International tax update – UK
Autumn Statement 2014, Budget 2015 and Finance Act 2015
The UK Chancellor delivered his Autumn Statement on 3 December 2014 and his Budget speech on 18 March 2015. For an overview of some of the key announcements, please see our Autumn Statement 2014 briefing and Budget 2015 briefing.
The UK’s Finance Bill received Royal Assent on 26 March 2015.
If you would like more information on how any of the announcements or changes affect you or your business or how they may apply in specific circumstances, please contact a member of the team.
Budget 2015 impact on Entrepreneurs’ Relief planning structures
Changes announced in last month’s UK Budget have tightened the rules around entrepreneurs’ relief with immediate effect, with the potential to impact on existing management equity structures.
Under the relevant legislation prior to the Budget, individuals owning shares in companies (sometimes referred to as “Mancos”) that held between 10% and 50% of the shares in a trading company or a holding company of a trading group were able to treat the company as if it were itself a trading company. In principle, this enabled up to twenty individuals to hold the requisite 5% of share capital and voting power and benefit from entrepreneurs’ relief on an eventual exit of the underlying trading group.
The changes mean that it is no longer possible to treat companies of this type as trading companies (unless they carry on a separate trade themselves). Accordingly, any shareholder in such a company who is within the scope of UK capital gains tax (“CGT”) will now be liable to the main rate of CGT on any disposal of their shares and will not benefit from entrepreneurs’ relief. It does not matter if the structure was established before the Budget announcements, as the new rules apply to any disposal on or after 18 March. Accordingly, to benefit from entrepreneurs’ relief, individuals will, from now on, need to hold the requisite 5% of shares and votes directly in a trading company or the holding company of a trading group for a 12 month period.
An unfortunate by-product of this change is that individuals holding shares in companies that are part of a genuine joint venture (e.g. a 50/50 split holding structure) will also no longer be able in principle, to benefit from the relief, unless the company they hold their shares in is itself a trading company or the holding company of a trading group or it is possible to restructure the ownership of the joint venture company (for example, to enable the company in which the individuals hold shares to be treated as the holding company of the overall group). This may of course have other ramifications and, in any event, the impact of the immediate change to the law is that the required twelve month period of ownership of shares in a qualifying company will have ceased for individuals in such structures, requiring, at the least, a “re-starting of the clock”.
Please contact a member of the team if you would like more information on how the changes affect you or your business.
Diverted Profits Tax
The UK Government has enacted a new tax, called the Diverted Profits Tax (“DPT”) which is intended to deter and counteract the diversion of profits from the UK by large multinational groups and will apply at the rate of 25% (rather than the corporation tax rate of 20%).
The DPT is applicable to diverted profits arising on or after 1 April 2015 (with apportionment rules where the accounting period straddles that date). HMRC has also issued Interim Guidance regarding the application of the rules. There is no grandfathering of existing structures so all existing arrangements can be within the scope of the new tax.
This new tax introduces potentially onerous burdens on large multinational enterprises and involves a “pay now argue later” approach giving extensive discretion to HMRC as to the amount of tax applicable to its assessment of an enterprise’s diverted profits.
The DPT is intended to apply to two broad situations:
where a foreign company structures its arrangements to avoid creating a UK permanent establishment (“PE”) and, broadly, makes more than £10m annually in UK-related sales revenues from the supply of goods, services or other property and its UK-related expenses exceed £1m. UK-related sales of affiliated companies are also included in determining the application of the £10m threshold where such sales are not subject to UK corporation tax; and
where entities or transactions (involving affiliated parties) lack economic substance and either involve a UK resident company or a UK PE of a foreign company to exploit tax mismatches where it is reasonable to assume that expenditure in the UK would not have been incurred, or taxable UK income would have arisen, but for the tax benefit of the actual arrangements.
Broadly, profits which are chargeable to UK taxes are generally subject to usual transfer pricing rules (where such adjustments are taken into account in the company’s tax return), with the diverted profits tax intended to apply particularly in those cases where the transfer pricing adjustment is insufficient or there is a recharacterisation of the arrangements and the tax is applicable to diverted profits determined on a just and reasonable basis.
The rules are intended to apply only to large enterprises and not to small or medium sized enterprises (“SME”) in any accounting period. SMEs broadly comprise enterprises employing globally fewer than 250 persons and which globally have an annual turnover not exceeding €50m and/or annual balance sheet not exceeding €43m.
The rules are not limited to transactions or arrangements with tax haven or low-tax jurisdictions, but can apply more broadly.
Whilst there are likely to be valid arguments challenging the validity of this new legislation under existing EU law principles and arguing its impact is limited by existing double tax treaty provisions, the short timeframe for providing notification to HMRC of the application of the DPT and the need to pay the tax well in advance of any challenge to the law’s validity, will expose larger enterprises with significant UK activities to the possibility of having to notify HMRC of the possible application of the diverted profits tax.
Larger multinational enterprises with existing activities in the UK and those enterprises looking to establish activities in the UK will need to consider the impact of these proposed new rules particularly if they are generating (or are looking to generate) significant revenues from UK activities as these new rules could influence how they structure their activities in the UK. These rules should also be considered if multinational enterprises are looking to develop UK property or lease property to UK affiliates. If you would like more information on the new Diverted Profits Tax relief, please contact a member of the team.
New registration and new online reporting for UK employee share plans by 6 July 2015
If you have any UK employee share plans, you will need to take the following actions by 6 July 2015:
register all share plans on the HMRC online system;
complete end of year reporting for options and share plans on the HMRC online system; and
self-certify tax-favoured share plans.
A failure to comply will result in automatic penalties and the withdrawal of tax-favoured treatment for some employee options.
As announced in 2014, all new and existing employee share plans and arrangements need to be registered online. Arrangements cover the acquisition of employment-related securities generally, not just under a formal plan.
Companies will also need to self-certify that any tax-favoured share plans meet certain requirements by 6 July 2015. This is because the process of HMRC approving tax-favoured plans has been replaced by the self-certification process.
Previously, companies were required to file share plan annual returns (i.e. the EMI 40, Form 42, Form 34 (SAYE), Form 35 (CSOP) and Form 39 (SIP) with HMRC on paper by 6 July of the relevant year. These forms will now be available as online versions to be completed through the HMRC online system by 6 July 2015. There will be automatic penalties for late filing after 6 July 2015.
Companies who have granted Enterprise Management Incentive (“EMI”) options after 6 April 2014 will have already registered their EMI plan online in order to notify the grant of EMI options. Where options are granted over shares in a non-UK company to employees of a UK subsidiary, it will be simpler for the UK subsidiary to be responsible for the online registration, self-certification and end of year reporting.
Next steps – start early
If you have not used the HMRC online site for employment-related securities already, it can take over two weeks to register your share plans. The end of year reporting cannot take place until registration has happened, so you do not want to leave it until the last minute.
You can set up a new login by entering the Government Gateway site and registering. To register on the Government Gateway site you will need your PAYE reference number and Accounts Office reference. Please note that your activation code for this site will be sent through the post and may take 7 days to arrive.
Once you have your activation code, the new online system is accessed through HMRC’s online services. Once you have set up your account, you will need to register your share plans.This may take up to two weeks following your registration for HMRC to process and verify. Once the registration of the share plan has been processed and verified, you will be able to view your unique scheme reference on the online system. Following the successful registration of the share plan, you will be able to complete the end of year returns.
We would advise leaving plenty of time to complete this process so you can meet the 6 July deadline for end of year reporting.