayer to value the residential versus non-residential portions, however from the government’s perspective, the alternative of a threshold test (where a purchase is only treated as mixed-property if the non-residential element is more than a certain proportion of the consideration) would not entirely eradicate the abuse as it would still incentivise certain behaviour around the threshold. Following a significant number of unreasonable claims for MDR, the government is also looking to introduce certain conditions to guard the relief, including consideration of a "qualifying business use" test.
Further tax policy announcements
Business rates and online sales tax
Hopes of fundamental business rates reform were crushed at Autumn Budget 2021, however the government did announce a string of proposals to make the system fairer. A technical consultation has been published to deliver on these measures which includes more frequent revaluations and provision of greater transparency around valuations. In addition, a couple of reliefs designed to encourage investment in improvements in occupied properties and green technology are under consultation.
The much-anticipated consultation on an online sales tax to level the playing field between physical and online retailers will be published next year. Time will tell if a new online sales tax can be neatly packaged to be compliant with the OECD pillar one agreement to withdraw digital services taxes and other relevant similar measures and remain inconspicuous to the US trade investigations team.
Hybrid rules: exemption for regulatory capital
One of the more technical TAMD announcements is that the government will bring forward secondary legislation to retain the exemption in the hybrid rules for regulatory capital instruments issued by banks, which was due to lapse from 31 December 2022. This is perhaps notable as another example of the government using its post-Brexit flexibility on tax policy. The regulatory capital exemption was required to be abolished by the EU Anti-Tax Avoidance Directive which applied while the UK was an EU member state but is permitted under the UK/EU Trade and Cooperation Agreement, which binds both parties to OECD tax standards.
R&D tax reliefs
The government has issued a report on several changes to R&D tax reliefs following the Autumn Budget 2021 announcements that came off the back of a series of consultations designed to improve the competitiveness and effectiveness of the relief. The definition of R&D qualifying expenditure is set to expand to include data and cloud costs which will be welcome to businesses that rely on vast data sets and invest in digital transformation projects.
However, what is given with one hand, is taken away by another. The government is also seeking to limit the relief to ensure only innovation that has a nexus to the UK qualifies.
This means subcontracted costs or expenditure incurred on payments for externally provided workers will only be eligible if the third party performs the work in the UK or the worker is paid through UK payroll.
Responding to concerns around abuse, the government is also seeking to improve compliance. This will involve strengthening the claim procedure by shifting the claim online; requiring advance notification of a claim; seeking more detail around the claim; and providing the name of a senior officer to endorse the claim as well as the names of any agents who have supported making the claim.
The government has published a call for evidence that outlines continued concerns about employment rights abuses and tax non-compliance in the umbrella company market. Umbrella companies act on behalf of employment agencies, employing workers who then work on temporary contract assignments for clients.
The call for evidence proposes building on previous reforms by bringing umbrella companies within the regulatory regime that applies to employment agencies, and then creating new regulations on their conduct.
It also outlines various tax compliance concerns.
Although these aren’t accompanied by concrete proposals the document invites views on how end clients of umbrella companies can help support tax compliance, hinting that the government may be interested in measures that outsource the task of ensuring compliance to clients, in a similar way to the off-payroll working rules.
This article was first published in tax journal.