There was no shame about imposing new types of tax on non-UK companies such as the digital services tax and income tax on offshore receipts from intangible assets.
When it comes to making Budget announcements, the UK government is very fond of grouping avoidance and evasion together. Now a third concept seems to have been added to the group: that of ‘unfair outcomes’. In total, 21 measures were announced to tackle these three mischiefs,
and they are expected to raise an additional £2.1 billion by 2023/24 – although it is not clear which of the 21 fall under this unfair outcomes head.
The VAT system though has been very clearly targeted – with an additional £1.2bn to be raised from closing ‘VAT looping’ in the insurance sector; changing the rules on post-supply price adjustments to ensure they are more transparent; and collecting VAT on ‘unfulfilled’ supplies.
The measures also include tightening the guidance to ensure ‘bought in’ services are subject to UK VAT, as well as providing clarity on when HMRC will exercise its ‘protection of the revenue’ powers to exclude a non-UK company with a UK fixed establishment from being part of a UK VAT group. This revised guidance will come into effect from April 2019 and reflects HMRC’s current ‘crackdown’ on perceived unfair exploitation of the UK’s generous VAT grouping regime by some in the banking sector.
Furthermore, the response to the consultation on an alternative method of VAT collection – split payment – will be published on 7 November. We are also promised a response at an unspecified date to the consultation on the role of online platforms in ensuring tax compliance by their users.
Budget 2018 notably also includes a range of measures tackling large multinational enterprises. The previously proposed royalties withholding tax is now the less snappily named ‘offshore receipts in respect of intangible property’. The name change denotes a substantive change to the basis on which this income tax will be applied – namely, directly on the non-UK entity receiving the income and not via a withholding on a UK person paying it. A £10 million de minimis applies in order to make sure it only hits larger operators. The tax will be collected under normal self assessment principles – and any unpaid tax can be visited under ‘joint and several liability’ provisions on a UK entity in the same control group. As it will be an income tax, it is worth noting that it will be subject to the new 12 year discovery time limit currently working through Parliament as a new s 36A of TMA 1970.
Of course, the most eye-catching announcement was the decision to introduce a 2% digital services tax (DST), albeit only for search engines, social media platforms and online market places. It will not include online sales which do not take place through an intermediator, or on the provision of online content. This is clearly targeted at the FAANGs (technology companies Facebook, Apple, Amazon, Netflix and Google). It is consistent with the approach taken by the EU commission to date, but not the European Parliament, which wants to tax the lot. It is not clear what precise form the UK’s DST will take, but the Budget 2018 announcement makes it clear that it will not be creditable against corporation tax and will fall outside existing treaty networks.
The UK’s permanent establishment (PE) rules are also to be changed. The intention is to stop multinationals avoiding a PE by fragmenting a business between various entities in order for each to try to fall within exempt activities.
Legislation will also be introduced to close some gaps in the diverted profits tax (DPT) legislation, including a ‘loophole’ which allowed a taxpayer to adjust its corporation tax return after the time limits for HMRC raising a DPT charge has expired. The review period following the issue of a charging notice will be extended from 12 to 15 months.
The government is pressing ahead with the proposals to reform IR35 for private sector engagers, in line with the changes already in place in the public sector. However, it has given industry one year’s breathing space, with the new measure coming into effect from 6 April 2020.
It will also only apply to medium and large enterprises. With so many of the latest measures being targeted at larger businesses, which of course don’t vote, one would think that the chancellor had one eye to the risk of there being a no-deal Brexit and snap general election...
A consultation has also been announced on giving HMRC preferential creditor status in an insolvency, harking back to pre-2003 days, in respect of taxes held ‘in trust’ for HMRC, namely VAT, PAYE, NICs and CIS. The government also proposes to introduce personal liability for directors of a company and others who engage in avoidance or evasion where the company deliberately enters insolvency.
The government will issue a call for evidence later in the year on ‘electronic sales suppression’; namely, the misuse of till systems to illegally hide or reduce the value of individual transactions. What happened to the call for evidence on ‘cash and digital payments in the new economy’ announced at the Spring Statement 2018? One has to hope that it will soon become clear where the government is going with this line of thinking. The government will also publish an updated offshore tax compliance strategy, building on the progress made since publishing the last strategy in 2014.
For all the rhetoric on measures to bring in an additional £2.1bn, there were – thankfully – few measures extending HMRC’s powers. The House of Lords Economic Affairs Finance Bill Sub-Committee has been asking whether the balance of power has tipped too far in HMRC’s favour in recent times. I think many would agree that it is perhaps time for HMRC to pause for breath before any more powers are added to its arsenal.
Jason Collins is a tax expert at Pinsent Masons LLP, the law firm behind Out-law.com. This comment first appeared in Tax Journal 2 November 2018.