Introduction

As Brexit rumbles on and the uncertainties surrounding it become no less murky, some slightly more concrete news is very welcome for the tax world. As readers may be aware, in 2016 the Chancellor announced that the Government would introduce a single fiscal event each year, delivered in the Autumn and would not make significant tax or spending announcements at the Spring Statement, unless the economic circumstances require it. Having now had the first “fallow” Spring under this new system, the next Finance Bill will soon be upon us. In this article I take a look at a selection of the provisions already announced with draft clauses and a number of other measures from recent months.

Draft clauses

Those draft clauses published by HMRC over the summer are intended to form part of the Bill that will take shape following the Budget on 29 October and eventually become Finance Act 2019.

Despite expectations that there would be announcements relating to taxation of the digital economy, royalty withholding tax and the corporate intangible fixed assets regime, none of these have yet materialised but rather are anticipated to be covered in future draft clauses. However, anti-avoidance remains high on the agenda as corporate social and tax responsibility continues to be increasingly important.

The proposed provisions and other announcements indicate HMRC is continuing its attempt to catch up to how modern businesses operate and the ways in which the current tax system is no longer relevant to our modern, globalised world. Some of the key new tax developments introduced are detailed below.

Non-residents – capital gains tax on direct and indirect disposals of UK property

The UK does not currently tax non-residents on their disposal of UK commercial investment property or disposals of interests in corporate entities which own UK property. However, this is soon to change in a widening of the UK tax net. From 6 April 2019, UK tax will be chargeable on gains made by all persons regardless of residence (subject to limited exemptions) upon the direct or indirect disposal of all types of UK immovable property. Currently, only certain disposals of UK residential property are subject to UK CGT under the non-residents capital gains tax regime introduced from 6 April 2015 or under the annual tax on enveloped dwellings regime.

Indirect disposal rules will apply where an entity is ‘property rich’, i.e. where 75 percent or more of the entity’s gross asset value at disposal is represented by UK immovable property. As currently envisaged, such disposals will only trigger the charge where a person holds, or has held at some point, a 25 percent or greater interest in the entity at any point in the two years ending on the date of disposal.

The proposed changes were initially announced in the 2017 Autumn Budget, and while the basis of the provisions remain the same, HMRC has made several welcome adjustments to settle initial concerns. These include an option to rebase to actual cost (instead of cost being based on April 2019 values) being available for indirect disposals; however, any loss arising on disposal where rebasing is exercised will not be allowable. Non-resident companies which become UK resident on or after 6 April 2019 will also be able to benefit from rebasing to April 2019 values. There is also a provision allowing a holding of 25 percent or more during the two-year period to be disregarded if the holding is for an insignificant amount of time.

The existing non-resident capital gains tax (“NRCGT”) regime will be incorporated within the new regime and the Annual Tax on Enveloped Dwellings related capital gains tax regime will be abolished.

Corporation tax on UK property income of non-resident companies

In an historic quirk of the UK tax system, currently non-UK resident companies pay income tax, not corporation tax, on non-trading profits arising from UK property income. In addition to corporation tax on gains as noted above, as expected the draft clauses confirm that from 6 April 2020, non-UK resident companies who carry on a UK property business will be liable to pay corporation tax going forward, including where they invest via a tax transparent collective investment vehicle.

The effect is that non-resident corporate landlords will no longer be required to complete a non-resident landlord return but will file a corporation tax return and be subject to the same rules as a UK company.

Some key impacts as a result of the proposed changes are as follows:

• The transition from income to corporate tax will result in non-UK resident corporate landlords benefiting from a lower tax rate under corporation tax (19 percent currently and 17 percent from 1 April 2020) compared to the income tax rate (20 percent).
• Currently, non-UK resident corporate landlords obtain relief for interest as an expense in calculating income tax profits. However, from April 2020, non-resident companies will need to familiarise themselves with the loan relationship and derivative contract regimes. They will also need to consider a wealth of complex provisions that could limit deductibility of financing costs such as the anti-hybrid rules and the corporate interest restriction rules which were both introduced in 2017 as part of the UK’s response to the BEPS (Base Erosion and Profit Shifting) initiative from the OECD.
• The shift from income tax to corporation tax should be beneficial in terms of group relieving losses that arise from 5 April 2020 onwards. However, the switch will also ensure that non-resident landlords are subject to the new loss restrictions, such as capping of relief, with an associated increase in complexity.
• The change may also represent a more significant compliance burden for many companies affected, particularly in the transitional year where both an income tax return and corporate tax return may be required.

Entrepreneurs’ relief

Entrepreneurs’ relief has now been on the books since June 2008 and has long been the capital gains relief for individuals to aim for when realising value from their trading business. While the scope and detail of the relief have undergone various changes and revisions, the content of draft clauses announced in July look to improve this relief.

Currently, voting rights and ordinary share capital of at least 5 percent are required in order to qualify for the relief. The proposed changes from 5 April 2019 will allow individuals whose voting rights or ordinary share capital is ‘diluted’ below the 5 percent threshold to obtain relief for the accrued gain up to that time, where the dilution is a result of a new share issue.

The aim is to ensure that entrepreneurs are not discouraged from seeking external investment to finance business growth in circumstances where their own shareholding becomes diluted. Given the continued strength of the UK private equity market, flying in the face of economic uncertainty, and the need to attract investment to further entrepreneurial businesses, this is a welcome change.

The new rules introduce two elections:

1. Where a trading company has issued shares for cash consideration for genuine commercial purposes and the individual’s shareholding has fallen below the 5 percent threshold, an election can be made to treat the shares as having been disposed of and immediately reacquired at market value prior to the dilution event. Entrepreneurs’ relief can then be claimed on any gain arising (subject to meeting the other requirements of the relief). This election on its own is likely to result in a dry tax charge and must be made on or before the first anniversary of 31 January following the tax year of the deemed disposal.
2. The second election allows an individual to defer the gain (on the deemed disposal referred to above) until an actual disposal of the shares thus avoiding the dry tax charge. This election should be made within 4 years from the end of the tax year of the deemed disposal.

EU Mandatory Disclosure Regime

The EU mandatory disclosure regime (“MDR”) is now in force and applies to transactions from 25 June 2018. The Directive was introduced by the EU in June 2017 and HMRC has introduced enabling legislation in the draft clauses to the Finance Bill. Under the EU rules, intermediaries will have an obligation to automatically report to local tax authorities on reportable cross-border arrangements. The rules will give HMRC and other tax administrations access to information about taxpayers (individuals and corporate entities), intermediaries who provided services in connection with these arrangements, their activities in other countries, and the types of cross border arrangements that are implemented.

Under the Directive, the rules apply to certain types of cross-border arrangements, defined as an arrangement that concerns either more than one Member State, or a Member State and a third country where at least one of the following conditions are met:

• Participants are resident for tax purposes in two or more jurisdictions.
• One or more participants are dual residents.
• Arrangements are part of the business of a permanent establishment.
• An activity is carried on in another jurisdiction without tax presence in that jurisdiction.
• It affects the automatic exchange of information or the identification of beneficial ownership.

Where a cross-border arrangement exists, details of the relevant arrangement should be reported to local tax authorities if the arrangement falls within certain hallmarks. A hallmark is a characteristic or feature of a cross-border arrangement, or series of arrangements which according to the EU indicates a potential risk of tax avoidance. While the scope of hallmarks is very broad, some of the hallmarks are subject to a main benefits test such that reporting only applies in the event that a tax advantage is the main benefit or one of the main benefits to the arrangement. However, a number of the hallmarks are not linked to a main benefits test and, therefore, will themselves trigger a reporting obligation. HMRC are expected to work within the above EU framework in introducing specific UK legislation (by December 2019) however the precise proposals will be the subject of consultation.

These tax avoidance provisions of course add an additional layer to, and indeed share some features with, the anti-avoidance disclosure regimes already in place in the UK such as DOTAS (Disclosure of Tax Avoidance Schemes) and the enabler legislation. The Government will also consult on how the MDR will interact with existing measures.

The timing of this is somewhat messy from a UK perspective in that while it is now in force, the UK legislation is not yet drafted and the first actual disclosures are not required until August 2020 which is, of course, post-Brexit. It remains to be seen how this regime will fit with the UK’s relationships with the EU however taxpayers and tax advisers need to take these requirements seriously and collect the required information in readiness for disclosures in due course.

Tax administration

The current UK regime for penalties on submission of various tax returns is a patchwork built up over many years with differing consequences and arrangements. With a view to simplification and convergence, the Government has drafted clauses to introduce a new late filing regime which will replace the existing late submission penalties with a points based system. The new system will be applicable initially only to Income Tax Self-Assessment and VAT. Whilst Excise, Environmental, Insurance and Transport Taxes are included within the scope of the legislation changes for these taxes will be implemented at a later date. Corporation Tax is not currently included in the scope of the legislation, however it is anticipated that this new approach will apply to Corporation Tax in the future.

This new system will introduce a points-based penalty regime for regular submission obligations (for example, tax return filing obligations), which replaces existing penalties for the taxes in scope. Returns have to be submitted more frequently for some tax regimes and in differing circumstances than others. Depending on the frequency of the return submission obligation, a defined number of penalty points will accrue to a threshold. Once this threshold has been reached, a fixed penalty will be charged to the taxpayer. Once a taxpayer has reached the threshold a penalty will be charged for every subsequent failure to make a return on time but their points total will not increase. Any points accrued will be reset to zero after a period of good compliance (i.e. returns must be filed on time and all relevant returns which were due within the preceding 24 months must have been submitted). Presently, no penalty rates have been published within the draft clauses.

The new points system is a welcome change for taxpayers offering a bit more lenience for taxpayers with a good compliance history before imposing a late-filing penalty. However, there are initial concerns that the new regime may be difficult to administer and that it may be slightly too complicated for taxpayers to follow the various points systems expected for the different regimes.

Other

In addition to the areas outlined above, a number of other changes are also in the pipeline with draft clauses published in recent months. These include:

• A proposed reduction in the filing and payment deadline for SDLT from 30 days to 14 days for transactions made on or after 1 March 2019.
• Draft legislation for consultation which aims to widen the eligibility criteria for VAT grouping. It seeks to include non-corporate entities (such as partnerships) which have a business establishment in the UK and control a body corporate. The proposed changes may simplify VAT arrangements for businesses with corporate and non-corporate entities, however it is important to note that under a VAT group all group members are jointly and severally liable for the group’s VAT liabilities. This will be a relevant consideration for non-corporate entities considering joining VAT groups.
• In relation to the Corporate Interest Restriction regime enacted from 1 April 2017, from 1 January 2019, the deadline for appointing a reporting company will be extended to 12 months from the end of the relevant period of account (compared to six months under the existing legislation). Further, the calculation of adjusted net group-interest expense will be amended to ensure that it deals correctly with capitalised interest and that debt releases with a connected company outside of the group do not distort the calculation.

Conclusion

Overall it has been a busy summer on the UK tax front with a number of fundamental changes to long-standing arrangements to come into force in addition to other areas where concrete proposals are still to be made. While convergence and simplification of UK tax legislation features in the recent announcements, there is still a very long road to travel. Additional layers of complexity are still a regular bump in that journey.

With Brexit now truly looming, there remains a balancing act for the Chancellor to achieve in ensuring the UK tax system not only remains competitive but actively seeks to attract investment in an ever more competitive international environment. This next Finance Bill could be a very important one indeed.