Making Tax Digital: Government response
HM Revenue & Customs (HMRC) have published their responses following the six consultation documents on Making Tax Digital (MTD) issued in August 2016, together with some draft legislation and a draft impact assessment. The summary of the consultation responses is at http://deloi.tt/2kV2M8E. Decisions on the key issues, namely the threshold for exemption from quarterly reporting and possible deferral of the changes for some businesses, have been postponed until the Finance Bill is introduced, probably towards the end of March. In the meantime, some concessions have been made, including:
· businesses may continue to use spreadsheets for record keeping, but must ensure that their spreadsheet meets the necessary requirements of Making Tax Digital for Business;
· businesses eligible for three line accounts will be able to submit a quarterly update with only three lines of data (income, expenses and profit);
· free software will be available to businesses with the most straightforward affairs;
· the requirement to keep digital records will not mean that businesses have to make and store invoices and receipts digitally;
· activity at the end of the year must now be concluded and sent either by ten months after the last day of the period of account or 31 January, whichever is sooner;
· charities will not need to keep digital records, but this does not apply to their trading subsidiaries;
· Making Tax Digital for Business for partnerships with a turnover above £10 million is to be deferred until 2020; and
· the option to account for income and expenditure on a 'cash in, cash out' basis will be extended.
HMRC estimate that converting to MTD will cost micro and small businesses £1 billion. See http://deloi.tt/2jWmcwd Ministers have previously estimated that MTD will yield an additional £1 billion of tax revenue by 2020/21 by cutting down on errors and under-reporting. See http://deloi.tt/2kQQ77v
Draft legislation including on corporate interest restriction, relief for carried-forward losses
As promised when the bulk of the draft legislation for Finance Bill 2017 was published on 5 December 2016, HMRC have now published further draft legislation. This includes expanded versions of the draft legislation on:
· carried-forward corporation tax losses – which increases the flexibility in how losses arising on or after 1 April 2017 can be relieved but limits the amounts against which all carried-forward losses can be offset (see http://deloi.tt/2kwXvYG); and
· new interest limitation rules – which take effect from 1 April 2017 and introduce the concept of 'tax-EBITDA' (a company’s or group’s taxable earnings before interest, depreciation and amortisation) as the key factor in calculating the amount of tax-deductible interest (see http://deloi.tt/2k4ZvXk).
There is also new draft legislation on deemed domicile at http://deloi.tt/2kxaB3Y and on income tax relief for social investments at http://deloi.tt/2kx6lWs
Our special bulletin on the interest rules can be found here
Criminal Finances Bill
The Criminal Finances Bill inter alia creates offences for cases where a person associated with a company or partnership facilitates the commission by another person of a tax evasion offence, and contains measures to create new offences of failure to prevent facilitation of tax evasion. Amendments tabled to date include New Clause 6 on public registers of beneficial ownership of companies registered in the Overseas Territories, which has cross-party support. See http://deloi.tt/2ly2Wnk A new fact sheet on the Bill deals with Company Ownership Transparency in the Overseas Territories (OTs) and Crown Dependencies (CDs). In the run-up to the London Anti-Corruption Summit in 2016, the OTs and CDs signed agreements with the UK to establish central registers of beneficial ownership information and to provide UK law enforcement a with near real-time access to this information. All the OTs and CDs with a financial centre have also signed up to the new OECD initiative for development of a standard for systematic exchange of beneficial ownership information. These commitments should come into effect by June 2017. The fact sheet states that the UK‘s practice has been only to exercise its powers to legislate for the OTs as a matter of last resort and on matters that relate to areas for which UK retains responsibility, such as human rights compliance. See http://bit.ly/2k2WLWG The Bill will have its remaining stages in the Commons on 21 February.
German proposals to limit deductibility of certain related party royalty payments
On 25 January 2017, the German Government introduced a Bill to limit the deductibility of some related party royalty payments. The Bill targets royalty payments that result in the 'low taxation' of the royalty income at the level of the recipient as a result of the application of an intellectual property (IP) regime, in situations where the IP regime is not based on the 'nexus approach' described in Action 5 of the G20/Organisation for Economic Cooperation and Development (OECD’s) Base Erosion and Profit Shifting (BEPS) project. If approved, the change would apply to royalty payments that become due after 31 December 2017. This measure would apply to royalty payments made to related companies grandfathered under the original UK Patent Box regime which does not incorporate the nexus R&D substance requirements (as set out in BEPS Action 5). Please contact Carmen Aqueretta or Sarah Lord for advice on this.
Review of limited partnerships, including in Scotland: call for evidence
The Department for Business, Energy & Industrial Strategy (DBEIS) has issued a call for evidence on limited partnerships. Recent press reports have suggested that limited partnerships registered in Scotland are being used as vehicles for money laundering, organised crime and tax evasion. Limited partnerships registered in Scotland have a separate legal personality, so that the entity can enter into contracts, including opening bank accounts, while the partners remain ‘invisible’. There is no data on the ownership of such partnerships, unlike LLPs. The number of limited partnerships registered in Scotland has increased compared to the numbers registered in England, Wales and Northern Ireland. The DBEIS is seeking views and evidence on the reasons for this increase, on the value of limited partnerships to the UK economy and on how the limited partnership framework operates and whether it should be changed. Comments are invited by 17 March 2017. See http://deloi.tt/2k3Sqa2
UK/Estonia double taxation treaty: withholding tax rate on royalties
The 1994 UK/Estonia double taxation treaty contains a 'most favoured nation' provision on royalties, to the effect that a lower withholding rate than that provided for in the treaty will apply if Estonia later signs a treaty with a lower rate with another OECD member country that was an OECD member when the 1994 treaty was signed. The Estonia/Switzerland treaty, which entered into force on 16 October 2015, provides for resident state taxation only of royalties and so the 'most favoured nation' provision has been triggered. The effect is, that from 16 October 2015, no withholding tax in respect of royalties is permitted under the treaty. See http://deloi.tt/2jDioAe
OECD documents for assessment of BEPS minimum standards (Actions 5 & 13)
The OECD has released documents, approved by the Inclusive Framework on BEPS, which will form the basis of the peer review of Action 13 (Country-by-Country (CbC) Reporting) and the Action 5 transparency framework. CbC reporting and the standard for the compulsory spontaneous exchange of information on tax rulings (the 'transparency framework') are two of the four BEPS minimum standards. Each of the four minimum standards is subject to peer review in order to ensure timely and accurate implementation and thus safeguard the level playing field.
The methodology for Action 5 is at http://deloi.tt/2jZ8cPK and the methodology for Action 13 is at http://deloi.tt/2jZbToP
Spring Budget 2017 survey
With Philip Hammond’s first and last Spring Budget less than a month away we are keen to hear your views on the key matters that will impact you, your business and your industry and would welcome your participation in a short 10-question survey. Results will be shared on www.ukbudget.com.
Click here to take part in the survey.
Deloitte treats survey responses as being made in the strictest confidence. The results of the survey will solely consist of aggregated data and respondents will not be identified on an individual basis
There are a number of Dbriefs webcasts over the next month covering such topics as US Tax Developments And Prospects For Reform, Tax Data Analytics: Trends In 2017, The Corporate Criminal Offence For Failure To Prevent Facilitation Of Tax Evasion, Corporation Tax Loss Reform In The UK, UK Tax Monthly Update (February), and UK Spring Budget 2017. For more information visit www.emeadbriefs.com
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