Tax

Tax

The pandemic has broken several business taboos and accelerated the role of digitisation in all walks of life. The UK tax system is no different. HMRC’s role in developing the job retention and self-employed schemes’ online portals at speed to deliver support to employers and businesses at a time of crisis has shown that digitisation can be done quickly. It might not have been perfect, but it was very good. On the back of these lessons, the UK Government published its vision for tax administration in the UK in July: building a trusted, modern tax administration system. The strategic importance of this goal has clearly been brought into sharper focus by the pandemic.An important part of the July publication was the announcement of further steppingstones in the roadmap of the Making Tax Digital (MTD) project, starting with extending MTD for VAT to VAT-registered businesses with turnover below the current £85,000 VAT registration threshold from April 2022. MTD for income tax will commence for self-employed businesses and landlords with income over £10,000 from April 2023.But there’s one glaring issue missing from the picture: UK tax legislation is extremely complex. Unless this is seriously addressed, efficient, problem-free, further digitisation of the UK tax system cannot be effectively achieved. For that reason, the Government should also develop a roadmap for simplification of the UK tax system which should work as a precursor to any new digital services developed. This should begin with income tax complexity. If this doesn’t happen, having to navigate legislation that continually increases in complexity coupled with a requirement to make multiple filings to HMRC has the capacity to be extremely challenging for both HMRC, the taxpayer and their agent. The UK Government must simplify to digitise.Leontia Doran FCA is a UK Taxation Specialist with Chartered Accountants Ireland.

Oct 01, 2020
Tax

In late 2018, HMRC surveyed over 1,000 businesses on their awareness of the corporate criminal offences legislation. Claire McGuigan reports on the findings and the next steps for businesses.Corporate criminal offences (CCO) legislation, introduced in the UK two years ago, was designed to drive a behavioural shift in companies and partnerships to take an active role in preventing the facilitation of tax evasion. HMRC conducted a research project in late 2018, one year after the legislation took effect, to examine the extent to which this has been successful.The results show that more work is needed to raise awareness of the legislation:74% have not heard of the Criminal Finances Act (the Act) and, of those aware, only one-third thought it was relevant to their business.Large businesses and those in the financial services and insurance sectors are much more likely to have taken action.64% of businesses had not made changes to operations as a result of the Act.55% of respondents said they had at least one of the five standard prevention procedures in place.Over one-quarter of respondents intended to make changes in the next 12 months.While some operational changes are happening as a result of the introduction of CCO, it is also clear that the key messages in HMRC’s guidance are not getting through. With no de minimis to the CCO legislation and with sanctions including unlimited fines, criminal prosecution and director disqualification, organisations face a genuine risk if they fail to act.Below is a list of commonly asked questions and lessons based on my work in this area.1. What is a corporate criminal offence?The CCO legislation took effect on 30 September 2017. It created two corporate offences, one relating to the evasion of UK tax and one relating to the evasion of foreign tax. It can apply to the evasion of any tax, including indirect and employment taxes, anywhere in the world. Any UK business, UK corporate, or a foreign corporate doing business in the UK will be within the scope of both offences. The business will have a strict liability under criminal law for failing to prevent the facilitation of tax evasion by one of its associates (employee, contractor or any other person providing services for, or on behalf of, the corporate). A defence exists of having ‘reasonable prevention procedures’ in place.2. Who does this affect?All companies and partnerships. There is no de minimis.3. What happens if we don’t do anything? Are we at risk of penalties?Yes, you are. A successful prosecution could lead to:an unlimited fine;a public record of the conviction; andsignificant reputational damage and adverse publicity.4. What has HMRC said since the legislation came into force?HMRC has made it clear that it is taking this legislation very seriously. It has undertaken investigations, for example, which include interviewing staff to see what they know about CCO, what actions they are aware the business is taking in response to CCO, and if personnel know what to look out for to identify tax fraud.5. Can you provide examples of what this legislation covers?Here are three examples:A member of your payroll team deliberately falsifying information relating to a worker so the worker is treated as a contractor rather than deducting PAYE at source.An employee deliberately collaborating with one of your suppliers to falsify the amount paid on an invoice.An employee deliberately conspiring with a supplier to conceal the true source country of goods to evade customs duties.6. We already have Bribery Act and AML/KYC procedures in place. What more do we need to do?You may already have financial and economic crime prevention procedures in place. These existing procedures are relevant, but a risk assessment specific to the facilitation of tax evasion must be carried out and then mapped to current procedures.7. What should the message be from the board?You need top-level commitment. The board is typically best placed to champion this. From here, your staff will need training so they know what they need to do.8. I haven’t done very much. What do I need to do?The CCO legislation is no longer new, and HMRC will expect you to have reasonable procedures to demonstrate a defence to this legislation in place. There are four stages of compliance with the CCO legislation:Risk assessment: your priority is to conduct and document your risk assessment.Implementation: the risk assessment process should include the development of an implementation plan, setting out the next steps and responsibilities.Training and communication: this is to ensure that CCO policies and procedures are communicated within and outside the business.Monitoring, review and testing: this comprises testing current process and the periodic update of the risk assessment.9. What are other organisations doing at a practical level?Once the risk assessment is complete, there are typical ‘quick wins’ and practical steps that businesses can focus on. This includes developing a suite of CCO policies, such as a board paper and communications to suppliers, and ensuring that CCO training is rolled out across the business.10. What should my business do now?All businesses should continue to develop their response both to COVID-19 and an evolving working environment. The challenges and opportunities of a remote workforce and the accelerating pace of digital change mean that different approaches to compliance, governance and regulation must be considered.It is important to ensure that your reasonable prevention procedures are designed to prevent associated persons committing the facilitation offences in the new reality. Ensuring that your staff and other associated persons understand their responsibilities is also a critical control in minimising the risk of enforcement action.Where there are staff reductions, employees working from home or management focused on critical functions only, unique opportunities arise to commit tax fraud. Risk assessments should be reviewed regularly, particularly within the context of COVID-19.For businesses that have already performed a risk assessment, it is important to carry out a periodic review of existing policies and procedures, as well as refreshing your current risk assessment to reflect any changes in the business.Claire McGuigan is Director, Corporate Tax, at BDO Northern Ireland.

Oct 01, 2020
Tax

Budget 2021 is the next instrument in the government's response to the impacts of COVID-19 on the Irish economy. Between the pandemic and a possible disorderly Brexit, Budget 2021 will not be a normal budget, says Kim Doyle.COVID-19 has presented unprecedented challenges for the global economy. Governments, along with their tax authorities worldwide, have adopted and administered emergency measures to preserve the health of their people and defend against collapse of their economies. In Ireland, we had a mini-Budget in the form of the July Jobs Stimulus, a €7.4 billion package of measures aimed at supporting the Irish economy in response to the impact of COVID-19. We also have a number of administrative measures in operation by Revenue to ease taxpayers’ compliance burden. Brexit also brings challenges. At this stage, we do need to respond to the immediate impacts of Brexit, and a possible disorderly Brexit, and plan for the long-term stability and robustness of the Irish economy. Climate change is, too, the ‘defining challenge of our generation’, according to the Minister for Finance. And, indeed, a raft of measures were introduced last year to tackle this challenge, while others were promised in the future. EU and OECD tax reform proposals continue to pose challenges and bring additional uncertainties into play. The impact of these on the Irish economy could extend well beyond corporation tax receipts and may influence unwanted changes in investment decisions by MNC groups going forward.Framing Budget 2021Budget 2021 may target revenue raising measures to cover the expenditure introduced to deal with the recent challenges brought about by COVID-19 and a possible disorderly Brexit, but any budgetary measures must avoid undoing the impact of the July Jobs Stimulus Package. Health and housing priorities will also have to be addressed in the budget. The government has said the measures will focus on the short-term and not beyond 2021.The government has pledged no increases to income tax credits or bands. (This is also promised in the Programme for Government.) The level of government expenditure over the coming months is unlikely to fall substantially, if at all. Despite the backdrop, tax receipts for the first eight months of 2020 are only 2.3% behind the same period in 2019. Given that some of this deficit is a timing issue and will be recovered in 2021, this is a remarkable outturn. September tax returns will be the final “piece in the jigsaw” before the final Budget 2021 is decided, according to the government. ExpectationsPre-COVID-19, Budget 2021 was expected to be framed around Brexit and climate change. Now, amid a pandemic, what are we more likely to see in the Budget from a tax perspective? Income taxConsidering the government has stated there will be no broad based increases in income taxation, we don't expect to see much by way of income tax measures. We may see some modest tax cuts in the form of increased tax credits for stay-at-home parents and other credits and reliefs targeting lower and middle income earners. We would like to see a long-term commitment to a reduction in our high marginal tax rates of 52% and 55% for employees and self-employed respectively; however, there is no fiscal space to make any pledge to reduce these rates in the short-term.The concept of broadening the tax base, so more people pay a little, has long been debated with very little reaction by government. The main reason may be it is likely to be unpopular with constituents. However, considering the challenges for the Irish economy, the government may need to embrace this concept but balance it with the pledge for no broad income tax increases. A new form of tax relief for individuals working remotely is a possible outcome of the Department of Business, Enterprise and Innovation public consultation on Guidance for Remote Working. Some responses to this summer consultation called for changes to the tax rules for reimbursement of employee expenses and changes to the tax treatment of expenses incurred by employees. We may see some tweaks to the Irish Tax Code in response. Corporation taxThe government reaffirmed its commitment to the 12.5% corporation tax rate in the Programme for Government. The importance of this commitment is evident in the remarkable tax receipts for the eight months to end of August 2020, which are largely driven by large corporation tax increases along with a strong start to the year pre-COVID-19 and more resilient income tax receipts. Ireland is obliged under EU law to implement changes to our tax code to restrict the interest tax deduction taken by companies. At the time of writing, these changes are more likely to take effect in 2022. The EU agreed last year to park its digital tax proposals in order to allow global consensus be reached through the OECD digital tax discussions. Changes to accommodate any digital tax proposals will be premature in 2020 and, therefore, unlikely to be a feature of Budget 2021. Capital taxes In order to further stimulate the economy, lowering both the CGT and CAT rates will likely promote activity in the market and should ultimately see assets put to a more productive use. This rate reduction has been called for and debated in recent years. Perhaps Budget 2021 will deliver. Considering residential property prices have fallen in recent months, there may be scope to increase the related Stamp Duty rate. However, such a rate increase will likely be unpopular among constituents and not helpful considering the struggles reported by many in getting a foot on the property ladder. VATThe extension of the 9% VAT rate to construction services would help encourage the scale of property development needed to absorb the current demand and address the housing shortage. The re-introduction of the 9% VAT rate to stimulate the hospitality sector would complement the other measures, such as the Stay and Spend Tax Scheme. An extension of the new temporary 21% VAT rate, while desirable by many, is unlikely; the headline VAT rate is a useful revenue raising measure. Increasing the threshold for cash-receipts basis of accounting, and the VAT registration thresholds, may support businesses to deal with the current challenges. Old reliablesPetrol and diesel excise increases may feature, particularly in the context of requirements to address climate change. Increases in the excise to diesel only to bring it in line with the cost of petrol at the pumps is more likely. Excise increases on alcohol and cigarettes is possible but the hospitality sector has already taken a battering due to COVID-19 and any further perceived attacks may not be in favour. ConclusionOverall there isn’t the fiscal space for wide-ranging and significant tax reductions and reliefs in Budget 2021. But the Budget 2021 equation must consist of tailored tax measures to support and stimulate the hardest hit sectors of the Irish economy and defend against the impacts of a possible disorderly Brexit on the economy while also satisfying climate change targets.Kim Doyle FCA is Tax Director, Head of Tax Knowledge Centre in Grant Thornton.

Sep 30, 2020
Tax

Paul McCourt and Fiona Hall consider the possible tax implications of current low asset values and what individuals can do to help protect family finances for the long-term.The COVID-19 outbreak is having a range of effects on families and individuals, with many investors seeing family finances suffer and the value of their assets fall in recent months. An important factor to remember at this point is that when an individual makes a gift, it is the current market value of the asset being gifted that applies for both inheritance tax (IHT) and capital gains tax (CGT) purposes.TrustsThe creation of a trust to hold assets for the benefit of the wider family or dependants has been a long-standing solution for many individuals seeking to pass assets to the next generation. Settling a trust is generally a chargeable IHT event. However, if the settlor’s nil rate band is fully available, individuals can transfer £325,000 of assets into the trust without incurring an IHT liability. This could increase to £650,000 for married couples jointly settling a trust with the availability of two nil rate bands. CGT hold-over relief may also be available so that the gift to trust does not trigger a CGT liability.For those considering using a trust, or who have already established one, now may be the time to gift or sell assets. When assets pass out of the trust to a beneficiary, either by way of an entitlement or an appointment by the trustees, any IHT and CGT liabilities are based on the current market value of the assets passing. Trustees may wish to consider whether the trust continues to meet its objectives and whether it is now appropriate to appoint assets out to trust beneficiaries.Personal giftsGifting an asset to another individual is often a potentially exempt transfer for IHT purposes. As such, if the donor survives for seven years from the date of the gift, it falls out of their IHT estate. However, if the donor does die in this period, the value of the assets gifted at the time the gift was made could become taxable.Where a gift fails the seven-year rule, subject to reliefs and the IHT nil rate band (currently £325,000), IHT could be payable on the gift (by the recipient or the executors) or the value of the estate. Making a gift when asset values are low will mitigate the potential IHT exposure for the individual considering gifting an asset.A gift is treated for CGT as being a disposal of the asset at market value by the donor. This could trigger a capital gain if the value exceeds the allowable cost unless the assets qualify for business assets hold-over relief.When asset values are lower, the likelihood of a gift triggering a gain is reduced, or a gift may give rise to a loss. Care should be taken in generating a loss on gifts, as any losses arising from the disposal of an asset to a connected person can only be set against gains that arise from other disposals to that same person. Capital losses generally carry forward to future years, but not back so timing is vital.Crystallising ‘paper’ lossesIndividuals may consider crystallising a current ‘paper’ or book loss on an investment and repurchasing a similar asset. Any such loss can then be offset against capital gains arising on asset disposals made in the same, or later, tax years. It is important to note, however, that ‘bed and breakfasting’ of shares is often ineffective for tax purposes and particular care is required with transactions conducted personally, via an individual savings account or between spouses.As with any investment decisions, independent investment advice should be sought before proceeding.Exercising share optionsWhere an individual exercises an option to acquire shares in an employer through a non-tax-advantaged share plan, income tax is charged on that exercise on the difference between the market value of the shares at the date of exercise and the amount paid for the shares under the option. If the shares acquired are ‘readily convertible’ (i.e. easy to sell for cash or shares in a subsidiary company) National Insurance contributions will also be due on the exercise of the option.Exercising such options while the value of a company is temporarily reduced could reduce tax liabilities in the longer-term. However, this is clearly a risk-driven investment decision on which independent investment advice should be sought before proceeding. One of the key benefits of holding an option is that it would often be exercised before an exit event (e.g. the sale of the company) so that there is an immediate return of value. In the absence of such an event, the implications of becoming a shareholder in the company, and the risk to the value thereby invested, should be considered carefully.Pensions – lifetime allowanceAn individual whose pension pot was previously above the lifetime allowance of £1,073,100 (and with no protection/enhanced protection) might choose to crystallise pension benefits now while the fund value is reduced to reduce/eliminate the lifetime allowance tax charge.There are many financial, investment and IHT issues to consider carefully before proceeding, but acting now may save tax in the long-term. Action should only be considered as part of overall wealth planning, including advice from an independent financial adviser.Short-term opportunity to achieve long-term goalsThis is a difficult time, but any temporary reduction in asset values may allow clients to pass assets into trust or to the next generation at a lower tax cost than both a year ago and a year from now.Fiona Hall is Principal, Personal Tax, at BDO Northern Ireland.Paul McCourt is Tax Principal at BDO Northern Ireland.

Jul 30, 2020
Tax

The Temporary Wage Subsidy Scheme is ever evolving in the face of uncertainty, writes Maud Clear.The Temporary Wage Subsidy Scheme (TWSS) was introduced on 26 March 2020. Looking back 20 weeks on, in a world turned upside down by COVID-19, it is fair to say that the Scheme has evolved since its inception. With many businesses facing an uncertain road to recovery, the July Jobs Stimulus package was the next eagerly awaited phase in this evolutionary process.Revenue offered its services to the Department of Finance to pay out the subsidy through real-time reporting tools – an extraordinary move from an institution whose function is to collect tax.While the initial assessment in establishing eligibility was a significant exercise for many employers, Revenue provided consistency and support in their operation of the Scheme.That is until a programme of compliance checks was announced on 23 June for all employers availing of the Scheme. This was an unforeseen turn in the Scheme’s evolution, particularly when Revenue issued guidance on 20 April indicating: “We may in the future, based on risk criteria, review eligibility”.Such a broad stroke approach and the requirement for a response within five days have many employers questioning what is yet to come in the operation of the Scheme.Chartered Accountants Ireland, under the auspices of the CCAB-I, sought an extension to this response time. In response, Revenue may now allow for an extension of the five days where an employer contacts them to explain their difficulty in returning a response within the required timeframe.The announcement of an extension to the TWSS until the end of August came with a warning from the Minister for Finance that “this support cannot last forever”. As the challenges facing employers in re-opening continue to mount, assurance has since been provided by the Minister that the Scheme will not come to “an abrupt end”.  Most employers need the support of the TWSS to get back on their feet. Clarity on how they will get it, and for how long, will be a determining factor in their recovery. It is hoped that the ‘July Jobs’ stimulus package will provide that certainty.Maud Clear is Tax Manager at Chartered Accountants Ireland.

Jul 30, 2020
Tax

The prospect of an EU-wide digital tax raised its head again in June following developments at the OECD. Peter Vale and Kim Doyle consider if we are now closer to implementation of an EU digital tax across all member states, and the impact on Ireland’s offering.The EU agreed last year to park its digital tax proposals to allow global consensus to be reached through the OECD digital tax discussions.Both the EU and OECD proposals aim to allocate a portion of profits based on the location of consumers, reflecting the increasing value that businesses place on consumer data.In June, the US withdrew from the OECD’s digital tax discussions. This has increased the likelihood that the EU will push ahead with its own proposals.In the short-term, the impasse at OECD level is also likely to see other countries push ahead with unilateral digital tax proposals. Indeed, many EU countries have either implemented or proposed their own digital tax proposals.An EU digital taxThe EU’s original digital tax proposals envisaged a simple 3% turnover-based tax as an interim measure, subject to reaching agreement on a means of allocating profits based on digital activity. Given the complexities involved in arriving at such a means, the risk is that any interim ‘quick fix’, such as a flat turnover-based tax, could potentially become permanent.While countries are free to introduce their own digital tax measures, as several have done, implementation of an EU-wide digital tax regime would require unanimity across all EU member states. The need for unanimity could make it challenging to implement as certain countries, including Ireland, are not in favour of the existing EU digital tax proposals.However, the EU is looking to replace unanimity over tax decisions with a form of “qualified majority voting”. While such a change will itself require unanimity, political factors may lead to the removal of the requirement for unanimity in the future. This could potentially pave the way for easier implementation of EU-wide tax changes.Although the removal of the requirement for unanimity on significant EU tax decisions is some years away, countries are often reluctant to use a veto to block EU tax proposals. Hence the real possibility of an EU-wide digital tax in the short- to medium-term.COVID-19 will also drive countries to seek out additional tax revenues to fund spending, with digital tax from large multinationals likely seen as an easy target.What does it mean for Ireland?In recent years, many multinational companies (MNCs) with substantial operations in Ireland have moved their valuable intellectual property (IP) here. Over time, this would be expected to increase corporation tax revenues in Ireland.A simple 3% tax on the ‘digital’ revenues of large MNCs would increase the effective tax rate of these companies and thus dilute the benefit of our 12.5% corporate tax rate. This would impact low-margin businesses most and from a tax perspective, would make it less attractive to operate from Ireland.While the movement of IP to Ireland should see an increase in our corporate tax revenues, an EU-wide digital tax could see a pull the other way; it may cause some groups to reconsider their Irish presence.However, even if our tax regime becomes relatively less attractive, our 12.5% corporate tax rate may still make Ireland the most compelling location in Europe in which to do business and help us retain key employers.Digital tax optionsThe EU acknowledges that a 3% turnover-based tax is a blunt instrument and that more refined taxation of digital activity is the end goal. The OECD considered other options, which would involve looking at the level of activity in the selling country in determining an appropriate allocation between the selling country and the market jurisdiction. However, it is acknowledged that this is a difficult exercise – one that potentially involves a rewriting of transfer pricing principles – hence the EU proposal to start with a straightforward 3% turnover-based tax.Ideally, there would be agreement at EU level on a more sophisticated and accurate means of profit allocation rather than simply jumping into a turnover-based tax regime. While this might take some time to develop, it could be part of negotiations at EU level given that unanimity is required to implement any digital tax proposals (although countries would remain free to continue to develop their own digital tax regimes, which is far from an ideal scenario). A longer-term solution that reflects the value-added activities taking place in the selling jurisdiction, not merely market jurisdiction factors, would be better for Ireland. It would also encourage more knowledge-based businesses to locate here.Wider impactIf the price of any negotiation on digital tax proposals is that unanimity over tax decisions is removed, there is a longer-term vista of other EU proposals being pushed through. This would include the dreaded Common Consolidated Corporate Tax Base (CCCTB), which would again look to rewrite the rules in terms of the allocation of a group’s profits. Such moves would be bad for a small, open economy such as Ireland with significant profits diverted to larger market jurisdictions diluting the benefit of our 12.5% corporate tax rate.Once again, we are at a critical juncture in terms of global tax rule changes. Developments to date have generally been positive for Ireland. However, it would be dangerous to think that this will continue to be the case. In practice, our options are limited in terms of influencing the direction of changes to the tax landscape. In any future scenario, however, the location of high value-add activities should continue to play a key role in the allocation of a group’s profits. One thing that is not good for Ireland is uncertainty. Groups cannot make robust plans in an uncertain environment. The sooner there is clarity on digital tax changes, the better for Ireland.Ongoing robust corporate tax receipts evidence the generally positive impact that global tax changes have had in Ireland to date, with a movement away from tax havens to jurisdictions with substance. If Ireland can maintain a regime that both encourages and rewards innovation, we will be in the best possible place to emerge relatively unscathed from the latest round of changes.Kim Doyle FCA is Tax Director, Head of Knowledge Centre at Grant Thornton.Peter Vale FCA is Tax Partner, Head of International Tax at Grant Thornton.

Jul 30, 2020