The Chancellor’s Budget delivered to Parliament on 16 March 2016 contained, as usual, a significant number of tax reforms relevant to EU claims and cross border transactions including:
Hybrid Mismatch Arrangements
In response to the OECD Report on hybrid mismatches, the Bill seeks to deal with tax mismatches involving permanent establishments. The legislation tackles perceived aggressive tax planning, typically involving multinational groups, where either one party gets a tax deduction for a payment while the other party does not pay tax on the receipt, or where there is more than one deduction for the same expense. The legislation will have effect from 1 January 2017.
BEPS
New rules will be introduced to limit the tax relief that companies can claim for their interest expenses. In October 2015, the OECD published its recommendations for best practice in this area as one of the outputs from its BEPS project. The government has consulted on the merits and general framework of the recommendations and has decided to introduce rules to limit interest deductions by companies. Existing commercial arrangements within the oil and gas ring-fence regime will not be adversely affected. The new rules will come into effect from 1 April 2017.
Royalty Payments
Provisions will be included to widen the circumstances in which withholding tax must be deducted from payments of royalties to persons not resident in the UK and to counter the use of contrived arrangements involving double taxation treaties to obtain relief from withholding taxes on royalties. The changes preventing the use of contrived arrangements have effect for payments made on or after 17 March 2016. The changes to widen the circumstances in which withholding tax must be deducted from payments of royalties will be introduced later in the passage of Finance Bill 2016 and will have effect for payments made on or after the date of Royal Assent to the Finance Bill 2016.
Some Other Provisions
The Finance Bill will be published on 24 March 2016.
- Large businesses will be required to publish their tax strategies as it relates to or affects UK taxation. The proposed legislation will also include a ‘special measures’ process that will be targeted to impact large businesses that persistently engage in what is regarded as aggressive tax planning and/or refuse to engage with HMRC in an open and collaborative way.
- The Bill will attempt to ensure that all profits from developing UK land are taxed fully in the UK, whether or not the business is resident in the UK and regardless of whether there is a UK permanent establishment. The legislation will be introduced at Report Stage, and take effect from the date it is introduced. Anti-avoidance rules have immediate effect to prevent arrangements to circumvent the rules: for example, by advancing profits to periods before the new legislation takes effect, or by arrangements designed to take advantage of tax treaties to avoid tax. Protocols have been agreed with Guernsey, the Isle of Man and Jersey, amending their treaties with the UK to support the introduction of this legislation. These will have effect from 16 March 2016.
- The government will reform the rules governing certain corporate losses carried forward from earlier periods. Firstly, the reform will give all companies more flexibility by relaxing the way in which they can use losses arising on or after 1 April 2017 when they are carried forward. These losses will be useable against profits from different types of income and other group companies. Secondly, companies will have their use of carried forward losses restricted so that they cannot reduce their profits arising on or after 1 April 2017 by more than 50%. This restriction will apply to a company or group’s profits above £5m. Carried forward losses arising at any time will be subject to the restriction. Following a consultation later in 2016 on the detailed design and implementation of the reform, legislation will be introduced in Finance Bill 2017.
- VAT measures primarily targeted avoidance or perceived avoidance and VAT fraud. The government announced its intention to legislation to provide HMRC with strengthened powers to direct overseas businesses selling goods to UK consumers via online marketplaces to appoint a VAT representative with joint and several liability and to enable HMRC to hold an online marketplace jointly and severally liable for the unpaid VAT of an overseas business selling goods in the UK via the online marketplace’s website. The government also announced consultations on a new penalty for participating in VAT fraud, on reform of the VAT Disclosure Regime to cover other indirect taxes and align it more closely with DOTAS, and on standards for UK fulfilment houses handling goods imported from outside the EU. Finally, the government said that it would continue to engage with international bodies, such as the EU and OECD, in order to explore international solutions to VAT fraud, including looking at alternative mechanisms for the collection of VAT.
This article appears in the JHA March 2016 Tax Newsletter, which also features:
- BPP Holdings v HMRC [2016] EWCA Civ 121 by Peter Stewart
- P Panayi Accumulation & Maintenance Settlements v Commissioners for Her Majesty’s Revenue and Customs (Case C-646/15) by Jivaan Bennett
- UBS AG and anor v Commissioners for HMRC [2016] UKSC 13 by Peter Stewart
- The Dutch Presidency of the Council presents its EU-BEPS Roadmap by Jivaan Bennett
