Draft Finance Bill 2020-21 provisions

Foreword

The initial draft clauses for the 2021 Finance Act were published on 21 July 2020 and include more detail on previously-announced proposals. Whilst the Government refers to it as draft legislation for Finance Bill 2020-21, in this commentary, for clarity, it is referred to as Draft Finance Bill 2021. The final contents of the Bill will be subject to confirmation at Autumn Budget 2020.

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Employment income

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Termination payments—new PENP calculation introduced where part-periods need to be calculated and changes for non-resident employees

Changes were made to the taxation of termination payments from April 2018. These changes: 

• introduced the concept of PENP (post-employment notice pay) so that payments in lieu of notice, whether contractual or not, are subject to tax and National Insurance contributions. This included a specific calculation of PENP which is not necessarily exactly the same as a simple calculation of notice period pay

• the removal of foreign service relief on termination payments to UK resident individuals other than seafarers

• adding explicitly to the legislation that the exemption for injury does not apply in cases of injured feelings, and

• applying employer’s NIC to termination payments above £30,000. This part of the legislation came into effect on 6 April 2020

Inconsistencies in PENP

New draft legislation in relation to termination payments has been published as part of Draft Finance Bill 2021. The amendments to this part of the legislation are intended to improve the fairness of the PENP (post-employment notice pay) legislation by remedying unintended outcomes so that individuals will not receive more or less favourable tax treatment depending on their contract or residence status.

PENP calculation where payment is for part of a month

This legislation provides a new PENP calculation where an employee’s pay period is defined in months, but their contractual notice period or post-employment notice period is not a whole number of months to provide consistency of treatment for employees regardless of the length of their notice period or post-employment notice period. This is achieved via an amendment to ITEPA 2003, s 402D

The calculation of the PENP (post employment notice pay) in ITEPA 2003, s 402D is amended as follows:

• the current calculation is defined as applying where the post employment notice period consists of whole months (ITEPA 2003, s 402D(6)). The amendment will apply this subsection only where the employee’s basic pay is paid in equal monthly instalments

• a new calculation is added (this will take the form of new subsection s 402D(6A)) where the post employment notice period consists of part months

The new calculation requires that, where the employee is paid in equal monthly instalments, and the final pay period is not an exact month, a different form of the calculation is used. This takes the number of days in the final pay period multiplied by the basic pay for a month and divided by 30.42.

This ensures that PENP is fairly distributed regardless of the number of days in any particular pay period, using the average number of days in a month as a basis given that payments do not vary where the number of days in a month vary.

This legislation will apply where both the payment and the termination of employment occur on or after April 2021.

PENP treatment for non-resident individuals

Currently, PENP is not chargeable to UK tax if an employee is non-resident for the tax year in which their employment terminates. The new draft legislation aligns the treatment for those non-resident employees with resident employees.

The amendment to ITEPA 2003, s 27 (the section defining UK earnings for non-UK resident employees) will ensure that non-resident individuals are charged to UK tax and NIC on PENP to the extent that their period of notice would have been worked in the UK via a new s 27(1)(c).

The measure will have effect from 6 April 2021. It will apply where both the employment is terminated, and termination payment is received, on or after 6 April 2021. The wording specifies that this treatment applies regardless of whether the employee remains in employment at the date of receipt of the payment.

Since October 2019, HMRC has exercised the managerial discretion (via the Commissioners for Revenue and Customs Act 2005) to provide for an alternative calculation for PENP where it benefits the employee. This will continue until 6 April 2021.

The draft legislation adds to ITEPA 2003, s 402B wording such that PENP earnings are not subject to subsections 27(1)(a) or (b). This prevents the same amount of earnings being charged under the scope of s 27(a) or (b) as well as s 27(c), thereby preventing a potential double charge.

Company vans

For the purpose of determining the taxable benefit of a company van, the cash equivalent of a zero-emission van has been a percentage of the cash equivalent (as set out each year in regulations) for conventionally-fuelled vans. For example, the percentage for 2020/21 is 80%, and the cash equivalent is £2,792 (£3,490 @ 80%). The percentage was to have increased to 90% for 2021-22, and was then to have been 100% thereafter. For this purpose, a zero-emission van is a van that cannot in any circumstances emit CO₂ by being driven. Draft Finance Bill 2021 will cancel the increased percentages intended for 2021/22 onwards, and will instead provide that the cash equivalent of a zero-emission van is nil for those years.

Enterprise management incentives (EMI)

At the time of writing, Finance Act 2020 is believed to be about 24 hours away from receiving Royal Assent. However, FA 2020, s 107 on EMI will have an unusually short shelf life, as Draft Finance Bill 2021 substitutes a new section 107. Section 107 is a coronavirus (COVID-19) special measure which modifies the EMI legislation in ITEPA 2003, s 535, Sch 5. The purpose of the modifications, as stated within the legislation itself, is that they are to be applied in determining whether a disqualifying event for EMI purposes occurs, or is treated as occurring, in relation to an employee. The working time requirement is then duly modified so as to ensure that a disqualifying event does not occur purely as a result of an individual being furloughed, taking leave, or working reduced hours because of the pandemic. The working time requirement is broadly that the employee’s time committed to the company must equal or exceed a statutory threshold of 25 hours per week or, if less, 75% of their working time.

The substituted FA 2020, s 107 is a word for word repeat of the original, except that the stated purpose is removed. The effect of this is that the section not only continues to ensure that a disqualifying event does not occur in the said circumstances but that employees can be granted options while taking unpaid leave, working reduced hours or furloughed because of coronavirus. The modifications have effect for the same time period as originally, ie the period from 19 March 2020 to 5 April 2021 inclusive. The original section 107 gave the Treasury the power to extend this period to 5 April 2022 via regulations made in 2020/21, and the substituted section continues to confer this power.

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Other income tax

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Pension schemes: collective money purchase benefits

The Pension Schemes Bill has introduced new legislation to allow collective money purchase pension schemes to operate in the UK. As a result, changes to the tax legislation are necessary to enable collective money purchase pension schemes to operate as UK registered pension schemes, alongside existing defined benefit and defined contribution registered pension schemes, without the unintended tax consequences that arise when a scheme is not registered.

Legislation to be included in Draft Finance Bill 2021 will allow pension schemes that provide collective money purchase benefits to operate as UK registered pension schemes in the same way that existing UK registered pension schemes can operate, as set out in Part 4 of the Finance Act 2004. This will open up access to pension tax relief and certain exemptions that are available, for example, exemption from tax for certain lump sum benefit payments and lump sum death benefits.

The changes to the tax legislation will be effective from 6 April 2021.

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Corporation tax

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Minor amendments to the corporate interest restriction rules

From 1 April 2017, there has been a restriction on the level of interest deductible for large multinational groups where the net interest in the UK exceeds £2 million. The corporate interest restriction (CIR) rules come with stringent reporting requirements which sit separately from the normal CT600 filing obligations.

The CIR regime can apply to real estate investment trusts (REITs) and can restrict the amount of interest that the REIT may deduct in computing the income of its property rental business, which is exempted from corporation tax, as well as the taxable income of its other residual business. From 6 April 2020, the CIR can also apply to non-UK resident company landlords that carry on a UK property business, or have other UK property income.

A technical amendment has been included in Draft Finance Bill 2021 to take into account that UK property businesses of non-resident companies are now within the charge to corporation tax rather than income tax. The amendment provides that in applying the special CIR provisions in the context of REITs, a non-resident company (within a UK REIT group) is treated, at all times in the accounting period, as carrying on a residual business within the charge to corporation tax, regardless of whether or not the company actually has a business other than a UK property rental business. The non-resident company could therefore incur a UK corporation tax charge where a disallowance under the CIR rules is allocated to the residual business. The amendment is drafted as having come into force on 21 July 2020.

A second technical amendment has been included in relation to penalties for failing to submit a corporate interest restriction return on time. The amendment ensures that no penalty will be charged where the company has a reasonable excuse for the failure. In cases where the company had a reasonable excuse for the failure, but that has since ceased, a penalty will not be charged if the return is submitted without unreasonable delay. The proposed change brings the CIR administrative rules into line with the general rules for corporation tax self assessment. This second amendment is treated as having applied from 1 April 2017, when the CIR rules were first introduced.

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Administration of taxes

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Making Tax Digital (MTD) for income tax

MTD is currently mandatory for VAT for businesses with a turnover exceeding the VAT registration threshold. Businesses that are trading below the VAT registration threshold are not required to file their returns using the MTD provisions; however, they can do so voluntarily if preferable. Initially when MTD was first proposed in 2015 it was intended that it would also apply to income tax for businesses but this was subsequently deferred; although businesses and landlords can voluntarily opt to use MTD for income tax.

In the corporate report the Government has now announced that from April 2023 businesses and landlords with business income of over £10,000 a year which are liable to income tax will need to keep digital records and update HMRC quarterly through appropriate software under MTD. There will also be consultation on MTD for corporation tax issued later this year.

In addition, the Government proposes exploring the options for allowing the payment of tax in real-time and will issue a call for evidence reviewing ideas to make it easier for those who wish to pay their tax more regularly.

Finally, the Government intends to review methods to modernise the administrative framework for tax which could include a simplified registration process and the pre-population of tax returns with information that HMRC already holds or could verify. The options for modernisation will also be subject to a call for evidence later this year.

Amendments to HMRC’s civil information powers

HMRC’s power to obtain information

Under FA 2008, Sch 36, HMRC has the power to obtain information and documents by means of a taxpayer notice, provided it is reasonably required to check that person's tax position. In July 2018 a consultation was launched to explore the effectiveness and efficiency of HMRC’s civil information powers, and consider possible targeted improvements. The consultation closed in October 2018 and the outcome has resulted in the proposed legislation in the Draft Finance Bill 2021.

What are HMRC’s current information gathering powers?

HMRC’s information powers are distinct from its power to open an enquiry under TMA 1970, ss 9A, 12AC or FA 1998, Sch 18, para 27 to determine the accuracy or completeness of a return. The issue of an information notice under FA 2008, Sch 36 is for the purpose of checking a taxpayer's tax position and allows HMRC to access information and documents, even before a return has been filed. The information can be gathered from:

• the taxpayer directly

• a third party about a known taxpayer

• a third party about a taxpayer whose identity can be ascertained

• a third party about a taxpayer whose identity is not known

This is effected by the issue of either a taxpayer notice or third party notice. HMRC may not issue a notice to a third party without the agreement of the taxpayer or the approval of the First-tier Tribunal. Different penalties for failure to comply with the notice apply if it was issued with Tribunal approval. The First-tier Tribunal will not approve the giving of a notice unless the taxpayer is given a summary of the reasons why HMRC requires the information and has an opportunity to make representations to HMRC concerning the information request. There is no right of appeal against the Tribunal's decision to approve a notice. There are restrictions on HMRC around what information can be requested.

What does the draft legislation propose?

The Draft Finance Bill 2021 seeks to increase HMRC’s powers by the introduction of a Financial Institution Notice (FIN) that can be issued to third party financial institutions such as banks and building societies, without the need for taxpayer agreement or Tribunal approval. HMRC will be able to obtain information and documents from financial institutions for the purposes of checking the tax position of a taxpayer, or for the purpose of collecting a tax debt. The third party will be prevented from telling the taxpayer about a third party information notice, where the Tribunal has decided that is appropriate.

What is a financial institution?

A financial institution is one under the Common Reporting Standard (unless it is just an investment entity as defined by the CRS), or an entity that issues credit cards. The exception for investment entities is to ensure that family trusts and charities, and entities not usually considered to be financial institutions, are not within scope of the FIN. The CRS is a standard adopted by the UK and other foreign tax jurisdictions for the exchange of financial information.

When can the FIN be issued?

The FIN can only be issued to the financial institution if two conditions are met as detailed below:

• Condition A: The information or document must not be onerous for the institution to provide or produce. This is in the reasonable opinion of the officer giving the notice.

• Condition B: The information or document must be reasonably required by the officer for the purpose of checking the tax position of the taxpayer or for collecting a tax debt of the taxpayer. The taxpayer’s identity must be known to HMRC.

The taxpayer must be supplied with a copy of the FIN and a summary of the reasons why HMRC requires the information, unless HMRC applies to the Tribunal for the taxpayer not to be notified of the FIN. If an application to the Tribunal is made by HMRC then the Tribunal is obliged to grant it if satisfied that the HMRC officer has reasonable grounds to believe that doing so might prejudice the assessment or collection of tax.

Similarly, the FIN must name the taxpayer to whom it relates unless an application is made by HMRC to the Tribunal to not do so. The Tribunal must grant the application where there are reasonable grounds to believe that doing so might seriously prejudice the assessment or collection of tax. The threshold for serious prejudice is not defined in the draft legislation. A FIN can be issued from enactment of the draft legislation. This is regardless of when the tax liabilities or tax debt in question arose. This also applies to third party notices.

What does collecting a tax debt mean?

A FIN can be issued for the purpose of collecting a tax debt. This refers to action taken to recover tax due. Any other amounts owed from the person subject to the FIN, in connection with any tax, such as penalties or interest, are also included. The draft legislation also ensures that a notice can be issued where liability for a debt has been transferred to another person, for example as part of insolvency proceedings.

Proposed changes to penalties for non-compliance

HMRC considers that the existing legislative provisions in FA 2008, Sch 36, para 47 are insufficiently clear and may lead to confusion. The draft legislation aims to improve the mechanism by which daily penalties are approved and assessed. HMRC can seek permission from the Tribunal to assess an increased daily penalty against the recipient of a notice. If the Tribunal grants HMRC’s application for an increased daily penalty to be assessable, it must specify the date from which that penalty takes effect and must determine its maximum amount. The maximum penalty is set at £1,000.

The amendments make it clear that it is for the Tribunal to decide a new maximum increased daily penalty amount and the date from which it may be applied, and for HMRC to assess and notify any such penalties. There will be no right of appeal against the increased daily penalties determined by the Tribunal.

The current requirement for a penalty under FA 2008, Sch 36, para 49A to be paid within 30 days of notification and to be enforced as if it were income tax charged in an assessment, will be removed. Under the draft provisions, notification of the penalty is not the assessment of a penalty, but merely notice of the date from which the increased daily penalty will apply and its maximum amount.

Non-disclosure requirements for recipients of FINs

Where the Tribunal has granted HMRC’s application for the taxpayer not to be notified of the FIN or named on it, then the recipient of the notice cannot disclose the notice to the relevant taxpayer. This includes non-disclosure of the notice itself as well as anything relating to it, such as correspondence. The non-disclosure requirement remains in place for 12 months since receipt of the notice unless lifted earlier. The period may also be extended by HMRC if there are reasonable grounds to believe that not doing so might prejudice the assessment or collection of tax.

Any breach by a person subject to a non-disclosure requirement will give rise to liability for a penalty of £1,000. If HMRC decides to assess the penalty, the assessment must be made within 12 months of the date on which the breach was discovered by HMRC. There is a right of appeal against the penalty.

The draft provisions in relation to FINs also extend to other third party information notices.

Reporting requirements on HMRC in relation to FINs

The draft legislation imposes some reporting requirement upon HMRC in relation to FINs. The report must be made to HM Treasury and laid before the House of Commons. It must be provided by 31 January following the end of the financial year to which the report relates. The report must contain the number of FINs given that year, as well as any other information HM Treasury may ask for. For this purpose a financial year will run to 31 March.

Disclosure of tax avoidance schemes (DOTAS)

Draft Finance Bill 2021 makes a number of amendments to FA 2004, Pt 7 (ss 306–319) on DOTAS. The amendments will apply to any scheme first promoted on or after the date of Royal Assent to FA 2021 or any scheme which was first promoted before that date but continues to be promoted on or after that date. The amended legislation provides for a two-stage process. The first stage creates a new information notice that can be issued to a wider range of promoters and intermediaries than is currently possible. This notice would require the recipient to supply HMRC with the information it needs in order to ascertain whether an avoidance scheme is being promoted that has not been disclosed to HMRC under the DOTAS regime. The second stage is triggered if the information is not forthcoming or insufficient, and will enable HMRC to issue a DOTAS Scheme Reference Number (SRN). The stated purpose is to bring a scheme into the DOTAS regime more quickly and allow HMRC to take faster remedial action where avoidance schemes are being promoted. HMRC will also be able to publish information from these notices, along with the SRN, to ensure that taxpayers are sufficiently informed on HMRC’s interest in the avoidance scheme.

Similar changes are made to the DOTAS regime for VAT and other indirect taxes in F(No 2)A 2017, Sch 17.

The new information notice regime applies where HMRC has become aware that:

• a transaction forming part of arrangements has been entered into

• a firm approach has been made to a person in relation to a proposal for arrangements, with a view to making the proposal available for implementation, or

• a proposal for arrangements is made available for implementation

and HMRC has reasonable grounds for suspecting that the arrangements or the proposal are notifiable. HMRC may issue a notice (a ‘section 310D notice’) to any person they believe to be involved in the supply or promotion of these arrangements or proposals. HMRC must issue a section 310D notice to anyone it reasonably suspects to be a promoter of the arrangements or proposals. A section 310D notice advises the recipient that unless they satisfy HMRC within the notice period that the arrangements or proposals are not notifiable, HMRC may issue an SRN in respect of those arrangements or proposals. The notice period is the 30 days beginning with the day on which the section 310D notice is issued (though HMRC may extend this period in any particular case).

HMRC has until one year after the end of the notice period to allocate an SRN. It must notify the SRN to any person who it reasonably suspects of involvement in the supply of the arrangements. HMRC may withdraw an SRN at any time. A person notified of an SRN may on certain specified grounds give notice of appeal, normally within 30 days, to the tribunal against the allocation of the SRN. The tribunal may affirm or cancel HMRC’s decision; if the latter is the case, HMRC must withdraw the SRN.

Where HMRC have allocated an SRN to arrangements or proposed arrangements in a case within the section 310D notice regime, it may require any person who it reasonably suspects of involvement in the supply of the arrangements to provide specified information about the arrangements and/or documents relating to them. A person so required normally has ten working days in which to comply. Where a person provides services to a client in connection with arrangements or proposed arrangements, and an SRN is allocated within this new regime, the person must pass on to the client the SRN within 30 days of being advised of it. HMRC may relieve a person of this duty by notice to that effect.

FA 2004, ss 312A, 312B, 313, 313ZA, 313ZB, 313ZC, 316 and 316A are all consequentially amended to allow for the new section 310D notice regime. These sections deal with the requirements imposed on users of arrangements, and those involved in the promotion or supply of arrangements or proposals, to provide information about them to others (including in some cases to HMRC).

The provisions under which HMRC can publish details of arrangements or proposals, and of the persons promoting them, are extended to include, in the case where the SRN is allocated under the section 310D notice regime, any person involved in the supply of the arrangements or proposed arrangements. The DOTAS penalty rules in TMA 1970, s 98C are updated so as to penalise compliance failures under the section 310D notice regime.

Penalties for enablers of defeated tax avoidance

Draft Finance Bill 2021 amends F(No 2)A 2017, Sch 16 (penalties for enablers of defeated tax avoidance). The amendments can be split into three distinct groups as set out below.

Firstly, there are changes to the way HMRC can use its information and inspection powers under FA 2008, Sch 36. The amended legislation provides for HMRC to exercise those powers to check an enabler’s position regarding liability for a penalty before the avoidance arrangements are defeated, and to help identify any other person who may have enabled those arrangements. A further change is to exclude for these purposes the application of FA 2008, Sch 36, para 25. Under para 25, a tax adviser is not required to provide information about relevant communications or to produce documents which are the tax adviser's property and consist of relevant communications. By excluding this rule, the amended F(No 2)A 2017, Sch 16 enables HMRC to require information and documents from tax advisers where pertinent to this penalty legislation. These amendments will apply to all ongoing and future investigations into potential enablers at Royal Assent to FA 2021.

Secondly, under current law, if a proposal for arrangements has been implemented more than once and all the arrangements are substantially the same, HMRC cannot assess any penalty until more than 50% of the arrangements have incurred a defeat, ie they have been defeated by a court or tribunal or otherwise counteracted, for example through a settlement or adjustment to a return. This is replaced by the following rules with effect in relation to schemes enabled and defeated after Royal Assent to FA 2021. Provision is made for HMRC to assess penalties on enablers of all related arrangements that have been defeated if at least one of those defeats is a court or tribunal defeat. In any other case the required number or percentage of defeats must have been reached. That number or percentage depends on the number of related arrangements implementing the proposal, as follows:

• if that number is fewer than 21, defeats must have been incurred in 50% or more of those cases

• if that number is more than 20 but fewer than 44, defeats must have been incurred in 11 or more cases

• if that number is more than 43 but fewer than 200, defeats must have been incurred in 25% or more of those cases

• if that number is 200 or more, defeats must have been incurred in 50 or more cases

It will remain the case that any person liable to a penalty may request that the penalty be assessed sooner than the rules otherwise allow.

Finally, the rules on publishing details of persons who have incurred penalties are amended. The amendment removes the rule that details can be published only where defeats have been incurred in all arrangements related to the arrangements in question. This change will apply in relation to penalties raised on or after the date of Royal Assent to FA 2021 where the enabling and defeat also occurs on or after that date.

Promoters of tax avoidance schemes

Overview of the promoters of tax avoidance schemes regime (POTAS)

Promoters of tax avoidance schemes who satisfy one or more ‘threshold conditions’ relating to previous behaviour or who regularly promote avoidance schemes which are defeated are subject to a compliance regime (FA 2014, ss 234–237A).

The regime provides for the issuing of a ‘conduct notice’ requiring the promoter to comply with specified conditions (FA 2014, ss 237–241).

Promoters who fail to comply with a conduct notice may be issued with a ‘monitoring notice’ (FA 2014, ss 242–247). Names of promoters subject to a monitoring notice may be published by HMRC, including details of how the conduct notice was breached, and promoters are required to notify their monitored status to clients (FA 2014, ss 248–252).

Information powers and penalties apply to promoters subject to a conduct notice and/or a monitoring notice and their clients and intermediaries (FA 2014, ss 254–280). Clients who fail to comply with their duty to provide HMRC with a monitored promoter's reference number are subject to a 20 year time limit for assessment (TMA 1970, s 36(1A)(d)).

Changes expected to be introduced by Finance Bill 2021

The changes to the promoters of tax avoidance schemes regime announced on 21 July 2020 have been widely expected since Budget 2020, when HMRC published a policy paper on Tackling promoters of mass-marketed tax avoidance schemes. The amendments to the promoters of tax avoidance scheme should be seen as part of a wider focus on promoters, tax advisers and agents in light of the loan charge controversy. Indeed, at the time of writing HMRC has calls for evidence open in relation to tackling disguised remuneration avoidance (closes 30 September 2020) and raising standards in the tax advice market (closes 28 August 2020).

The changes to the promoters of tax avoidance scheme rules are expected to be introduced with effect from the date of Royal Assent to Finance Bill 2021. The drivers for the charges are to:

• ensure that HMRC can issue a stop notice to a promoter in order to make it harder for them to promote tax avoidance schemes which do not work, and

• prevent promoters from abusing corporate entity structures to avoid their obligations under the regime

TIIN: New proposals for tackling promoters and enablers of tax avoidance schemes, 21 July 2020

Stop notices

If HMRC issues a ‘stop notice’ to a named promoter under the proposed legislation, that person must immediately stop promoting the arrangements or proposed arrangements specified in the notice. If the arrangements are also being promoted by another entity which the named promoter either controls or has significant influence over, the named promoter must pass on a copy of the notice and provide details of the entity to HMRC (Draft legislation, Sch 1 (s 236B)).

The proposed threshold for issuing a ‘stop notice’ is low and a stop notice can be issued independently of a conduct notice. HMRC can issue a stop notice if the officer suspects that the person is promoting arrangements or proposals for arrangements that meet conditions A and B (Draft legislation, Sch 1 (s 236A)).

Condition A is met if either:

• had the arrangements/proposed arrangements been implemented before 5 April 2019 they would have been likely to cause a person to be treated as taking a ‘relevant step’ under the disguised remuneration rules in ITEPA 2003, Pt 7A for the purposes of the loan charge rules in F(No 2)A 2017, Sch 11, Pt 1, para 1(1)

• had the arrangements/proposed arrangements been implemented before 5 April 2019 they would have been likely to cause a ‘relevant benefit’ to be treated as arising under the disguised trading income rules in ITTOIA 2005, ss 23A–23H for the purposes of the loan charge rules in F(No 2)A 2017, Sch 12, Pt 1, para 1 (note that there is a typographical error in draft legislation; it refers to Sch 11, when it should be Sch 12)

• the arrangements/proposed arrangements are similar in form or effect to those that have been notified under the disclosure of tax avoidance scheme rules in FA 2004, Pt 7

• De Voil Indirect Tax Service V5.213), or

• the arrangements/proposed arrangements are similar in form or effect to those that have been given a follower notice under FA 2014, s 204

Draft legislation, Sch 1 (s 236A(3))

Condition B is met if both:

• the arrangements/proposed arrangements have been or are likely to be marketed as capable of enabling a person to obtain a tax advantage, and

• it is more likely than not that the arrangements/proposed arrangements will fail to produce the tax advantage

Draft legislation, Sch 1 (s 236A(4))

Where a promoter is subject to a stop notice, that person must provide a return to HMRC every three months for up to three years starting with the date the stop notice was given. It must list the clients that have implemented the arrangements subject to the stop notice in that period (which may be nil) (Draft legislation, Sch 1 (s 236C)). Although it may seem nonsensical that clients could implement a scheme after the stop notice was given, it is possible that the promoter may have been the middleman. Penalties can be charged if the promoter fails to file a return (Draft legislation, Sch 1, para 6).

The promoter subject to a stop notice can request in writing to HMRC that the stop notice be lifted. Representations can be made on the basis that the promoter does not intend to promote or has not promoted the arrangements within the stop notice (ie the HMRC officer was wrong in their suspicions), that condition A and/or B above are not met or there are other reasons why the promoter believes it should no longer apply (Draft legislation, Sch 1 (s 236D)).

If HMRC declines to withdraw the stop notice following representations by the promoter, the promoter can appeal to the First-Tier Tribunal within 30 days of the decision (Draft legislation, Sch 1 (s 236E)).

Any promoter subject to a stop notice may have their details and the details of the arrangements/proposed arrangements published by HMRC (Draft legislation, Sch 1 (s 236F)). This is often called ‘naming and shaming’.

Stop notices—information requests

As well as issuing the stop notice to the promoter, the HMRC officer may also request information from the promoter to:

• ensure they comply with the stop notice

• establish whether they meet the threshold conditions for a ‘conduct notice’, or

• enable HMRC to understand how the arrangements/proposed arrangements operate

Draft legislation, Sch 1 (s 261A(1)–(2))

If the promoter fails to provide the information requested, penalties can be charged under FA 2014, Sch 35 (Draft legislation, Sch 1, para 6).

HMRC can also request information from a third party for the purposes of checking the first two bullet points above or to establish the identity of a person to whom a stop notice could be given. If the third party fails to provide the information requested, penalties can be charged under FA 2008, Sch 36, Pts 7, 8.To request the information from the third party, HMRC either needs to have permission from the promoter to do so or it needs approval from the First-tier Tribunal (Draft legislation, Sch 1 (ss 261A(3)–(6), 261B)).

Promotion structures

The existing definition of promoter in FA 2004, s 235 is expected to be tightened up to prevent promoters from abusing corporate entity structures to avoid their obligations under the regime. The new definition will catch any person who is a ‘member of a promotion structure’, whether or not the person carries on a business (Draft legislation, Sch 1, para 7).

A person is a ‘member of a promotion structure’ if they:

• are a multiple entity promoter—this is where the normal business of a promoter has been split up amongst various connected persons in order to avoid being considered a promoter

• act for a non-resident promoter—this is where a person acts either as promoter or facilitator under the instruction of an offshore promoter or receives remuneration from that promoter

• control another promoter—this is where an individual controls or has significant influence over a company or partnership that carries on business as a promoter and either the individual (a) is disqualified from acting as a director, has been made bankrupt or subject to an individual voluntary arrangement/debt relief order, or (b) controlled a company or partnership that carried on the business of a promoter that was dissolved, became insolvent or became dormant. This prevents individuals from avoiding the promoter rules by serially setting up new promoter businesses

• transfer a promotion business—this catches situations where the business of being a promoter is transferred to the ownership of another person

Draft legislation, Sch 1 (Sch 33A, paras 1–5)

As a result of the definition of promoter being widened to include a situation where an existing promotion business has been transferred to a new owner, the rules in relation to conduct notices and monitoring notices are to be amended so that HMRC can serve such notices on the new owner (Draft legislation, Sch 1 (ss 239A, 244A)).

Conduct notices—increase in duration from two years to up to five years

It is proposed that the duration of conduct notices be increased from the existing two years to up to five years, depending on the number of threshold conditions met under FA 2014, s 237 or number of conditions met under FA 2014, s 237A (Draft legislation, Sch 1, para 22).

Main narrative treatment for the promotors of tax avoidance schemes regime

Proposed changes to the GAAR

The Draft Finance Bill 2021 aims to ensure that the GAAR applies equally to partnerships, as it does to other entities and individual taxpayers.

What is the GAAR and what does it seek to do?

The GAAR (general anti-abuse rule) is a general approach to tackling tax avoidance. It seeks to counteract tax advantages arising from abusive tax arrangements. The counteraction is exercised by making adjustments on a just and reasonable basis.

A tax advantage can include outcomes such as relief from tax, or avoidance of a possible assessment to tax. It can also include an avoidance of an obligation to deduct or account for tax.

Abusive tax arrangements are arrangements which cannot reasonably be regarded as a reasonable course of action in relation to the relevant tax provisions, having regard to all the circumstances.

The GAAR takes priority over any other part of tax legislation and forms part of the UK's anti-avoidance framework. It applies to almost all taxes including national insurance.

Where HMRC believes that an abusive tax arrangement has been entered into or carried out it must follow the procedural steps, and which have been subject to some recent changes in the Finance Act 2020. A potentially abusive tax arrangement will be referred to the independent GAAR advisory panel. Guidance on the GAAR, and GAAR advisory panel opinions are available on the GOV.UK website.

Current problems with partnerships and the GAAR

The GAAR legislation applies to the person who received the tax advantage. This can cause HMRC difficulties when considering anti-avoidance in the case of a partnership.

HMRC can enquire into the partnership return, and correspond with the partner nominated to deal with the enquiry. A notice to the partnership is deemed to include the giving of a notice to each of the partners (individual or corporate) who has or will deliver a self-assessment return. However, this does not mean that non-partnership aspects of a partner's return are automatically subject to HMRC review without a separate enquiry being opened into their individual returns.

During the course of an enquiry into the partnership return, the final profit or loss figure is agreed with the partnership and individual partners are then informed of the relevant adjustments required to their personal tax returns.

Whilst this process is generally sufficient for the course of an enquiry into a partnership return it can pose some problems with regards to the GAAR. The GAAR lacks a clear mechanism to enable HMRC to issue separate GAAR notices to partnerships or to individual partners in such a way that each partner can be made responsible for their share of any partnership liability.

What does the draft legislation propose for partnerships and the GAAR?

Schedule 3 of the Draft Finance Bill 2021 aims to make provision for the GAAR procedure to work consistently with how HMRC conducts tax enquiries in respect of partnerships. The draft legislation proposes:

• giving a notice to relevant partners via the responsible partner

• making amendments to the partnership return

• allowing counteraction through to the relevant partners’ tax returns

• enabling the responsible partner to appeal

  
  

Table

A protective GAAR notice may be issued to the responsible partner

Where it is believed that the tax advantage has arisen (or will arise) from an abusive tax arrangement then HMRC will have the power to issue a written protective GAAR notice to the responsible partner.

Protective GAAR notices were very recently introduced by the Finance Act 2020 and they replace provisional counteraction notices (PCNs). The replacement of PCNs with protective GAAR notices removed a potential anomaly whereby if HMRC decided not to (or was unable to) pursue the GAAR, it was arguably prevented from recovering the tax using non-GAAR technical arguments. The protective GAAR notice must be issued within the normal statutory time limits for making the adjustments included in the proposed counteraction, unless there is an open enquiry. In this case the notice can be issued at any time before the enquiry is closed (see A2.130 for more on the protective GAAR notices).

The Draft Finance Bill 2021 simply extends and aligns the use of protective GAAR notices to partnerships.

Just as a taxpayer has the right to take counteraction (see A2.128), the draft legislation will enable the responsible partner to make adjustments to the partnership return upon receipt of the protective GAAR notice. Similarly, the interaction of existing notices of proposed counteraction, pooling notices and notices of binding with the protective GAAR notice will be aligned for protective GAAR notices issued to partnerships. Existing procedural requirements will also apply (see A2.130 and A2.132).

The draft legislation will require HMRC to notify the responsible partner in writing where it is considered that on the basis of a partnership return one or more partners has obtained a tax advantage which should be counteracted under the GAAR. The notice must contain information which:

• specifies each relevant partner, the arrangements and the tax advantage, and

• explains why HMRC consider that a tax advantage has arisen to each relevant partner from tax arrangements that are abusive, and

• sets out the counteraction that the officer considers ought to be taken, and

• informs the responsible partner of the period for making an appeal, and

• explains the penalties and changes to tax documents as a result of the counteraction

Pooling notices and notices of binding may also be given to the responsible partner in respect of partnership tax arrangements. The draft provisions allow for equivalent arrangements used by partnerships and non-partnership entities to be pooled and bound behind the same lead arrangement.

GAAR penalties will be applied to individual partners

Provision is made in the Draft Finance Bill 2021 to amend FA 2013, s 212A so that each relevant partner becomes liable to pay a penalty calculated by reference to their counteracted tax advantage. The penalty for each relevant partner will be 60% of the counteracted tax advantage. The value of the counteracted tax advantage will be calculated separately for the purposes of each partner’s penalty. This will take account of their own individual tax position.

The responsible partner will be notified of the penalty alongside the person liable for the penalty. The appeal rights will sit with the responsible partner.

Similarly it is proposed that penalties will be calculated and charged, in relation to notices of pooling or binding that have been issued to the responsible partner.

Tax conditionality

Tax conditionality refers to a principle whereby businesses are granted access to Government awards and authorisations only if they are able to demonstrate good tax compliance. It is designed to test compliance with the obligation to notify chargeability to tax under TMA 1970, s 7 or FA 1998, Schedule 18, para 2.

From 4 April 2022, firms applying for licences in England and Wales to drive taxis and / or private hire vehicles (PHVs), to operate a PHV business or to deal in scrap metal will only be able to obtain or renew a licence to operate if they carry out a tax check. An applicant carries out a tax check by providing information to enable HMRC to satisfy itself that the applicant has complied with an obligation to notify their chargeability to tax, where such an obligation applied. The check will be completed when HMRC is satisfied that the applicant has provided all information requested. The licensing body will be required to signpost first-time applicants to HMRC guidance about their potential tax obligations and obtain confirmation that the applicant is aware of the guidance before considering the application. Where the application is for renewal of a licence, the licensing body must obtain confirmation from HMRC that the applicant has completed a tax check before considering the application.

The Government intends to consult on extending the provisions to other sectors over time and will work with the devolved administrations in Scotland and Northern Ireland regarding its possible extension there.

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Stamp taxes

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New SDLT rates for non-resident buyers of residential property

Non-UK resident purchasers of residential property in England and Northern Ireland will be chargeable to SDLT at rates 2% higher than the current rates where the effective date of the transaction is on or after 1 April 2021. The rates will apply to purchases of freehold and leasehold property and to SDLT payable in respect of rents on the grant of a new lease. The Government has indicated that the revenue raised from the increased rates will be used to tackle rough sleeping.

The new rules will apply to non-resident purchasers, including companies, and also to certain UK-resident companies which are controlled by non-residents. The draft legislation includes rules for determining whether an individual is non-UK resident and for whether a company is controlled by non-residents. Where a purchase is made by spouses or civil partners, both will be treated as UK-resident if one of them is so resident.

Transitional rules may apply to exclude transactions where contracts were exchanged before 11 March 2020 and not subsequently varied or where a contract is substantially performed before 1 April 2021 but not completed until on or after that date.

Housing co-operatives

New exemptions are to be introduced for certain housing co-operatives from the annual tax on enveloped dwellings (ATED) and from the 15% flat rate of SDLT which applies to companies, partnerships with any corporate members and collective investment schemes on the purchase of residential property. The exemptions will apply to non-social housing co-operatives which are not publicly funded but which do not have transferable share capital. The Government considers that the absence of transferable share capital means eliminates the potential for the perceived avoidance of SDLT which both ATED and the 15% flat rate were designed to counter.

The ATED exemption will apply retrospectively from 1 April 2020. Qualifying housing co-operatives which have paid ATED for 2020/21 will be able to claim a refund.

The exemption from the 15% SDLT rate will apply where the effective date of the transaction is on or after Budget Day in Autumn 2020. The exemption will be withdrawn if the conditions are no longer met at any time in the three years beginning with the effective date.

Categories: Comment & Analysis