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Weekly Tax Matters
KPMG LLP (UK)
7 November 2014
contents
TAX POLICY
•
•
BEPS Action 7 Discussion Draft – Permanent
Establishments
BEPS Action 10 Discussion Draft – Low Value-Adding
Intra-Group Services
CORPORATE TAX
•
•
Vocalspruce - Court of Appeal decision
FTT decision on deemed loan transactions
EMPLOYMENT TAX
•
•
•
Workers win key holiday pay appeal
New HMRC guidance on online annual returns for
employee share plans
Has the RTI dream materialised?
PERSONAL TAX
•
Personal tax summaries to be issued to taxpayers
INTERNATIONAL STORIES
•
•
Tax Journal – international round up for October
International round up
OTHER NEWS IN BRIEF
© 2014 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG
network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
TAX POLICY
BEPS ACTION 7 DISCUSSION DRAFT
– PERMANENT ESTABLISHMENTS
The OECD has set out a number of
far-reaching proposals that would
significantly widen the definition of a
permanent establishment.
Mario Petriccione
 +44 (0)20 7311 2747

[email protected]
Robin Walduck
On Friday 31 October, the OECD published a discussion draft in relation to BEPS
Action 7: Artificial avoidance of Permanent Establishment (PE) status. This sets out 13
“Options” to change the definition of PE in the OECD Model, which have the potential
to significantly widen the definition of PE, as well as leaving room for uncertainty and
potential conflicting tax claims. The proposed changes include:
Commissionaire arrangements and similar structures – definition of “dependent agent”
Options include a much broader test by reference to whether the activities of the agent
result in the conclusion of contracts in the name of the enterprise, or for the transfer of
property owned by the enterprise, or for the provision of services by the enterprise.
While the discussion draft, in line with earlier BEPS pronouncements, explicitly targets
commissionaire structures, it would appear that “flash title” buy-sell structures could
also be caught.
Specific activity exemptions
 +44 (0)20 7311 1816
Options include removing the exemption for the storage of goods for delivery; this
appears originally focussed on electronic trading, but could have much wider
application. Other options would remove the exemption for purchasing activities. A
further option would see the exemptions unchanged but would impose a requirement
that the activities be of a preparatory or auxiliary character; this requirement may introduce a strong risk of tax authorities arguing that the storage of
goods for delivery or the purchasing activities are a core part of the business and cannot therefore be auxiliary or preparatory.

[email protected]
Anti-fragmentation rules
Options include aggregating activities of related parties (including local subsidiaries) in relation to testing the duration of a construction or installation
project.
The draft does not propose changes to the Commentary, meaning changes would apply from the earlier of a renegotiated treaty, or the proposed
Multilateral Instrument pursuant to BEPS Action 15, coming into force.
© 2014 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
1
BEPS ACTION 10 DISCUSSION
DRAFT – LOW VALUE-ADDING
INTRA-GROUP SERVICES
The OECD has updated transfer
pricing guidelines on intra-group
services including simplifications for
low
value-adding
intra-group
services.
Komal Dhall
 +44 (0)20 7694 4498

[email protected]
Tim Sarson
 +44 (0)20 7694 4831

[email protected]
On 3 November 2014, the OECD published a Discussion Draft titled BEPS Action 10:
Proposed Modifications to Chapter VII of the Transfer Pricing Guidelines relating to
Low Value-Adding Intra-Group Services. This draft proposes modest changes to the
existing guidance on intra-group services and a new section on Low Value-Adding
Intra-Group Services (LVS). Combined, these changes to Chapter VII should help
taxpayers by challenging tax authorities to meet higher thresholds when contesting an
LVS charge.
The two main changes to the existing guidance are around shareholder services and
what to do in the situation of a duplication of services between a service provider and
recipient. The draft expands the list of shareholder services to include items such as
parent company tax compliance and stock exchange listing. However, the wording has
been softened so a company may be able to charge for services such as assisting with
a related party listing whereas previously this would not have been possible.
Where services between group companies had similar descriptions to in-house
activities, i.e. were duplicated, achieving a deduction was often difficult. In the draft, the
OECD proposes a requirement to look “in detail” at the services provided before
concluding on whether a charge is appropriate. However, if these services are not
“different, additional or complementary” to the recipient’s activities, a deduction for the
recipient may still be denied.
The proposed LVS regime is elective. LVS are services which are typically supportive,
non-core to the group’s operations, do not require the use of/creation of valuable
intangibles and do not assume or control significant risks. Examples of services which
would fall within LVS are given including HR and administration. Other pragmatic
proposals in the draft include:
•
•
•
•
a three-step method for calculating the LVS charges;
reduced documentation requirements;
mark-up of 2 percent – 5 percent ; and
clarification that annual invoices are appropriate.
These proposals on shareholder services, duplication and LVS will be welcomed by
many groups seeking clarity on these issues.
© 2014 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
2
CORPORATE TAX
VOCALSPRUCE - COURT OF APPEAL
DECISION
The taxpayer has lost at the Court of
Appeal in the lead case for an intragroup financing arrangement.
Rob Norris
 +44 (0)121 232 3367

The taxpayer has lost at the Court of Appeal in the lead case for an intra-group
financing arrangement (Vocalspruce Ltd v Revenue & Customs [2014] EWCA Civ
1302). Whilst the outcome is the same as at the First Tier Tribunal (FTT) and the
Upper Tribunal (UT), the Court of Appeal had different reasons for its conclusions.
In summary, loan notes (issued at a discount) were transferred intra-group in exchange
for shares with a nominal value equal to the accounts carrying value of the loan notes
at the time of the transfer. Subsequently, the discount income on the loan notes was
initially taken to the profit and loss account and then transferred to the share premium
account. The intended benefit was that the borrower would recognise a deduction for
the finance charge but the lender would not bring into account taxable income.
[email protected]
Two arguments were advanced by HM Revenue & Customs (HMRC). First, it was
argued that the profit was required to be taken to share premium account and so was
not taxable (applying the legislation relevant at that time). This argument, which had
been accepted at both the FTT and UT, was rejected by two of the three judges at the
Court of Appeal.
The second argument was that the special rule for intra-group transfers of loans, in the
form applying at that time, meant that the loan transfer was to be disregarded except
for certain limited purposes. It followed from this that there was deemed to be no issue
of shares and so no transfer to share premium account. This argument, which had
been rejected by the FTT and UT, was accepted by all three judges at the Court of
Appeal.
It is not yet known whether the taxpayer will appeal.
© 2014 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
3
FTT DECISION ON DEEMED LOAN
TRANSACTIONS
The FTT decision in Biffa (Jersey) Ltd
considers the treatment of interest
on intra-group transactions.
Rob Norris
 +44 (0)121 232 3367

[email protected]
The First Tier Tribunal (FTT) has found for HMRC in a lead case relating to a disclosed
scheme - Biffa (Jersey) Ltd. The intention was that the special rules on sale and
repurchase of securities would apply to certain intra-group transactions, so as to
achieve a deemed interest deduction with no corresponding taxable income. However,
it was held that there was deemed interest income corresponding to the deemed
interest expense.
In case the Tribunal is wrong on this (such that there is a deduction with no
corresponding income), consideration was also given to the application of the receipts
case of the arbitrage rules because the scheme included a subscription for shares. It
was held that these rules would not apply because the company entitled to the
deduction did not make a contribution to the capital. As a result, the mismatch would
not be countered by the arbitrage rules.
Peter Scholes
 +44 (0)20 7311 8343

[email protected]
However, if, contrary to the above, the company entitled to the deduction did make a
qualifying contribution to capital, it was held that the other conditions for the receipts
case of the arbitrage rules to apply would have been satisfied.
It is not yet known whether the taxpayer will appeal.
© 2014 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
4
EMPLOYMENT TAX
WORKERS WIN KEY HOLIDAY PAY
APPEAL
The EAT has made a key decision in
favour of workers regarding how
holiday pay should be calculated.
Steve Wade
 +44 (0)20 7311 2220

[email protected]
Ian Goodwin
The Employment Appeal Tribunal (EAT) has decided that non-guaranteed overtime
payments should be included for the purposes of calculating how much holiday pay a
worker should receive. The decision was made on the basis that although the
employer was not obliged to offer the overtime, the overtime was regularly worked (and
paid) and should be treated as normal pay.
Whilst this case is good news for workers who work overtime, it will represent an
additional cost and increase in administrative burden for some employers. However, it
is not all bad news for employers. The EAT has decided how the value of retrospective
claims should be limited as follows:
•
They have decided that the law should be interpreted so that if there is a period
of more than 3 months during which the correct payments have been made,
Employment Tribunals (ETs) will not have jurisdiction to hear claims.
 +44 (0)113 231 3227

•
•
[email protected]
Therefore, practically, if employers:
have recently amended how they pay holiday pay in anticipation of this decision, then it is unlikely that their employees will be able to claim
(unless they have brought one already); and
can evidence a period of 3 months during which an employee did not take holiday and therefore an incorrect deduction was not made, this will
break the chain in the series of deductions. This will limit the period in respect of which a claim can be made (on an individual basis).
In making this assessment, the EAT also decided that workers cannot retrospectively designate holiday as either EU (to which these rules apply) or
UK (to which they don't). This is a highly technical argument, but it means that the necessary break in incorrect payments will be easier for employers
to show. This aspect of the decision will be a huge relief to employers and bodies representing them. However, it comes with a health warning: it
represents a huge departure from a well-established understanding of how unlawful deductions claims are assessed, making it susceptible to appeal.
Read more on this story on KPMG’s Employers Club.
© 2014 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
5
NEW HMRC GUIDANCE ON ONLINE
ANNUAL RETURNS FOR EMPLOYEE
SHARE PLANS
Employment
Related
Securities
Bulletin 18 contains further guidance
on the move to online filing of
employee share plan annual returns.
Alison Hughes
 +44 (0)20 7311 2626

[email protected]
HM Revenue & Customs (HMRC) have published Employment Related Securities
(ERS) Bulletin 18. With effect from the current 2014/15 tax year, the previous paper
annual returns for employee share plans (Form 42 etc.) have been replaced with a
requirement to file online. The first online returns are due by 6 July 2015. HMRC have
previously released draft versions of the new online forms. The ERS bulletin sets out
some proposed revisions to these forms (and indicates that updated forms will be
available for download in the new year). If a company wishes to produce its own
version of a form there is a technical guidance note available.
The ERS bulletin also provides a link to draft screenshots illustrating the annual return
online process and announces the release of a ‘checking service’ that a company can
use to ensure that its annual return form is in the correct format. Most companies will
want to use this checking service well in advance of the 6 July deadline to identify and
rectify errors. The checking service can only be used once a share plan has been
registered online (a new requirement to register all share plans, including unapproved
and existing plans has been introduced as part of the move to online filing).
It appears that the format of the new annual return forms is going to be rigid – for
example if a column is expecting a date it does not appear to be possible to write
‘various’ or leave this blank. There also appears to be limited functionality to add subheadings, additional information etc. at this stage, although hopefully this will be
addressed before final versions are published.
Employers should, if they haven’t already done so, review their processes to ensure
they can meet these new requirements. Leaving this to after the year end will probably
be too late.
© 2014 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
6
HAS THE RTI DREAM
MATERIALISED?
Steve Wade looks at how far the
original objectives of RTI have been
achieved.
Steve Wade
 +44 (0)20 7311 2220

1
[email protected]
Real Time Information (RTI) went live on 6 April 2013. By September 2014, “over 95
percent of PAYE schemes had joined the system, with 70 percent saying that it is easy
to do” according to HM Revenue & Customs (HMRC). This is a major achievement and
has meant significant cultural change for employers, agents and HMRC.
In an article for Tax Journal 1, Steve Wade, Director in KPMG in the UK’s Global
Mobility Services Practice, compares this success with that of the five original aims of
the RTI consultation and suggests that there is still work to be done and further
investment required before it can be considered a success for taxpayers.
The article also examines the difficulties faced by the Debt Management and Banking
team at HMRC as a result of erroneous PAYE debts generated by the RTI system, and
considers how the system can be improved.
First published in Tax Journal on 31 October 2014. Reproduced with permission.
© 2014 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
7
PERSONAL TAX
PERSONAL TAX SUMMARIES TO BE
ISSUED TO TAXPAYERS
The first personal tax summaries
detailing income tax and NICs due in
respect of the 2013-2014 tax year will
be sent out from November.
Steve Wade
 +44 (0)20 7311 2220

[email protected]
From 3 November 2014 the Government will be sending out personal tax summaries
(PTS) for the first time to around 80 percent of individual taxpayers, approximately 24
million people.
Personal tax summaries were first announced at Budget 2012 with a view to increasing
transparency around personal tax and helping people to understand how the tax and
National Insurance Contributions (NICs) they had paid in the previous year had
contributed to public expenditure. The summaries will show total income from
employment and total taxable income before tax. If an employee has more than one
employer only the combined total employment income will be shown.
The PTS is not a tax bill and taxpayers do not have to take any action in response to
receiving the PTS. However, taxpayers should be aware that in some instances the
figures shown could be incorrect. There are a number of reasons for this, for example
where duplicate Real Time Information (RTI) records may have been set up in error, or
where amendments have not been processed.
We recommend that employees should contact HM Revenue & Customs (HMRC) if the
employment income figure on their personal tax summary looks substantially different
to that which they were expecting. They should not contact their payroll department.
HM Treasury’s press release suggests that an employee may not receive a statement
if HMRC are waiting for the details of a change of address from an employer.
Unfortunately HMRC do not currently accept change of address details from the
employer. It is the employee’s responsibility to notify HMRC of any change of address.
© 2014 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
8
INTERNATIONAL
STORIES
TAX JOURNAL – INTERNATIONAL
BRIEFING FOR OCTOBER
Chris Morgan’s latest summary of
international developments.
Chris Morgan
 +44 (0)20 7694 1714

2
[email protected]
In the latest of his regular articles for Tax Journal 2, 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 Advocate General opinion on the UK’s cross border group relief rules (the
M&S exception);
Automatic exchange of information between EU and global tax authorities;
Ireland’s 2015 Budget, including announcements on company residency and
the proposed ‘knowledge development box’;
Swiss corporation tax reform; and
The final decision in the Indian Centrica tax case regarding seconded
employees creating a permanent establishment.
First published in Tax Journal on 31 October 2014. Reproduced with permission.
© 2014 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
9
INTERNATIONAL ROUND UP
This week: Canadian trust tax
changes; BEPS implications for Latin
America and Asia Pacific regions;
new Vietnamese tax provisions;
report on Irish company residency
rules; limits proposed to German
cross-border hybrid arrangements;
and this month’s German Tax
Monthly.
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.
Americas
Canada – Recent changes to the taxation of trusts may impact certain estate
planning.
Latin America – A report by KPMG International Tax sets out the base erosion and
profit shifting (BEPS) implications for taxation across the region.
More TaxNewsFlash – Americas can be found here.
Asia Pacific
Asia Pacific – KPMG International have prepared a report on the BEPS impact in the
Asia Pacific region.
Vietnam – A number of new corporate income tax and VAT provisions have been
implemented.
More TaxNewsFlash – Asia Pacific can be found here.
Europe
Ireland – KPMG in Ireland have prepared a report on company residency rules, including the proposed changes.
Germany – Legislation has been proposed to limit cross-border hybrid financing arrangements and amend the rules for intra-group transfers.
Germany – “Add backs” for trade tax purposes and tax treaties are covered in this month’s German Tax Monthly, prepared by KPMG Germany.
More TaxNewsFlash – Europe can be found here.
© 2014 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
10
OTHER NEWS IN BRIEF
OTHER NEWS IN BRIEF
This week: two thirds of the UK’s
biggest businesses under HMRC
enquiry; David Gauke’s speech at
HMRC’s autumn conference; online
Gambling Tax Service open; Scottish
Taxation
breakfast
briefing;
Employers Club online briefing; latest
edition of the consultation tracker;
and a rise recorded in workers paid
less than the Living Wage.
Two thirds of the biggest businesses in the UK are currently under enquiry, according
to a press release from HM Revenue & Customs (HMRC). The press release
emphasises that this highlights both the complexity of the UK tax system and HMRC’s
need to scrutinise how companies deal with their tax affairs.
David Gauke’s speech at HMRC’s 2014 autumn stakeholder conference sets out
progress on “creating a modern and efficient tax system”.
HMRC’s online Gambling Tax Service opened on 3 November 2014. Because of
changes from 1 December 2014, those who will start to pay General Betting Duty, Pool
Betting Duty or Remote Gaming Duty need to register.
On 21 November 2014, KPMG in the UK is holding a Breakfast Briefing at our 15
Canada Square office to discuss the implications of prospective changes to the income
tax treatment of ‘Scottish Taxpayers’. To register click here.
As previously mentioned in Weekly Tax Matters, the Employers’ Club online briefing for November – focusing on salary sacrifice - will be held on 11
November 2014. To register click here.
The latest edition of the Weekly Tax Matters consultation tracker can be found here.
A modest rise in workers paid less than the Living Wage masks a more uncomfortable truth, according to new research published by KPMG in the
UK.
© 2014 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
11
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© 2014 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights
reserved.
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particular individual or entity. Although we endeavour to provide accurate and timely information, there can be
no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate
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