Weekly Tax
Matters
20 March 2015
kpmg.co.uk
contents
TAX POLICY
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•
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Budget and Finance Bill
EU proposals to combat tax avoidance and
harmful tax competition
Government action to tackle evasion and
avoidance
CORPORATE TAX
•
New debt cap regulations
INDIRECT TAX
•
Colaingrove Ltd (Power) – Upper Tribunal
decision
EMPLOYMENT TAX
•
Test for self-employment and working
tax credits
INTERNATIONAL STORIES
•
International round up
OTHER NEWS IN BRIEF
TAX POLICY
Budget and Finance Bill
The Chancellor has delivered his last Budget before this year’s General Election: now we await
more detail on some key measures in the Finance Bill.
Readers will be well aware that the Chancellor delivered the last Budget of this Parliament on Wednesday 18
March. As expected, it was a Budget with more than half an eye on the upcoming election, and while the
Chancellor had a lot to say about the state of the economy and announced several investment decisions across
the country, there were only a few major tax changes. Our dedicated Budget web page includes links to our
commentary on the key measures in the Budget, our On a Page summary and tax rate card, and a recording of our
Budget web briefing which considered some of the major issues. You can also still register for the following:
Diverted Profits tax
Some changes to the new Diverted Profits Tax draft legislation were outlined in the Budget. Final legislation will
be published on Tuesday 24 March and we are holding a web briefing on Wednesday 25 March at 3.30pm. Please
use this link to register.
Employment taxes
We are holding a web briefing on Thursday 26 March at 10am, and an Employment Taxes breakfast in our Canada
Square office on Tuesday 31 March at 9am, both focusing on the employment tax measures in the Budget. You
can register through the Employers’ Club site or by emailing [email protected]. Employers may also be
interested in our Budget Flash Alert.
The main Parliamentary business for the week commencing 23 March has also now been confirmed. We already
knew that the Finance Bill would be published on Tuesday 24 March: we now have details of when its
Parliamentary stages will take place:
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Wednesday 25 March – House of Commons (all stages). As the House of Lords cannot amend a Finance
Bill, this is the only point at which we might see amendments to the version published the day before.
Thursday 26 March – House of Lords Second Reading (and remaining stages).
We would also expect to see Royal Assent on Thursday 26, as Parliament is expected to prorogue the same day.
More on the Bill will be included in next week’s Weekly Tax Matters.
Chris Morgan
T: +44 (0)20 7694 1714
E: [email protected]
EU proposals to combat tax avoidance and harmful tax competition
The EC has released proposals for compulsory exchange of information on cross-border tax
rulings and potential public CbyC reporting.
On 18 March 2015, the European Commission released draft legislation regarding automatic exchange of
information on cross-border tax rulings as part of a package of measures to combat tax avoidance and harmful tax
competition. If approved by Member States the new automatic exchange would apply from 1 January 2016.
Weekly Tax Matters | 4
The proposals would require Member States to exchange information on cross-border tax rulings, including
advance pricing agreements (APAs), automatically with each other as well as with the Commission on a quarterly
basis.
The minimum requirements for information to be covered include the identification of the taxpayer and the group
to which it belongs, the content of the ruling/APA, the criteria used for the transfer price in the case of an APA,
and identification of Member States and other taxpayers possibly affected by the ruling/APA. Member States can
in principle request further information including the full text of the ruling in question.
Assessing potential for further transparency initiatives
The Commission intends to assess whether to extend additional public disclosure of certain corporate tax
information. An impact assessment will be undertaken to gather evidence on possible options however no details
are given on timing.
It should also be noted that the country-by-country reporting being considered under the new proposals would
involve public disclosure, in line with the EU rules for banks and the extractive industry, rather than that envisaged
under the OECD’s BEPS action 13.
Next steps
If approved by all Member States the proposals for automatic exchange of rulings must be implemented into their
domestic legislation by the end of 2015, and be applied from 1 January 2016.
Click here for a Euro Tax Flash from KPMG’s EU Tax Centre on this subject.
Peter Steeds
Julie Hughff
T: +44 (0)20 7311 3449
E: [email protected]
T: +44 (0)20 7311 3287
E: [email protected]
Government action to tackle evasion and avoidance
Measures to reduce opportunities and increase consequences for those who avoid or evade tax
and for those that help them have been published.
On 19 March 2015, the Government outlined measures to reduce opportunities and increase consequences for
those who avoid or evade tax and also for those that help them.
Much of the detail of the announcement repeats what has been announced previously but there are some new
measures on evasion:
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Civil penalties on enablers of tax evasion. This would carry a penalty equal to the fine paid by the individual
who has been helped to evade the tax. There are already criminal offences of facilitating or encouraging
tax evasion. This new measure is civil, rather than criminal, which will make it easier for HMRC to use.
A new criminal offence for corporates of failing to ‘prevent tax evasion or the facilitation of tax evasion’.
This would apply where, for example, a bank fails to have adequate controls in place to stop members of
staff aiding clients to evade tax. Therefore, it appears to be similar to current rules under the anti-bribery
act, which require companies to have procedures in place preventing staff from giving bribes. Presumably
it will also apply to partnerships and any other form of association. It is unclear whether this will also
oblige organisations to actively take measures to prevent their clients evading tax. Such a rule might
impose an unworkable administrative burden.
Weekly Tax Matters | 5
The Government also announced the strict liability criminal offence for those who have not paid tax on offshore
income. This will stop offshore evaders claiming, for example, they didn’t understand the rules. However, it is to
be hoped that there will be a defence for somebody who can demonstrate that they took adequate advice and a
mistake was genuine. And there will be a change in the penalties with the ability to link the size of the penalty to
the value of the offshore asset, not just the taxable income.
Sharon Baynham
Chris Davidson
T: +44 (0)118 964 4926
E: [email protected]
T: +44 (0)20 7694 5752
E: [email protected]
Budget 2015 | 6
CORPORATE TAX
New debt cap regulations
New debt cap regulations have been published in relation to subsidiaries not consolidated with
certain new GAAP accounting standards.
The Tax Treatment of Financing Costs and Income (Change of Accounting Standards: Investment Entities)
Regulations 2015 modify the worldwide debt cap provisions to take into account changes to IFRS 10 and the
requirements of FRS 102 affecting groups where a subsidiary is treated as an 'investment entity' rather than being
consolidated. The changes are intended to ensure that the external financing costs of unconsolidated subsidiaries
are taken into account in the debt cap computations to the same extent they would have been had they been
disclosed in the consolidated profit and loss account.
The regulations will apply where the ultimate parent of the worldwide group is either not required to consolidate
one or more relevant group companies or is not required to prepare consolidated accounts because of changes to
IFRS 10 and FRS 102. This can be relevant, for example, for listed investment funds, collective investment
schemes, pension and sovereign funds. It is of particular relevance to those groups which invest in infrastructure
(and especially PPP/PFI projects) which have high levels of third party (and shareholder) debt where subsidiaries
may be accounted for as investments measured at fair value so their external interest expense is not included
within interest expense in the consolidated accounts.
Broadly, the debt cap rules limit the net tax deductible financing costs in UK group companies to the extent that
this exceeds the gross finance expense in the group accounts. Amendments are as follows.
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The finance expense in the group accounts (the available amount) is increased where the tax computations of
UK group companies include a financing expense amount not included in the available amount because of the
change in accounting standards. Similarly, for non-consolidated non UK group companies, the available
amount is increased by the finance expense in the single entity accounts.
Where no consolidated accounts are prepared because of the change in accounting standards, the starting
point for determining the available amount will be the external financing expense in the single entity financial
statements of the ultimate parent which is then increased as described above.
The changes apply to (1) accounting periods beginning on or after 2 April 2015 and (2) for earlier periods where
these are affected by the relevant accounting standards.
Rob Norris
Mark Eaton
T: +44 (0)121 232 3367
E: [email protected]
T: +44 (0)121 232 3405
E: [email protected]
Weekly Tax Matters | 7
INDIRECT TAX
Colaingrove Ltd (Power) – Upper Tribunal decision
The UT found the consideration paid by holiday makers for electricity was not a reduced rated
supply of fuel and power for VAT purposes.
This case concerns a popular newspaper promotion under which readers collect tokens in return for cheap chalet
or caravan holidays. The accommodation charge (typically £60) is collected by the newspaper and paid (less
commission) to Colaingrove when the holiday takes place. The dispute concerns the amounts the customer pays
to the taxpayer in the form of a separate daily charge in advance for gas and electricity. This charge, which is not
optional, does not correlate to actual use.
Whilst dismissing the taxpayer’s argument that the fuel was a separate supply, the First-tier Tribunal (FTT)
concluded that the UK had wanted domestic fuel and power to be reduced rate even when supplied as part of a
single supply.
HM Revenue & Customs (HMRC) argued that the UK legislation only applies the reduced rate to standalone
supplies of power. There is nothing within the legislation which specifically applies the reduced rate to domestic
fuel and power when supplied as part of a wider single supply.
The Colaingrove Upper Tribunal (UT) cited a number of cases. These included the Morrisons UT decision in which
the taxpayer was unsuccessful in seeking a reduced rate for the charcoal element of disposable barbeques and the
subsequent AN Checker FTT. AN Checker concerned the supply of installed residential energy saving-materials
that would, if supplied on their own, be subject to VAT at the reduced rate, which are supplied with the wider non
qualifying supply of the installation of a boiler.
Applying that same reasoning in the current case the UT noted there was nothing in the VAT Act applying the
reduced rate to domestic fuel and power when supplied as part of a wider different supply. Therefore, if by
applying CPP principles the supply is a single one of standard rate holiday accommodation this does not fall under
the reduced rates provided for in Schedule 7A. Despite, the FTT recognising there was at least some doubt as to
the Government’s intention around the scope of the fuel and power reduced rate and whilst having some
sympathy for the taxpayer, HMRC’s appeal was allowed.
Steve Powell
Karen Killington
T: +44 (0)20 7311 2746
E: [email protected]
T: +44 (0)20 7694 4685
E: [email protected]
Weekly Tax Matters | 8
EMPLOYMENT TAX
Test for self-employment and working tax credits
The Budget confirmed a new test for self-employment where working tax credits are claimed.
HM Revenue & Customs (HMRC) have identified a vulnerability in the working tax credit (WTC) system, where
individuals were falsely claiming to be self-employed. The Government wants to prevent this, whilst ensuring that
workers who are genuinely self-employed have access to the WTC. The self-employment test is, therefore, being
strengthened to ensure that work being carried out on a self-employed basis is commercial with a view to a profit.
The test originally proposed (at the time of last year’s Autumn Statement) included a need to show that work
carried out is genuine and effective, as well as a requirement for claimants to supply their UTR as part of a claim.
However, the test will now be to show that the work is commercial and profitable, or being done with a view to
becoming profitable. The requirement to provide a UTR remains.
As the Office of Tax Simplification recently highlighted in their review of employment status, a variety of different
tests are already used to determine self-employment for tax, pensions and employment law purposes, and it will
be interesting to see how this new test works alongside them. It is also not clear how HMRC will apply the test in
practice, and how it will interact with (for instance) any use by the claimant of the employment status indicator tool
(ESI).
The new test will apply from 6 April 2015, and the requirement to be registered with HMRC and have a UTR as a
self-employed worker will apply from 6 April 2016. HMRC will be encouraging claimants to register throughout
2015/2016.
Colin Ben-Nathan
Mike Lavan
T: +44 (0)20 7311 3363
E: [email protected]
T: +44 (0)20 7311 1437
E: [email protected]
Weekly Tax Matters | 9
INTERNATIONAL STORIES
International round up
This week: Publications on US taxation; update on Canadian exploration expenses; Brazil 2015
annual tax assessment plan; Hong Kong proposes tax reliefs for corporate treasury centres;
Australian thin capitalisation changes; Malaysian FATCA guidance; EU tax transparency
agreement with Switzerland; OECD reports on EOI; new French tax bill; Belgium proposals for
new tax on banks and insurance companies; US court decision on transfer pricing; India
guidance on ‘rollback’ rules in APAs; and Indian court decision on transfer pricing treatment of
sales promotion expenses.
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
United States – KPMG in the US have released two annual publications – US Taxation of Americans Abroad and
US Taxation of Foreign Citizens – updated to reflect US tax law applying to taxable years ending on or before
31 December 2014.
Canada - Costs associated with environmental studies and community consultations that are required to obtain
exploration permits are eligible for treatment as Canadian exploration expenses (CEE) from February 2015.
Brazil – The tax authorities have issued their 2015 annual tax assessment plan for determining which issues
warrant a tax audit.
Jamaica – The 2015/16 budget was presented on 12 March 2015.
More TaxNewsFlash – Americas can be found here.
Asia Pacific
Hong Kong - The government is proposing a number of tax reliefs to encourage mainland and foreign firms to set
up corporate treasury centres in Hong Kong.
Australia - Taxpayers contemplating undertaking any refinancing or capital restructures should consider the 2014
amendments to the operation of the thin capitalisation rules.
Malaysia – The tax authorities have released guidance on Foreign Account Tax Compliance Act (FATCA) filings
for financial institutions.
More TaxNewsFlash – Asia Pacific can be found here.
Europe
EU – The European Commission has announced that it has concluded negotiations on an “ambitious” new tax
transparency agreement with Switzerland.
OECD – Nine ‘peer review’ reports concerning progress toward implementation of the international standard for
exchange of information (EOI) have been released.
France – A Bill has been passed which includes proposals for a favourable tax system with respect to bonus
share plans and a tax exemption for new French impatriates.
Weekly Tax Matters | 10
Belgium – A new tax on banks and insurance companies has been proposed.
More TaxNewsFlash – Europe can be found here.
Transfer Pricing
United States – A recent court decision held that an accounts receivable did not create related-party
indebtedness.
India - Guidance implementing ‘rollback’ rules under the advance pricing agreement (APA) program has been
issued.
India – The Delhi High Court has ruled that advertising, marketing, and sales promotion expenses were
international transactions and therefore subject to the transfer pricing rules.
More TaxNewsFlash – Transfer Pricing can be found here.
Weekly Tax Matters | 11
OTHER NEWS IN BRIEF
A round up of other news this week
This week: Response from HM Treasury to the OTS on tax recommendations; HMRC guidance on
Appendix 5 agreements and RTI; updates to the HMRC Corporate Finance Manual; and KPMG in
the UK’s research on investor strategies for 2015.
A letter from the Financial Secretary to the Treasury to the Office of Tax Simplification (OTS) has been published,
giving details on how a number of the OTS recommendations are being taken forward. The letter includes
comments on employment status, partnerships, competitiveness, penalties and employee benefits and expenses.
By the start of the new tax year on 6 April 2015, all employers using Appendix 5 agreements (which allow credit to
be given for foreign tax in the payroll) must either ensure that their payroll software can report correctly under RTI
or stop using their Appendix 5 agreement altogether (see this Flash Alert from last year for more information). HM
Revenue & Customs (HMRC) have now published guidance on Appendix 5 ahead of the deadline.
The HMRC Corporate Finance Manual has been updated to take account of the following:
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New GAAP accounting standards which are mandatory for periods beginning on or after 1 January 2015
but may be adopted earlier; and
Amendments to the Disregard regulations in relation to derivatives which are accounted for at fair value.
For example, the amended guidance covers the new rules where elections are now required.
Greater access to capital and increasing confidence in market conditions is driving a surge of activity in the global
real estate market, reigniting investor interest in less traditional sectors, according to new research by KPMG in
the UK.
Weekly Tax Matters | 12
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