Draft Finance Bill 2020–21—Tax analysis

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The government has published draft provisions to be included in Finance Bill 2020–21 (FB 2020–21) together with accompanying explanatory notes, other supporting documents and consultations. The consultation on the draft legislation will run until 15 September 2020. FB 2020–21 is expected to be introduced to Parliament in autumn 2020 (after the Autumn Budget) and to receive Royal Assent in spring 2021.

The majority of the provisions were previously announced but there were some new measures relating to:

the corporate interest restriction (CIR)—two further technical amendments have been published, both of which seek to ensure these rules work as intended
termination payments and post-employment notice pay (PENP)

There are some provisions which apply with immediate or retrospective effect, including:

the two technical amendments to the CIR rules, one of which takes effect from 21 July 2020 and the other from 1 April 2017
a new relief from the annual tax on enveloped dwellings (ATED), which takes effect from 1 April 2020, and
changes to the working time requirements for enterprise management incentives (EMI), which take effect from 19 March 2020

The government has also published a 10 year plan for tax administration reform, focusing in particular on pressing ahead with the Making Tax Digital (MTD) project as the foundation for a modern digital tax system. MTD initially applied only to VAT. The government has now made further announcements about the timing of the introduction of MTD to income tax self assessment, and will be consulting in autumn 2020 on extending MTD to corporation tax. MTD was originally intended to apply to corporation tax in due course, but this had been on a back-burner for a number of years. It seems that this project will now be receiving renewed HMRC attention.

The key business tax provisions are considered below. For a detailed look at measures relevant to private client practitioners, see News Analysis: Draft Finance Bill 2020–21—Private Client analysis.

BUSINESS AND ENTERPRISE

Technical amendments to the CIR

The draft legislation for FB 2020–2021 includes two further technical amendments to the CIR rules. These are being made to ensure the CIR regime works as intended and have been identified following engagement with affected businesses.

The first proposed amendment concerns the specific provisions in the CIR rules that deal with real estate investment trusts (REITs) and the treatment of any interest restriction as between the exempt and any residual part of their business (section 452 of the Taxation (International and Other Provisions) Act 2010 (TIOPA 2010)). Since 6 April 2020, UK property businesses of non-resident companies have been within the charge to UK corporation tax, rather than income tax, and this first amendment clarifies that a non-resident company within a UK REIT group is deemed to carry on a residual business within the charge to UK corporation tax (regardless of whether or not the company actually has a business other than a property rental business) so that it would face a UK corporation tax charge where a CIR disallowance is allocated to the residual business. This clarification will take effect from 21 July 2020.

The second proposed amendment seeks to ensure that no penalties arise for the late filing of an interest restriction return if there is a reasonable excuse for the failure and the return is submitted as soon as possible once the reasonable excuse ceases (new paragraph 29A of Schedule 7A to TIOPA 2010). This brings the CIR administrative rules in line with those for corporation tax self-assessment, and the fact that this is only now being addressed is stated to be an unintended omission. This amendment will be treated as having always had effect, and so will apply from 1 April 2017 (when the CIR rules first came in).

For information on the CIR generally, see Practice Note: Corporate interest restriction.

The government has published a policy paper, draft legislation and explanatory note.

REAL ESTATE

New rates of stamp duty land tax (SDLT) for non-UK residents from 1 April 2021

As announced at Budget 2018, confirmed at Spring Budget 2020 and following a government consultation that ran until 6 May 2019, FB 2020–21 will include provisions for an SDLT surcharge of 2% for non-residents buying residential property in England and Northern Ireland.

The 2% surcharge will apply (subject to transitional provisions) to transactions with an effective date on or after 1 April 2021 where:

one or more purchasers is non-resident
the property being acquired is a major interest in one or more dwellings (and the major interest is not a lease with 21 years or less to run or subject to a relevant inferior interest being a lease with more than 21 years to run), and
the chargeable consideration is £40,000 or more

The new provisions include a residence test to determine whether a particular person is non-UK resident for the purposes of the 2% surcharge. Detailed rules apply for individuals and companies (with special rules for particular purchases and transactions including those involving partnerships, trusts, co-ownership authorised contractual schemes and alternative property finance).

As a general rule individuals are UK resident if they are present in the UK on at least 183 days in any continuous 365 day period within a period starting from 364 days before the effective date of the transaction and ending on 365 days after the effective date of the transaction. Where it is necessary to consider whether an individual is non-UK resident, the land transaction return must be filed on the basis that the individual is non-UK resident and, if at the end of the relevant period (ie 12 months after the effective date), the individual is found to be UK resident the land transaction return can be amended (within two years after the effective date). Companies that are not close companies are not UK resident if they are non-resident for the purposes of the Corporation Tax Acts (within chapter 3 of part 2 of Corporation Tax Act 2009 (CTA 2009)). Close companies that are resident for the purposes of CTA 2009 may be non-resident for the purposes of these rules where they are controlled by a non-UK resident participator.

The surcharge rate is 2% more than the rate payable by UK residents. It applies in addition to the various other rates that apply to acquisitions of residential property including:

the standard residential rates
the higher 3% rates
the higher 15% rate, and
the standard rates that apply to the rental element of a newly granted residential lease

For more on rates of SDLT, see Practice Note: Rates of SDLT.

The provisions insert a new section 75ZA and schedule 9A to Finance Act 2003.

For information on the original consultation, see News Analysis: Reforming SDLT—the government consults on a non-UK resident surcharge.

The government has published a policy paper, draft legislation and explanatory note together with the outcome of the previous consultation.

New reliefs from ATED and SDLT for housing co-operatives

As announced at Spring Budget 2020, FB 2020–21 will include provision for a new relief from ATED and the 15% rate of SDLT for certain qualifying housing co-operatives. The relief is aimed at housing co-operatives that are not registered providers of social housing.

Relief from ATED will be available where a qualifying housing co-operative is entitled to an interest in residential property valued over £500,000 on any day in a chargeable period.

Relief from the 15% rate of SDLT will be available where a qualifying housing co-operative acquires an interest in residential property for more than £500,000. The relief can be withdrawn at any time in the three years following the acquisition where the co-operative ceases to be a qualifying housing co-operative and immediately before still owned the property.

The measure will apply for ATED retrospectively from 1 April 2020 and for the 15% rate of SDLT for transactions with an effective date on or after Autumn Budget Day 2020.

For more on ATED and the 15% rate of SDLT see Practice Notes: Annual tax on enveloped dwellings (ATED)—the basics and 15 per cent rate of SDLT for high-value residential property transactions.

The government has published a policy paper, draft legislation and explanatory note.

EMPLOYMENT TAXES

Changes to the treatment of termination payments and PENP

FB 2020–21 will include legislation amending the income tax treatment of termination payments in two ways:

introducing an alternative calculation for PENP for employees paid by equal monthly instalments but whose post-employment notice period is not a whole number of months—since October 2019, HMRC has used its discretion to provide an alternative calculation for PENP in such circumstances (see here) and that discretion will continue to apply until 6 April 2021, when the new measure comes into force
bringing PENP within the charge to UK tax for individuals who are not resident in the UK in the year their UK employment is terminated—this aligns the PENP tax treatment of non-residents with that of all UK residents, with the result that PENP from UK employment in respect of a notice period that would have been worked in the UK will be chargeable for all individuals regardless of where they are resident. Currently, PENP is not chargeable to UK tax if an employee is non-resident for the tax year in which their employment terminates. This tax treatment was unintended and HMRC had previously commented that it would address this issue in a future Finance Bill (for more, see Practice Note: Taxation of payments in lieu of notice (PILONs) and post-employment notice pay (PENP)—from 6 April 2018).

The measure will apply from 6 April 2021 to individuals who have their employment terminated and receive a termination payment on or after that date.

The government has published a policy paper, draft legislation and explanatory note.

Changes to working time requirements for EMI

Following an announcement at Spring Budget 2020, the government has now published further changes to the EMI scheme working time requirement, to be included in FB 2020–21.

Previously, the government introduced a time-limited exception to the EMI disqualifying event rule relating to working time by accepting that, from 19 March 2020, if an employee with EMI options granted before that date would otherwise have met the scheme requirements but did not do so for reasons connected to the coronavirus (COVID-19) pandemic, the time which they would have spent on the business of the company will count towards their working time for the purposes of the disqualifying events legislation. The original change did not impact on an employee’s ability to qualify to be granted new EMI options where they are furloughed or working reduced hours.

From 19 March 2020, employers can now issue new EMI share options to individuals who have been furloughed, have taken unpaid leave or have had their working hours reduced below the current statutory working time requirement for EMI as a result of coronavirus.

This measure substitutes a new section 107 for the existing section 107 of the Finance Act 2020. The modifications take effect from 19 March 2020 and will come to an end on 5 April 2021. The clause also includes a provision for HM Treasury to extend the exception for a further 12 months by regulations if the coronavirus pandemic has not ended by April 2021.

For further information on the EMI working time requirement, see Practice Note: EMI—what makes an employee eligible?

The government has published a policy paper, draft legislation and explanatory note.

Pension schemes—collective money purchase benefits

FB 2020–21 will include legislation to allow pension schemes that provide collective money purchase benefits to operate as UK-registered pension schemes.

The Pension Schemes Bill 2020 introduces legislation to allow collective money purchase pension schemes to operate in the UK. Changes to the tax legislation are necessary to enable collective money purchase pension schemes to operate as UK registered pension schemes, alongside existing defined benefit and defined contribution registered pension schemes, without the unintended tax consequences that arise when a scheme is not registered.

The new legislation will allow pension schemes that provide collective money purchase benefits to operate as UK registered pension schemes in the same way that existing UK-registered pension schemes can operate, as set out in Part 4 of the Finance Act 2004. This will open up access to pension tax relief and certain exemptions that are available, for example, exemption from tax for certain lump sum benefit payments and lump sum death benefits.

The measure takes effect from 6 April 2021.

The government has published a policy paper, draft legislation and explanatory note.

TAX ADMINISTRATION AND AVOIDANCE

Promoters and enablers of tax avoidance schemes

As announced at Spring Budget 2020, and following a policy paper (the ‘promoter strategy’) published on 19 March 2020, FB 2020–21 will include provisions to strengthen the existing promoters of tax avoidance schemes (POTAS), disclosure of tax avoidance schemes (DOTAS), general anti-abuse rule (GAAR) and tax avoidance enablers regimes. According to HMRC, promoters are increasingly failing to comply with their obligations under these regimes and ‘are using every available opportunity to delay, obstruct or sidestep HMRC compliance activity while they continue to sell their schemes’.

The new provisions include:

POTAS: allowing HMRC to issue stop notices to promoters earlier and in a wider range of circumstances—this is intended to stop the sale of schemes that do not work (from the taxpayer’s perspective) before the scheme has been defeated in the courts
POTAS: widening the rules to include individuals who control, or significantly influence, promoter entities, as well as the people they work through in the UK and other entities that have been set up in a fragmented way—the intention is to prevent high-risk promoters hiding behind corporate or other entities
POTAS: lengthening the maximum period for which a conduct notice can remain in place from two to five years, and to factor in the time taken for legal challenges
DOTAS: a new information notice that HMRC may issue to anyone they suspect of being involved in the supply of arrangements that should have been disclosed, and a power for HMRC to issue a scheme reference number if the requested information is not forthcoming—this change will also be applied to the rules on the disclosure of avoidance schemes involving VAT and other indirect taxes (DASVOIT)
GAAR: provision for the GAAR procedure to work consistently with how HMRC conducts partnership tax enquiries and amends tax returns in respect of partnerships
enablers: permitting HMRC to use its information powers to check a person’s position regarding liability for a penalty before the relevant arrangements are defeated, and to request information from one enabler about other enablers involved in the same arrangements

HMRC describes these measures as ‘necessarily far-reaching’. It has also published a separate detailed consultation document on the draft legislation. The consultation is designed to run alongside the call for evidence on disguised remuneration (see below), and includes case studies to illustrate the application of the new provisions. The consultation runs until 15 September 2020.

Further measures to disrupt the business model of promoters and give HMRC yet more powers to tackle promoters are promised for Autumn Budget 2020.

The measures in the draft legislation published on 21 July 2020 will apply from Royal Assent to FB 2020–21.

For background on the various regimes affected by these measures, see Practice Notes: Promoters of tax avoidance schemes, Disclosure of tax avoidance schemes—income tax, corporation tax, CGT and NICs, The general anti-abuse rule (GAAR) and Penalties for enablers of defeated tax avoidance schemes.

The government has published a consultation together with a policy paper, draft legislation and explanatory note.

HMRC’s civil information powers

FB 2020–21 will include measures reflecting the long-awaited outcome of the consultation on HMRC’s civil information powers that ran from July to October 2018.

The measure will introduce a new ‘financial institution notice’ (FIN) that will be used to require financial institutions to provide information to HMRC about a specific taxpayer, without the need for approval from the First-tier Tax Tribunal (FTT). Under current rules, FTT approval, or taxpayer agreement, is required before HMRC can issue an information notice relating to the tax affairs of someone other than the recipient of the notice (a third party notice). The new FIN is designed in part to assist HMRC to comply with information requests from other tax authorities around the world, under the UK’s network of tax information exchange agreements.

HMRC has dropped a broader proposal included in the original consultation document that the process for issuing a third party notice could be aligned with that for a taxpayer notice (ie a notice seeking information about the tax affairs of the recipient of the notice). The consultation included the alternative idea of a new information notice specifically for financial institutions, and HMRC has now decided that this is the proposal it will be taking forward.

The new FIN is subject to a number of safeguards including:

the requested information must be reasonably required to check a known person’s tax position
for international requests, the information must be foreseeably relevant to the administration or collection of tax
FINs must be approved by an experienced HMRC ‘authorised officer’, and the officer must be of the opinion that the requested information ‘would not be onerous for the institution to provide’
the taxpayer will receive a copy of the notice and a summary of reasons why the information is required, unless the FTT waives this requirement
documents do not have to be produced if they are covered by legal professional privilege

HMRC will also have to produce an annual report to Parliament on the ways in which it has used the FIN.

Respondents to the consultation emphasised the importance, in evaluating the proposed FIN, of the definition of a ‘financial institution’. The definition in the draft legislation is based on that in the OECD’s Common Reporting Standard, except that credit card issuers are included, and there are exclusions for investment entities so that family trusts and charities should not be classed as financial institutions for this purpose.

The existing types of information notice (including third party notices and taxpayer notices) can, at present, only be issued for the purpose of checking a person’s tax position. FB 2020–21 will change this so that both the new FIN, and the existing types of information notice, can be issued either for the purpose of checking a person’s tax position, or for the purpose of collecting tax debts of a known taxpayer. HMRC is not pursuing a wider proposal that would have enabled it to use its information powers to pursue any of HMRC’s tax functions.

The draft legislation also corrects an error in the current rules about the use of daily penalties.

For information on the consultation in 2018, see News Analysis: Removing taxpayer safeguards from HMRC information powers.

The new measures will apply from Royal Assent to FB 2020–21. A FIN may be issued on or after the date of Royal Assent regardless of when the tax liabilities or tax debt in question arose.

For more details on HMRC’s current information powers, see Practice Note: HMRC information powers.

The government has published a policy paper, draft legislation and explanatory note together with the outcome of the previous consultation.

New tax checks on licence renewal applications (conditionality)

As confirmed at Spring Budget 2020, FB 2020–2021 will include provisions making compliance with tax obligations a condition of holding or renewing certain licences.

Pursuant to the new legislation, licences for taxis, private hire vehicles and scrap metal dealers will be conditional on passing checks to confirm they are appropriately registered for tax. In summary, licensing bodies will have to signpost first-time applicants to HMRC guidance about their potential tax obligations and obtain confirmation that the applicant is aware of the guidance before considering the application. A renewal applicant will have to carry out a tax check (namely, provide information to enable HMRC to satisfy itself that it has complied with any obligation to notify chargeability to tax) and the licensing body will have to obtain confirmation from HMRC that the applicant has completed the check before being able to consider their application. The aim of the measure is to make it more difficult for individuals and entities to operate in the hidden economy (ie sources of taxable income that have not been declared to HMRC), thereby helping to level the playing field for compliant businesses.

The requirements will take effect for applications made from 4 April 2022 in England and Wales. The government is also liaising with the devolved governments in Scotland and Northern Ireland on extending this reform further, and intends to consult on extending the principle of conditionality to other sectors of the economy over time.

The measure, which was announced at Budget 2018 following consultation, had originally been intended for Finance Act 2020 but was deferred.

The government has published a policy paper, draft legislation and explanatory note.

Building a trusted, modern tax administration system

Alongside the publication of draft FB 2020–21 clauses, the government has published its 10 year strategy to build a trusted, modern tax administration system.

The strategy is contained in a report that sets out a road map for extending making tax digital (MTD) and reforming the UK tax system. The report states that the current paper-based tax system is out of date and at odds with the world we live in, where smart devices and other technology shape the way people communicate, earn money and pay for things. The strategy has three key elements:

extending MTD to taxes other than VAT
exploring appropriate timing and frequency for payment of different taxes and the technology infrastructure needed to support this, and
reforming the law and practice of the tax administration framework

The following areas are fundamental to government strategy:

MTD—MTD for VAT is the first stage of a modern, digital tax system. From April 2022 MTD will apply to all VAT registered business. From April 2023 all businesses and landlords with business income over £10,000 per annum liable to income tax will be required to keep digital records and use software to update HMRC on a quarterly basis. The government will consult later in 2020 on the design of a MTD system for corporation tax
digitalisation of tax administration—digitalisation is required to ensure that the UK remains an effective tax authority
timely tax payment—the government wishes to explore whether, over the longer term, tax payment should be brought more in line with the increasingly real-time nature of tax reporting and other customer services. HMRC is already looking at payment of tax at the point of sale, facilitated by an intermediary, for the payment of VAT. The government intends to publish a call for evidence on the appropriate timings and frequency for payment of taxes
reform of tax administration framework—the UK’s tax administration framework consists of a patchwork of rules and obligations. The government wishes to explore the options for a revised framework that is simpler and more transparent, is flexible to adapt to different circumstances and can support HMRC’s aim to make it easy to get tax right and harder to get it wrong. The government intends to publish a call for evidence later in 2020 to help identify the range of reforms that could be required including how taxpayers are identified and registered, how tax liabilities are identified and assessed, HMRC and taxpayer obligations, penalties and sanctions and taxpayers’ rights and safeguards

The benefits of reforming the system are stated to be greater ease of use, greater productivity (including narrowing the tax gap) and greater resilience in the event of a national crisis such as a pandemic.

The government has published its strategy here: Tax administration strategy.

OTHER DOCUMENTS PUBLISHED

The government also published a number of consultations, responses to consultations and calls for evidence, including the following.

New consultations:

the scope of qualifying expenditures for R&D Tax Credits: as announced at Spring Budget 2020, the government is consulting on potential changes to the scope of qualifying expenditures for R&D tax credits, and especially whether expenditures on data and cloud computing ought to qualify for relief. The consultation closes on 13 October 2020
economic crime levy: at Spring Budget 2020, the government announced its intention to introduce a levy to fund new government initiatives tackling money laundering and to help deliver reforms in the 2019 Economic Crime Plan. The government is inviting views on how the levy should be designed, what it should pay for, how it should be collected and how it should be calculated and distributed across the anti-money laundering regulated sector. The consultation also includes a call for evidence on current levels of private sector investment in counter fraud measures and private sector views on funding the fraud response. The consultation closes on 13 October 2020
carbon emissions tax: the consultation sets out details on how the carbon emissions tax would be operated if it is introduced from 1 January 2021, and seeks comments on the proposals to inform secondary legislation. The carbon emissions tax was originally proposed at Budget 2018 in the event of a ‘no-deal’ Brexit scenario, and legislated for in Finance Act 2019 (as amended). The consultation also proposes how the tax might be developed. If it is introduced, installations currently in the EU emissions trading system whose emissions exceed their annual tax emission allowance would become liable to pay the tax on their emissions from 1 January 2021. The tax remains an alternative to a linked emissions trading system between the UK and EU. The consultation runs until 29 September 2020
NICs holiday for employers of veterans: the government is consulting on the design of a measure introducing a NICs holiday (from April 2021) for employers of veterans during their first year of civilian employment, as announced at Spring Budget 2020. The consultation closes on 5 October 2020

Summaries of responses:

review of the operation of insurance premium tax (IPT): a call for evidence, which ran from 3 June to 17 July 2019, sought evidence and views on the administration and collection of IPT and how it could be modernised, and on practices that could lead to unfair tax outcomes and how these could be effectively addressed. The government has now published a summary of responses, noting that the responses received illustrate a range of views and concerns and do not clearly indicate specific changes which could be made to improve IPT, however the responses will inform its consultation on specific proposals to improve IPT that was announced at Spring Budget 2020. For more on IPT, see Practice Note: Insurance premium tax
review of the aggregates levy: the government has published a summary of responses to its comprehensive review of the aggregates levy (that was originally announced at Spring Statement 2019 and ran until 5 July 2019). The responses document also sets out government next steps, which include a commitment to further consultation on the tax treatment of aggregate removed during construction works, following concerns raised during the review, and publication of a public register of businesses and sites registered for the levy as a tool for tackling non-compliance. As in the original discussion document, the government confirmed its commitment to devolving the levy to the Scottish Parliament. For more on the aggregates levy, see Practice Note: Aggregates levy

Calls for evidence:

modernisation of the stamp taxes on shares framework: the government is asking for views on the principles and design of a new framework for stamp duty and stamp duty reserve tax (SDRT) to inform a longer-term modernisation of the stamp taxes on shares (STS) framework. The call asks for views on what should be prioritised for modernisation including questions on amalgamating stamp duty with SDRT, the scope of stamp duty and SDRT, reporting and collecting STS and enforcement and payment of STS. The call follows a review and report by the Office of Tax Simplification (OTS) in 2017. The government envisages that it will consult further on specific policy and legislative changes with no major legislative redesign until Finance Bill 2021–22 at the earliest. The closing date for comments is 13 October 2020
tackling disguised remuneration tax avoidance: the government is asking for views and evidence on the drivers of continuing use of disguised remuneration tax avoidance, whether there are any variations of disguised remuneration schemes not covered under the current legislation and where the government can take further action to tackle disguised remuneration tax avoidance beyond its planned approach. The call for evidence is designed to run alongside the consultation on tackling promoters of tax avoidance (see above) and the closing date for comments is 30 September 2020
pensions tax relief administration: following concerns about the potential for a low-earning individual’s take-home pay to be affected by the method of pensions tax relief operated by their pension scheme, the government is gathering evidence on the operation of both the main methods of administering pensions tax relief and what improvements might be made to address the discrepancy in outcomes for low earners. The closing date for comments is 13 October 2020
fundamental review of business rates the government is seeking views on how the business rates system currently works, issues to be addressed, ideas for change and a number of alternative taxes. It is asking for views on the multiplier and reliefs sections of the call for evidence by 18 September 2020, to inform an interim report in autumn 2020. Responses on the other sections are invited by 31 October 2020, ahead of the review’s conclusion in spring 2021

What was not published?

There are a number of consultations and calls for evidence for which the government was unable to publish responses because the closing dates were extended to August 2020 as a result of the coronavirus pandemic. In his written statement to Parliament, Jesse Norman MP (the Financial Secretary to the Treasury) stated that the government will publish draft legislation for these measures in autumn 2020. This affects:

the tax treatment of asset holding companies in alternative fund structures, see News Analysis: Review of the UK funds regime—Consultation on tax barriers to establishing alternative fund structures in the UK
plastic packaging tax
taxation impacts arising from the withdrawal of LIBOR
preventing abuse of the R&D tax relief for SMEs
notification of uncertain tax treatment by large businesses, see News Analysis: HMRC’s proposals for notification of uncertain tax treatment by large businesses
the hybrid mismatch rules
tackling construction industry scheme abuse, and
raising standards in the tax market

For more details on these consultations and calls for evidence, see the Tax—consultation and legislation tracker.

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