Finance Bill 2014: news roundup

The Treasury has published draft legislation for consultation and future inclusion in Finance Bill 2014.

It relates to measures proposed in past Budgets and provides more detail of announcements made in the autumn statement earlier this month.

Avoidance: partnerships

As announced in the 2013 Budget, and following consultation over the summer, legislation will be introduced to counter avoidance by partnerships. In particular:

• the disguising of employment relationships in relation to salaried members of limited liability partnerships;
• tax-motivated allocations of business profits or losses in partnerships where the partners include individuals and companies (mixed membership partnerships); and
• tax-motivated disposals of assets through partnerships.

On the treatment of salaried partners, the new rules will apply when an individual (M) is a member of a limited liability partnership (LLP) and three tests are met.

Condition A is that there are arrangements in place under which M is to perform services for the partnership in his capacity as a member, and it would be reasonable to expect that the amounts payable by the LLP in respect of M’s performance of those services will be wholly, or substantially wholly, fixed or, if variable, variable without reference to, or in practice unaffected by, the overall profits or losses of the partnership.

Condition B is that the mutual rights and duties of the members and the LLP and its members do not give M significant influence over the affairs of the partnership.

Condition C is that M’s contribution to the LLP is less than 25% of the disguised salary which it is reasonable to expect will be payable in a relevant tax year in respect of M’s performance of services for the partnership.

In relation to mixed membership partnerships, legislation will be introduced to reallocate excess profits allocated to a non-individual partner to an individual partner where these conditions are met:

• a non-individual partner has a share of the firm’s profit;
• the non-individual’s share is excessive;
• an individual partner has the power to enjoy the non-individual’s share or there are deferred profit arrangements in place; and
• it is reasonable to suppose that the whole or part of the non-individual’s share is attributable to that power or arrangements.

In addition, excess profits will be reallocated to an individual who is not a partner if it is reasonable to suppose that the individual would have been a partner but for the new rules and the whole or part of the non-individual’s share is attributable to the individual’s power to enjoy the non-individual’s share or to deferred profit arrangements.

Certain income tax loss reliefs and capital gains relief for a loss allocated to an individual partner will be denied where the individual is party to arrangements, the main purpose of which is to secure the allocation of some or all of the loss to the individual, instead of a non-individual, with a view to the individual obtaining relief.

Legislation will also be introduced for setting up a collection mechanism for partnerships (including LLPs) operating as alternative investment fund managers (AIFMs).

It will allow income tax at the additional rate to be paid by the partnership (rather than the individual members of these partnerships) on profits which the members are prevented from accessing as a result of the AIFM Directive (2011/61/EU). The legislation also includes provisions concerning the tax treatment of the profits when they vest with the members.

The changes to partnerships will take effect from April 2014, with the exception of anti-avoidance provisions in the mixed membership partnership rules which came into force on
5 December 2013.

Mark Saunders, tax director at PwC, said, “It makes sense that there is a clearer distinction between partners and employees, as some partnerships have been set up purely to avoid tax and National Insurance. The new rules are tougher than expected and could make a big financial difference to junior partners.

“The chancellor is making this change, along with ‘mixed partnerships’, where there is a corporate partner, to raise more than £1bn a year so we are talking about a significant amount for the firms and partners affected.

“We are likely to see even junior partners trying to justify that they have significant influence on the partnership, and it will be hard to prove either way with something so subjective,” claimed Saunders.

“Unfortunately, although the people affected will no longer be treated as partners for tax purposes, they will not get the employee law protections of ordinary employees. So it is all bad news for the salaried partners who are unexpectedly caught.”

Avoidance: offshore employment intermediaries

The legislation is to be strengthened to ensure the correct amount of tax and National Insurance contributions are paid when UK and UK continental shelf workers are employed by offshore companies or engaged by or through offshore employment intermediaries.

A record-keeping and return requirement for intermediaries placing workers with end clients but not deducting income tax and National Insurance at source will also be introduced.

Avoidance: onshore employment intermediaries

As announced in the autumn statement, legislation, to take effect on 6 April 2014, will be introduced to prevent the use of employment intermediaries to avoid employment taxes by disguising employment as self-employment. A consultation document was published on 10 December 2013.

In essence, HMRC plan to remove the obligation for the worker to provide his services personally. Instead the proposal is that the agency legislation will apply where the worker is:

• subject to control, supervision or direction as to the manner in which the duties are carried out;
• providing his services personally;
• remunerated as a consequence of providing his services; and
• receiving remuneration not already taxed as employment income.

Where a worker is engaged by or through an intermediary and meets these conditions he will be deemed to be employed for tax purposes.

This change will be supported by a statutory returns requirement. There will also be an evidential requirement on the intermediary where it considers the worker not to be under control, direction or supervision to be able to provide evidence of this. The concept of an agency contract will also be removed from the legislation.

Baker Tilly’s David Heaton explained that from April 2014 “if the worker personally carries out the work, or is involved in the provision of the services, the payment will have to be payrolled, so the worker will have tax and employee National Insurance (at 12%) deducted at source, and the agency will become liable for employer National Insurance at 13.8%.”

He added, “The worker’s own National Insurance cost is therefore 3% higher than the 9% paid as a self-employed person, and the ‘employer’ agency has a completely new liability. With some agencies, workers are free to send somebody else along to do the contracted work, which has the effect of taking the payments out of the scope of PAYE and National Insurance rules.

“This freedom will, in future, not prevent the operation of PAYE and National Insurance at the employed rates.”

Responses should be emailed by 4 February.

High-risk promoters

Following consultation over the summer, legislation will be introduced to allow HMRC to designate promoters if they meet certain objective criteria, and follow up tribunal or court decisions in HMRC’s favour in avoidance cases.

Such promoters will be named by HMRC, and they and their intermediaries will be subject to new information powers and penalties. Users of designated promoters will have to tell HMRC they have used such a promoter.

Taxpayers will required to act on a decision reached at the tribunals or courts in HMRC’s favour in avoidance cases. They will also have to pay the tax in dispute rather than wait for the dispute to be settled.

Draft legislation for these measures will be published in January 2014.

Welcoming the delay in publishing the draft legislation, Stephen Coleclough, president of the CIOT said, “The government is right to target promoters of abusive tax avoidance schemes. ‘High-risk promoters’, as they are called by HMRC, can cause significant problems for not only HMRC but also mainstream tax advisers and their clients.

“While a pragmatic solution is required to this problem area, it is vital that HMRC get the definitions of high-risk promoters and ‘follower cases’ right and do not tip the playing field nor unfairly target uninformed or misinformed clients of such promoters, particularly the man on the street who is sold a tax scheme, who should be distinguished from a sophisticated investor,” said Coleclough

“It is crucial to ensure that the legislation is clear and, as far as possible, is not open to different interpretations by those involved. The resulting legislation must not give rise to further burdens on the majority of tax advisers who do not engage in this sort of activity. This is something that has to be right first time: rushing into legislation with loose ends and unclear issues would not help the government achieve its aims in this area.”

Personal tax

As announced in December 2012, and after consultation, legislation will be introduced to give effect to several of the proposals recommended by the Office of Tax Simplification (OTS) to simplify the tax rules for employee share schemes. These changes will take effect from 6 April 2014.

The current requirement for a share incentive plan, save-as-you-earn scheme or company share option plan to be approved by HMRC before it can be operated will be replaced with new requirements in relation to the self-certification of schemes by businesses.

In addition, businesses will be permitted to submit information pertaining to employment-related security options digitally, including annual return forms and notifications of options granted under enterprise management incentives.

These changes will be accompanied by new HMRC compliance, penalty and assessment powers, information requirements, and appeal rights.

In addition, legislation will be introduced to give effect to a number of the OTS’s proposals to simplify the tax rules for unapproved share schemes. These include:

• new tax and National Insurance arrangements for employment-related securities awarded to internationally mobile employees;
• removal of tax and National Insurance charges that currently apply on certain share for share exchanges; and
• an extension to circumstances in which corporation tax relief can be claimed when an employee acquires shares after a company takeover.

In addition, as recommended by the OTS, the measure will change the circumstances in which taxable earnings can arise where an employer meets an employee’s tax liability on certain payments of employment income.

It will simplify the tax rules in relation to nil-paid and partly-paid employment-related securities and the valuation of listed company shares.

Issue: 4433 / Categories: News , Admin , Budget/Finance Act