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A summary of the tax-related consultations, and other tax developments, published at the Spring Statement on Tuesday 13 March 2018.
LexisPSL subscribers can access all analysis and insight on the Spring Statement 2018. If you are not a subscriber, you can take a free trial here.
The Chancellor of the Exchequer, Philip Hammond, delivered his first Spring Statement on Tuesday 13 March 2018. Sticking to his promise of a single fiscal event each autumn, Mr Hammond did not announce any new spending commitments or immediate tax
changes, instead stating that the abolition of twice-annual tax changes gives businesses more certainty and aligns the UK system with those of its counterparts.
As promised, the Chancellor’s statement focused on providing an update on the overall health of the economy and a summary of the public finances provided by the government’s independent forecaster, the Office for Budget Responsibility
The Spring Statement was used to announce policy reviews and consultations. Immediately following the Spring Statement, the Treasury published 13 consultation documents inviting views on future changes to the tax system.
The following abbreviations are used in this analysis:
Following the publication of a position paper at Autumn Budget 2017 and a consultation that ran until 31 January 2018 (see News Analysis: Adapting the corporate tax system for the digital economy),
the government has published an updated position paper reflecting feedback from stakeholders and providing more details. This is not a final paper and has been published with a view to further engagement to resolve outstanding questions.
As before, the government recognises that many online digital businesses rely on their users to generate revenue and create value through their active participation in the platform. The updated paper provides a more detailed explanation of how the
government thinks this value is created. Examples include the advertising revenue that is generated by a social media platform as a result of users uploading their own content, and where sustained engagement by users allows a business to tailor
its platform and content to each specific user. The updated paper differentiates between users and customers, with users performing supply-side functions which a business would otherwise have undertaken. The paper also sets out the government’s
view that data collection is not equivalent to user participation and thus the sourcing of data from the UK should not entitle the UK to a taxing right on any business profit.
In the government’s view, user participation is most relevant for online networks such as social media platforms, file or content sharing platforms, search engines and online marketplaces, and less relevant for businesses such as e-retailers
and digital software/hardware providers. The government recognises there is a need to continue to examine business models to make sure any tax measure is correctly targeted and can distinguish between different business categories. Newer business
models, eg those based on artificial intelligence or augmented reality, also need to be considered.
As stated in the previous position paper, the government believes that the best way to capture ‘user-created value’ is to reform the international corporate tax framework to reflect the value of user participation. The framework would
need to be amended to set out a method for determining user-created value and to identify the companies which should be taxed on profits attributable to that value. Jurisdictions would then need to be given the right to tax those companies
and a method would need to be agreed for allocating user-created profits between each jurisdiction with a taxing right. This would require modifications to Articles 5, 7 and 9 of the OECD Model Tax Convention and modifications to the OECD transfer pricing and profit attribution guidelines. The updated position paper includes a possible approach (together with practical examples), setting out the government view that:
Although the ideal solution is a multilateral one, the government has reiterated it intends to look at interim options to raise revenue from digital businesses which generate value from UK users and that it is prepared to act unilaterally. It
envisages a tax on the revenues of digital businesses deriving significant value from UK user participation, irrespective of the physical presence those businesses have in the UK. The updated paper discusses considerations regarding the scope
and design of such a measure. The government intends to engage further on the scope of the interim tax measure, commenting that the tax could apply to businesses for which the channels through which users create value are most relevant, to
specific business types or to specific revenue streams of any type of business. It is likely the government will only tax revenues which relate to users in the UK but the government is aware there are challenges in identifying user location.
The paper also includes suggestions to ensure there are protections built in for start-ups and growth companies.
The government intends to keep engaging with businesses, the OECD’s Inclusive Framework and the EU in order to develop an effective policy solution. Stakeholders can provide written feedback on the updated policy paper, albeit there is no
deadline for submission.
See: Corporate tax and the digital economy: position paper update.
As announced at Autumn Budget 2017, the government is consulting on creating a fund structure within the Enterprise Investment Scheme (EIS) for investment in innovative knowledge-intensive companies (KICs) that would enable
the use of capital over a long period. These proposals form part of the government’s response to the Patient Capital Review (conducted in 2017).
The Patient Capital Review identified that KICs, meaning companies that are R&D-intensive and capital-intensive and have high growth potential, have the most difficulty obtaining the capital they need to grow. As a result, a number of changes
are being made in FB 2018 to loosen the conditions for EIS and Venture Capital Trust reliefs for investments into KICs.
This consultation is considering solutions to close that gap further.
The consultation considers two broad areas:
Capital gap for KICs
On the capital gap, the government is asking:
KIC EIS fund structure proposals
The government identifies that there is a limited approach to EIS funds in the existing legislation, broadly enabling investors through a fund to be treated as if they had made the EIS investments themselves; and an accompanying option for the
fund manager to seek HMRC approval to reduce the administrative burden (for more detail, see Practice Note: EIS funds).
However, HMRC state that very few funds seek HMRC approval. To reduce complexity, any new fund structure would replace the existing fund arrangements.
The government’s approach to the new EIS fund is:
The options the government is considering to incentivise investment into knowledge-intensive funds are:
The government confirms that:
The consultation is open until 5 May 2018.
The government has stated in its new consultation status checker that these changes are intended
to be legislated in FB 2019. We might therefore expect to see draft legislation published this summer.
See: Financing growth in innovative firms: Enterprise Investment Scheme knowledge-intensive fund consultation.
Following its review of the environment for business
growth in the UK and as announced at Autumn Budget 2017,
the government is consulting on extending entrepreneurs’ relief so that individuals can continue to access the capital gains tax (CGT) relief where their shareholdings are diluted below the qualifying 5% level as a result of raising
Entrepreneurs’ relief (see Practice Note: Entrepreneurs' relief)
provides a lower 10% rate of CGT for gains on qualifying disposals of business assets, which includes certain disposals of shares in a company by an individual where that individual has held at least 5% of the ordinary share capital prior
to the disposal. Currently, the 10% CGT rate may be lost where the entrepreneur’s company issues new shares to raise capital and, as a result of not purchasing further shares themselves, the entrepreneur’s personal stake falls
The consultation paper explains that there have been concerns that the 5% minimum shareholding requirement for entrepreneurs’ relief can act as a barrier to growth for some businesses as it can disincentivise entrepreneurs from seeking external
investment and can encourage individuals to exit their businesses early, so as not to lose the benefit of the relief. This outcome conflicts with the relief’s intended purpose, which is to encourage enterprise.
The paper sets out some details on how entrepreneurs’ relief is proposed to be extended and invites views on how this will work in practice. Specifically, it is proposed that:
To ensure that the relief is properly targeted, the dilution of the individual’s shareholding must be a consequence of an issue of new shares made by the company for genuine commercial reasons. The consultation paper also touches on the
interaction of the changes with the share pooling rules and rules for trusts, and sets out some detail on the precise time at which a deemed disposal would take place.
The amending legislation is proposed for FB 2019 and will apply in respect of fundraising events taking place on or after 6 April 2019. Comments on the consultation should be submitted by 15 May 2018 and the government will publish its response
and draft legislation in summer 2018.
See: Consultation: Allowing entrepreneurs’ relief on gains made before dilution.
As announced at Autumn Budget 2017, legislation will be introduced in FB 2019 to extend the
scope of the existing security deposits legislation to include corporation tax (CT) and Construction Industry Scheme (CIS) deductions, with effect from April 2019. The government has published a consultation which invites comment on proposals
for implementing these changes.
HMRC currently has powers to require a security deposit in respect of certain taxes and duties, including VAT, Pay As You Earn (PAYE) and National Insurance contributions. The legislative provisions of the security regime varies slightly to reflect
the design of the individual tax or duty, but in all cases the power to require security is framed in broad terms and applies where HMRC considers it necessary for the protection of the revenue at risk. A criminal sanction may apply if a person
doesn’t comply with a requirement to provide security and the courts may impose an unlimited fine.
It is intended that securities for CT and CIS will follow the existing regime as far as possible, and the power to require security will be framed in similarly broad terms. CIS corresponds quite closely with PAYE in terms of its structure and
the frequency of filing and payment obligations, and will fit readily within the existing securities processes. However, the profits-based nature of CT and its calculation by reference to accounting periods that are up to, and most frequently,
a year long, raises new issues which may necessitate a more tailored approach.
The consultation seeks input on numerous aspects of the extension, including the forms of security that could be required, which entities should be within the scope of the CT security deposit regime, whether an instalment approach should be considered
and how the amount of security should be calculated.
Alongside this extension, and as announced at Autumn Budget 2017, the government will be looking
more widely at options for tackling those who deliberately abuse the insolvency regime to avoid or evade their tax liabilities, including through the use of phoenixism. A separate discussion paper, ‘Tax Abuse and Insolvency: A Discussion
Document’, will be published in due course, which will seek views on how to tackle the small minority of taxpayers who abuse the insolvency regime in this way. Extending the current securities provisions to CT and CIS complements that
measure as it strengthens an existing tool for protecting future revenues where there is a proven history of contrived insolvency.
The deadline for responses to the consultation is 8 June 2018.
See: Extension of security deposit legislation.
As announced at Autumn Budget 2017, the
government has published a call for evidence on the VAT registration threshold. This follows the publication of the Office of Tax Simplification’s report on routes to simplification for VAT that recommended the VAT registration threshold be examined.
The current UK VAT registration threshold is £85,000. It is the highest in the EU (with the average in the EU and the OECD being around £29,000). Although a high registration threshold allows small businesses to avoid the administrative
requirements of VAT, it may also encourage businesses with turnover just under the threshold to restrict their growth to remain under the threshold. The government is not minded to reduce the threshold, but is consulting on whether the design
of the threshold could be improved to better incentivise growth. The call for evidence seeks views on:
The call for evidence is open until 5 June 2018. The government would like responses from all interested parties, in particular small businesses that trade near the current VAT threshold.
See: VAT registration threshold: call for evidence.
Following the call for evidence that was announced at Spring Budget 2017, the government is consulting further on the
design of a split payment mechanism for online sales.
At Budget 2016 and Autumn Budget 2017,
the government introduced a series of measures to tackle online VAT fraud and, in particular, the issue of overseas businesses selling goods to UK consumers without paying the correct UK VAT. The government is looking at introducing a split
payment model as a new VAT collection mechanism for online sales as a further measure to tackle online VAT fraud.
A split payment model would harness technology to allow VAT to be extracted directly from transactions at the point of purchase, rather than relying on overseas sellers to account for that VAT. This would reduce the cost of enforcing online seller
The consultation seeks views on:
The consultation is open until 29 June 2018. HMRC will also be running a series of workshops to test emerging views over spring and summer 2018 and invites interested parties to get in touch.
See: Alternative method of VAT collection – split payment.
HMRC has published a call for evidence on the opportunities and challenges presented by online marketplaces in the context of tax compliance. This builds on the FB 2018 measures combating VAT fraud in online marketplaces (for which, see News Analysis:
Finance Bill 2018—online market places and VAT)
and seeks to extend the discussion beyond VAT.
HMRC’s bulk data powers (see Practice Note: HMRC data-gathering powers)
already enable it to obtain data from a variety of businesses so that it can identify non-compliance. However, in the case of online platforms, the data holder may be offshore, and so the data is not easy for HMRC to obtain.
HMRC has also consulted on ‘conditionality’ (in December 2017)—making
compliance with certain tax obligations a condition of holding some public sector licences. The new call for evidence suggests that these proposals could, in time, be developed so that tax checks become integrated into the platforms that businesses
use to trade.
The questions posed by the call for evidence include:
As this is a call for evidence rather than a consultation, the government has not committed itself to providing any follow-up within a particular timescale.
See: Online platforms’ role in ensuring tax compliance by their users: call for evidence.
HM Treasury has issued a call for evidence about what the government can do to:
In the context of tax evasion, the government notes that some countries (including France, Belgium and Spain) have placed legal limits, of amounts going up to €15,000, on the size of cash transactions. These limits have been motivated by
countering the financing of terrorism, but research suggests that cash thresholds can also have an impact on tax evasion and money laundering. The government is seeking views on whether the UK should introduce a similar threshold and, if so,
what the level should be.
See: Cash and digital payments in the new economy: call for evidence.
As announced at Autumn Budget 2017, the government is consulting on a proposal to extend the tax relief available for work-related training that is funded by employees and the self-employed.
At present, where an employer funds an employee’s work-related training, or an employee is reimbursed for the cost of their work-related training by an employer, employers are able to deduct the cost for tax purposes and employees are not
taxed on the benefit (see: sections 250–
254 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003)).
If, however, the employee funds the training and is not reimbursed, employees cannot currently receive tax relief other than in limited circumstances when the training is an intrinsic contractual duty of their existing employment (see:
ITEPA 2003, s 336 and EIM32535).
Some respondents to the 2017 call for evidence on employee expenses suggested this position was unfair.
Currently, the self-employed can deduct the costs of training incurred ‘wholly and exclusively’ for their business where it maintains or updates existing skills (see: section 34 of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005)),
but cannot deduct the costs when the training introduces new skills (as this is deemed to be expenditure of a capital nature, see: ITTOIA 2005, s 33 and BIM35660).
The consultation is taking place at an early stage and does not set out specific options on how to extend the existing scope of tax relief for self-funded work-related training. Instead it asks for feedback on other UK and non-UK efforts of using
the tax system to support individuals’ training, and sets out high-level objectives and design principles for any proposed reform for comment. Changes to the tax system for employers are outside the scope of the consultation.
The deadline for responses to the consultation is 8 June 2018. The responses will be used to inform future policy development, albeit the government has made no firm decisions about the issues as yet.
See: Taxation of self-funded work-related training.
The following calls for evidence and consultation responses were also published on 13 March 2018:
The government asks respondents to consider the whole supply chain, from production and retail to consumption and disposal.
The call for evidence closes on 18 May 2018.
See: Tackling the plastic problem.
See: Tax treatment of heated tobacco products.
The document states the government has decided not to introduce self-assessment at this stage. Instead, valuations will continued to be carried out by the Valuation Office Agency.
The summary of responses also announces the implementation of the new business rate digital system for local authorities, announced at Budget 2016, will be delayed until after 2024.
See: Business rates: delivering more frequent revaluations.
The call for evidence closes on 5 June 2018.
See: VAT, Air Passenger Duty and tourism in Northern Ireland
The Chancellor’s written statement lists
a number of further documents that will be published over the coming months. These include the following.
Responses to consultations:
In addition, the government’s new consultation status tracker confirms the government’s
intention to legislate the outcome of the following consultations in FB 2019:
LexisPSL subscribers can access all analysis and insight on the Spring Statement 2017. If you are not a subscriber, you can take a free trial here.
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