Offshore Tax Update
UK Budget 2016
The 2016 UK Budget contained a wide range of measures including significant changes for large multi-nationals and property investors to the new tax on sugary drinks.
Looking at the detail, the taxation of UK resident non-domiciled individuals remains an area of focus, as does tackling tax evasion. These measures are continued evidence of the UK Government’s belief that offshore centres are a source of increased tax revenues. With automatic exchange of information about to commence under UK FATCA and from 2017 under the Common Reporting Standard, local business should not under estimate the possible consequences if appropriate controls and policies are not in place to identify and manage their own as well as their clients’ UK tax exposures.
Many of the changes come as no surprise, either having been pre-announced in the 2015 Autumn Statement (including the UK non-domiciled changes and the introduction of new offences and penalties around offshore evasion as well as the enabling and facilitation of offshore evasion). Other measures reflect the UK’s desire to lead on implementation of G20/OECD Base Erosion and Profit Shifting (‘BEPS’) recommendations.
Turning to some specific measures which could be relevant to the offshore financial services sector:
BEPS and UK Corporate Tax
The Treasury estimates that it will raise about £1.3 billion annually from limiting tax deductions for interest and financing costs, outlawing the use of hybrids – arrangements where tax deductions are not matched with equivalent taxable income in the other country- and introducing a withholding tax on royalty payments. Further amounts are expected to be generated from changes to the intercompany transfer pricing rules. Of course, UK companies will welcome the cut in corporation tax to 17% from April 2020.
Withholding Tax on Royalties and Similar Intangibles
Withholding tax on UK source royalties will be applicable to a wider range of payments, with effect from Royal Assent of the Finance Bill 2016, subject to relief under double tax treaties. From 17 March 2016, relief from withholding will no longer be available under double tax treaties, where the payment is made by a UK person to a connected party under an arrangement which has a purpose of obtaining access to the treaty, where this is not in line with the object and purpose of the treaty. These changes could impact payments made from the UK to offshore companies. Groups will need to undertake a review of their royalty arrangements to determine the impact of this measure.
UK Property Development
Offshore developers of UK property will be subject to UK tax on development profits even if there is no UK permanent establishment. The intention is to create a level playing field with UK developers. Protocols agreed with Guernsey, the Isle of Man and Jersey to amend the existing double tax treaties with the UK take effect from 16 March 2016 and further legislation will follow. In addition, HMRC will create a task force to target offshore structures which may avoid tax on profits and rental income from property development in the UK.
Reform of SDLT Rates and Bands for Non-Residential and mixed-use Property
In line with previous reforms in respect of residential property, Stamp Duty Land Tax (‘SDLT’) on purchases of non-residential property and transactions involving a mixture of residential and non-residential properties will move to a progressive system for transactions completing on or after 17 March 2016. Currently, the whole of the purchase price is taxed at the applicable rate and the changes aim to reduce distortions to improve the functioning of the commercial property market. Under the new rules, rates and thresholds will be amended and will apply to the portion of the purchase price within each band. Properties purchased for up to £150,000 remain exempt from SDLT, and the purchase of properties for more than £150,000 but less than £1,050,050 will attract less SDLT. However, property continues to be seen by the Chancellor as a source of revenue with the measure predicted to raise £500m through increases of up to 25% more SDLT payable on property purchases with consideration of £1,050,050 or more.
Employment Benefit Trusts
Some important changes will affect companies (and beneficiaries) who have not yet reached a PAYE and NIC settlement with HMRC in relation to assets held within a disguised remuneration scheme. As a result, if a PAYE and NIC settlement is not reached with HMRC by 5th April 2019 on all assets appointed to sub funds within the EBT, any outstanding sub-fund loans to beneficiaries as of that date will be subject to an employment tax charge. The final decision in the Rangers EBT case has now become an irrelevance. A second announced change is that if an EBT settlement is reached after 30 November 2016, any growth in the sub-fund assets that is distributed to the beneficiary following a settlement will now be subject to an employment tax charge (previously any capital gains were not subject to any tax charge (ignoring IHT) on distribution. In practice, therefore it is likely that many companies/beneficiaries will want to ensure that a settlement is reached with HMRC by 30 November 2016 to ensure that any growth in the value of the sub-fund is not subject to an employment tax charge.
UK Non-Domiciled Individuals
The Chancellor has announced that where individuals become deemed UK domiciled from April 2017, their non-UK assets will be rebased to their market value on 6 April 2017. The announcement does not contain details on whether this will apply automatically or whether individuals will need to make an election. The Government has also re-iterated their previously-stated intention that where an individual has created a non-UK resident trust before they become deemed UK domiciled, they will not be subject to tax on non-UK income and gains retained within the trust.
The rebasing announcement will generally be welcomed by non-domiciled individuals who hold foreign assets standing at gains at 6 April 2017. However, this measure could also result in gains arising where assets were otherwise in loss positions, so careful consideration of the overall position will be necessary.
Capital Gains Tax
Higher and standard rates UK Capital Gains Tax will be reduced from 28% and 18% to 20% and 10% respectively with effect from 6 April 2016. However, gains from residential property and carried interest will continue to be taxed at the existing rates.
New Window to correct past errors in Offshore Tax Compliance
There will be a new legal requirement to correct past offshore non-compliance within a defined period of time with new sanctions for those who fail to do so. A formal consultation will be published later this year.
New GAAR Penalty
There will be a new penalty of 60% of tax due to be charged in all cases assessed under the GAAR. This will have effect from Royal Assent of the Finance Bill 2016.
Non EU Online Retailers and VAT
HMRC is strengthening existing legislation for directing non-compliant businesses to register for VAT in the UK, to appoint a UK VAT representative, and will have greater flexibility in relation to when it can require security from a business. In addition, a new provision will enable HMRC to make online marketplaces jointly and severally liable for the unpaid VAT of an overseas businesses who continue to be non-compliant under UK VAT rules. HMRC’s traditional compliance powers have been difficult to apply against businesses based overseas, and it will be interesting to see if these new measures enable HMRC to tackle and address the perceived evasion of VAT.