While this week’s Paradise Papers revelations have rekindled the public debate and added pressure for further action to deter tax avoidance and evasion, for many businesses and tax advisers the immediate concern is keeping on top of changes already announced.
The second finance bill of 2017 has now completed its House of Commons stages, and will be considered – although it cannot be amended – by the House of Lords on 15 November, just a week before the chancellor is set to deliver his autumn budget. Consultation on several measures to be included in the next finance bill closed on 25 October.
The September bill has 72 clauses and 18 schedules. This article focuses on just six of the measures likely to be of interest to readers. Others include detailed rules taking forward the Making Tax Digital reforms. While the bill occupies 665 pages, two major corporation tax measures dealing with losses and relief for interest occupy 302 pages.
Many of the bill’s measures were subject to technical consultation in December 2016 and some were debated by MPs earlier this year. But concerns remain about the level of parliamentary scrutiny, and witnesses to a Lords committee’s inquiry into the legislative process identified tax as one area of law where complexity has developed to the point where it is “a serious threat to the ability of lawyers and judges to apply it consistently”. AAT’s current views on aspects of tax complexity were set out in an August 2017 submission to the Office of Tax Simplification.
Termination payments taxable as employment income
Measures to tighten and clarify the tax treatment of payments on termination of employment from 2018/19, and in particular to ensure that liability to tax and national insurance contributions will no longer depend on how an employment contract is drafted, are set out in clause 5. All payments in lieu of notice will be taxable earnings, whether or not there is a contractual right to such payments.
MPs debated clause 5 on 11 October. A “fair and proportionate” set of changes will continue to protect the vast majority of employees, Financial Secretary to the Treasury Mel Stride said. “The first £30,000 of a termination payment will remain tax-free, as will the whole of the compensation payment for discrimination during employment. However, where there were opportunities for manipulation, the loopholes must be closed, and they now will be,” he said.
Pension savings: money purchase annual allowance
Where a person has accessed defined contribution (DC) pension savings under the 2015 “pensions flexibility” rules, further contributions to a DC pension scheme are subject to the money purchase annual allowance (MPAA). The allowance was set at £10,000 initially but a permanent limit of £4,000 would be fair and reasonable, and would only affect up to 3% of individuals over age 55, the Treasury said: “It allows people who need to access their pension savings to rebuild them if they subsequently have opportunity to do so, while limiting the extent to which pension savings can be recycled to take advantage of tax relief, which is not within the spirit of the pension tax system.”
Clause 7 reduces the MPAA to £4,000 with effect from 6 April 2017.
Income charged at the dividend nil rate
Clause 8 reduces the income charged at the dividend nil rate in section 13A Income Tax Act 2007 from £5,000 to £2,000 from 6 April 2018. The so-called “dividend allowance” introduced in 2016 had increased the tax advantage of incorporation, Philip Hammond said at the March 2017 Budget.
The change will reduce the “tax differential” between the self-employed and employed on the one hand, and those working through a company on the other hand, the government said, adding that it will also target support for investors more effectively and will continue to mean that 80% of general investors pay no dividend tax.
“Typically, a general investor will still be able to invest around £50,000 without paying any tax on the resulting dividend income,” Stride told a public bill committee on 17 October.
Calculation of profits of trades and property businesses
Clause 16 and schedule 2 introduce new rules for calculating taxable profits of unincorporated businesses. The measures occupy 39 pages of the bill but are intended to simplify treatment of capital expenditure where the cash basis is used to account for income, and introduce a cash basis for unincorporated property businesses with receipts of no more than £150,000. They take effect for 2017/18 onwards, and were the subject of consultation in August 2016 and January 2017. The cash basis threshold for traders was increased to £150,000 from April 2017 by regulations.
The general disallowance of deductions for capital expenditure is replaced by a limited disallowance for assets that are not used in the business over a limited period. A series of technical amendments agreed at the finance bill’s report stage are intended to ensure that the measures work as intended.
“We are not convinced that the policy objective of simplification will be met in all cases,” the Chartered Institute of Taxation said in evidence to the public bill committee. Many businesses using the cash basis will not be represented by an agent, the CIOT said, so “HMRC must be very clear about how the new rules work so that taxpayers do not miss out on valuable tax relief or HMRC become unable to cope with the level of queries raised”.
Stride told the committee that more than a million trading businesses have chosen to use the cash basis since its introduction in 2013.
Penalties for enablers of defeated tax avoidance
Clause 65 and schedule 16 (28 pages) introduce a new penalty for enablers of “abusive tax arrangements” which are later defeated. The penalty, introduced following consultation in 2016, is equal to the fees received or receivable by an enabler as consideration for enabling the arrangements.
“Enablers” include people who design, manage, or market arrangements, or provide financial products. Part 3 of schedule 16 defines a defeat for this purpose.
The government’s stated intention is that this measure will not inhibit genuine commercial transactions. Tax arrangements are “abusive” if they are arrangements the entering into or carrying out of which “cannot reasonably be regarded as a reasonable course of action” in relation to the relevant tax law. This definition is based on the general anti-abuse rule enacted in 2013, and the CIOT has noted that the government “does not expect” members of the professional bodies – including the Association of Accounting Technicians – who adhere to the standards set out in the recently-updated guidance on Professional Conduct in Relation to Taxation to be affected by this measure.
A taxpayer who enters into arrangements that are counteracted by the GAAR is liable to a 60% penalty introduced by Finance Act 2016.
Disclosure of avoidance schemes: VAT and other indirect taxes
Clause 66 and schedule 17 introduce a new regime for disclosure of tax avoidance schemes involving VAT or other indirect taxes including insurance premium tax, landfill tax, air passenger duty and customs duties.
The primary responsibility for disclosure passes from users to promoters of schemes. The new regime is intended to resemble DOTAS, the disclosure of tax avoidance schemes regime for direct taxes, in order to provide a more coherent approach to tackling avoidance.
The existing disclosure regime in schedule 11A to VATA 1994 will not apply to require disclosure of a scheme first entered into on or after 1 January 2018, and no scheme or proposed scheme may be notified under the schedule 11A regime on or after that date.
Andrew Goodall is a freelance tax writer and journalist.