7 tax issues for 2017

The city at night
By ICAS Tax Team

11 January 2017

The ICAS Tax Team rounds-up what CAs need to know about tax in 2017, from new penalties to corporation tax loss relief reforms.

1. Client notifications

CAs who are “specified relevant persons” (which includes tax agents and advisers, solicitors and financial advisers) need to consider whether they are required to send any of their clients an HMRC notification letter informing them:

  • That HMRC will soon be getting data on overseas financial accounts.
  • That there are opportunities to come forward to make disclosures about overseas affairs.
  • Of the possible consequences for those who don’t come forward.

The letters must be sent to qualifying clients by 31 August 2017. If an adviser within the scope of the rules does not identify relevant clients and send them the letter by the deadline, they could be charged a one-off penalty of £3,000.

Find out more about client notification letters.

2. Making Tax Digital

Making Tax Digital (MTD) is to be delayed to April 2019 for a raft of smaller business – this limit should be announced in January along with draft legislation and feedback from the MTD consultation. This will set the scene for 2017.

If MTD is phased-in for most unincorporated businesses based on the first accounting period beginning in the 2018/2019 tax year, we could see early adoption for 31 March/5 April year end. To get 12 months’ practice with a new accounting package before quarterly submission go live, many businesses would need to transition from spring 2017.

Thought should be given to overlap relief. The consultations suggested that MTD will crystallise overlap relief, with the “frozen amount” being released on cessation of the business. This may cause difficulties for many businesses, as MTD overlap relief may arise at a time where profit rate differs significantly from that of the initial overlap period when the business started trading.

Under normal change-of-accounting-date rules, the accounting date can be moved forward only six months at a time. This potentially gives a window to absorb some overlap relief now, rather than have the whole impact falling in the cessation period.

3. Penalties, penalties, penalties

Several new penalties are on the way as part of the government’s ongoing initiative to tackle tax evasion and avoidance:

  • Penalty for failing to correct (linked to the new requirement to correct)
  • Penalty for participating in VAT fraud
  • Penalty for “enablers of tax avoidance which is defeated”

Penalty for failing to correct (linked to the new requirement to correct)

The introduction of the Common Reporting Standard (CRS) means that by the end of 2018 HMRC will be receiving more data from offshore jurisdictions. A “requirement to correct” past offshore tax evasion (issues existing up to and including 5 April 2017) by 30 September 2018, is being introduced by Finance Bill 2017.

Those who do not take the opportunity to correct by 30 September 2018 will be subject to a new tougher “Failure to Correct” penalty. The intention is to provide a strong incentive for taxpayers to review their offshore affairs, to come forward and put them in order before HMRC receives the full CRS data.

Draft legislation has been published; subject to any changes made during the Parliamentary process the “requirement to correct” will come into force following Royal Assent to Finance Bill 2017.

More details can be found in the government response to the consultation which took place on the proposals.

Penalty for participating in VAT fraud

Missing Trader Intra-Community (MTIC) fraud presents significant challenges and despite some HMRC successes in tackling it in recent years, it continues to cost the exchequer between £0.5bn and £1bn per year.

The new penalty is intended to address problems arising from the misalignment between the existing error penalty regime and the “knowledge principle” used in tackling serious VAT fraud, such as MTIC. Draft legislation is included in the draft Finance Bill 2017 and will come into effect after Royal Assent.

Subject to any changes made as the Bill moves through the parliamentary process the penalty will be at a fixed rate of 30% which will apply to businesses and (in some cases) company officers, where they knew or should have known, that their transactions were connected with VAT fraud.

More details can be found in the government response to the consultation which took place on the proposals.

Penalty for “enablers of tax avoidance which is defeated”

This new penalty is intended to deter those who make a profit from enabling abusive arrangements, while ensuring that most professionals can continue to provide advice on genuine commercial arrangements to help clients comply with their tax obligations. The legislation is also included in draft Finance Bill 2017.

The new penalty for enablers is intended to:

  • Apply to abusive schemes defeated by HMRC.
  • Impose a fixed 100% fee-based penalty on everyone in the supply chain.
  • Apply to advice provided after Royal Assent to the Finance Bill 2017.

For more information, read the government’s response to the consultation which took place on the proposals.

4. Reforms to corporation tax loss relief

Reforms to the corporate loss relief regime will be implemented from 1 April 2017.

There are two main aspects to the changes:

  • Losses arising from 1 April 2017 will have greater flexibility when carried forward: it will be possible to set them against the total taxable profits of a company and members of its group. This will be welcomed by many companies.
  • However, large companies will be adversely affected by the other aspect of the new regime. This will restrict the amount of profit that can be relieved by carried-forward losses to 50%, subject to an allowance of £5m per stand-alone company or group.

In order to address one of the concerns raised in the consultation, where a company ceases trading it will be entitled to use any remaining carried forward trade losses against profits arising in the final 36 months of the trade without restriction. Post-April 2017 losses will be able to be set off against total profits, whilst pre-April 2017 trading losses will only be able to be set against profits of the same trade.

In response to concerns raised about excessive complexity, some of the details of the new regime have been amended. More details can be found in the government response to the consultation.

Draft legislation for the core rules has been published – the remaining draft legislation will be published by the end of January.

5. A new corporate interest restriction

The UK government has been a strong supporter of the OECD Base Erosion and Profits Shifting project (BEPS). One aspect of BEPS seeks to tackle the erosion of taxable profits in a jurisdiction through excessive borrowing, creating deductions for interest expense.

From 1 April 2017, a new corporate interest restriction will take effect – following two consultations on the proposals. The government response to the second consultation provides details of the new regime and draft legislation for the core rules has been published. The remaining draft legislation will be published in due course.

Key features:

  • All groups will be able to deduct up to £2m of net interest expense and similar financing costs in the UK per annum. Only larger companies will therefore be affected by the restriction.
  • Above the £2m threshold deductions for net interest expense will be capped at the higher of:
    • 30% of taxable earnings before interest, taxes, depreciation and amortisation (EBITDA) in the UK (this is referred to as the “fixed ratio rule”); or
    • A proportionate share of the worldwide group’s net interest expense, equal to UK taxable EBITDA multiplied by the ratio of worldwide net interest expense to worldwide EBITDA (referred to as the “group ratio rule”).
  • There will be a Public Benefit Infrastructure exemption to try to protect investment in infrastructure which has a public benefit.
  • The current debt cap rules will be repealed, but in order to prevent abuse a modified debt cap regime will be included to limit deductions to the net interest expense of the worldwide group.

6. Improvements to SSE

The substantial shareholdings exemption (SSE) is an exemption from corporation tax on capital gains (and losses) realised on disposing of certain substantial shareholdings. It is intended to ensure that the possibility of a corporation tax charge on share disposals does not unduly influence business decisions – or lead to companies creating complex offshore holding structures.

The relief, however, had failed to keep up with fundamental changes to the tax landscape. A consultation was therefore held in 2016 to consider whether SSE could be made simpler, more coherent and more internationally competitive. Read our response to the consultation.

The government has now decided to make a number of changes from April 2017 to improve SSE with the aim of making it simpler and more internationally competitive.

The proposed changes are:

  • Removing the investing company trading condition. This should improve certainty for those making decisions on corporate disposals.
  • Extending the period over which the SSE requirement can be satisfied from 12 months within two years, to 12 months within six years prior to disposal. This should provide more certainty where companies dispose of shareholdings in several tranches.
  • Removing the post-disposal investee trading condition. This should improve certainty that SSE will apply where it may be difficult to ascertain the trading status of the activities of the company being disposed of immediately after the disposal.
  • Introducing a broader exemption for companies owned by qualifying institutional investors. This should make the UK a more attractive location for institutional investors to locate their investment holding platforms.

7. Employment tax

There are six key changes to the calculation and implementation of employment taxes that CAs need to know about in 2017:

  • Employee shareholder relief is to be abolished.
  • Salary sacrifice/exchange schemes have been restricted.
  • The National Living Wage increases to £7.50 from April 2017.
  • Public sector contractors no longer have the right to be treated as “self-employed” where they are engaged via a personal service company.
  • The government has pledged £13 million to boost management skills and productivity.
  • A green paper on executive pay will be published and gender pay gap reporting requirements are being introduced.

Read more about these changes in our 2017 employment briefing.

Topics

  • Tax

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