The International Tax Round | Autumn 2018
Sonal Shah is the editor of our International Tax Round and this edition features contributions from Graham Busch, Richard Staunton, Sonal Shah and Amal Shah.
A Swiss court has ruled that HSBC must release information on bank account holders that was leaked by former employee Herve Falciani in 2008, to Indian authorities. The ruling is based on the fact that the information was not purchased. Other countries which deem themselves privy to the leaked data may well follow with their requests.
We can also expect a significant number of tax investigations worldwide, as countries report under the Common Reporting Standard for the first time.
UK resident non-doms – A remittance pitfall
UK resident non-doms can avoid income and capital gains taxes on remittances to the UK by remitting capital only. A problem arises when the remittance is from a ‘mixed fund’, i.e. an account which contains clean capital (funds accumulated before becoming UK tax resident), but also, often unwittingly, income and the proceeds from capital gains.
HMRC takes the view that an individual remits their income first then gains proceeds, and only once those are exhausted do they gain clean capital. This can result in unforeseen and unfortunate consequences where these funds land in one account. HMRC has given certain resident non-doms a window of opportunity to ’cleanse’ such accounts by separating out the income and gains elements. This period ends on 5 April, 2019 and is only available to taxpayers who have previously claimed the remittance basis. For those who haven’t yet claimed, they can now do so in respect of the 2017/18 tax year and then successfully cleanse. We recently saved a remittance basis user over £200,000 in tax on remittances by successfully cleansing.
Declare or beware – HMRC cracks down on undeclared offshore assets
HMRC has issued a warning that offshore assets will now need to be declared. The ‘Requirement to Correct’ came into effect on 30 September, 2018 and as a result, there will now be penalties for taxpayers if they do not declare any income that they derive from foreign assets, or profits from offshore assets. Under this new legislation any tax liability offshore that relates to UK income tax, capital gains or inheritance tax must be declared. Failure to do so will leave an individual open to the risk of high tax penalties.
It is possible that a multitude of UK taxpayers may not realise that they are now obliged to make a declaration of their foreign financial interests concerning property and other investments. Taxpayers are being urged by HMRC to immediately declare any financial interests that they have overseas.
New public register for overseas entities
The Department for Business, Energy & Industrial Strategy (‘BEIS’) has launched a consultation on the Draft Registration of Overseas Entities Bill, which sets out provisions to establish a new public register of the beneficial owners of overseas entities that hold UK land. The proposed new rules are similar to those for UK company beneficial ownership, which are provided by the existing Persons with Significant Control (‘PSC’) regime. The Government intends that this register will be operational in 2021. The aims of the new foreign entities register are to prevent and combat the use of land in the UK by overseas entities for the purposes of money laundering, and to achieve greater transparency in the UK property market. This register was initially proposed in 2016 following the Anti-Corruption Summit held that year.
Offshore property companies – The switch from income tax to corporation tax
Non-UK resident companies carrying on a UK property rental business, or otherwise receiving UK property income, are currently subject to UK income tax (at the basic rate of 20%) on their UK property income profits e.g. rent.
In recent years, the UK government has made significant changes to the taxation of non-UK persons acquiring, holding and disposing of UK property. There was a consultation with the policy objective of equal tax treatment between UK and non-UK companies holding UK property.
Draft legislation published on 6 July, 2018 confirms that from 6 April 2020, non-UK resident companies that carry on a UK property business or have other UK property income will be charged corporation tax rather than being charged income tax, as they are at present. A non-resident company that has an accounting period that straddles 5 April 2020 will be required to submit two tax returns, one under income tax for profits arising up until 5 April 2020, and one under corporation tax in respect of profits arising from 6 April 2020.
The switch from UK income tax (20%) to UK corporation tax (currently 19%, but reducing to 17% from 1 April 2020), may be a tax cut for some overseas property companies – a small saving in comparison to the implications and complexities of moving into the UK corporation tax system.
Offshore property companies should begin to consider the potential implications.
Potential consequences of Brexit
There is still no certainty over the terms of the UK leaving the European Union.
VAT is a European tax which replaced ‘Purchase Tax’ when the UK joined the Common Market in 1973. We do not expect that there will be any major changes to the mechanics of the VAT system in the UK, which we believe will continue to follow the European Commission’s legislation for at least the next two – three years. The area of uncertainty is around whether sales and purchases of goods and services to and from the EU from 1 April 2019 will remain as they are today, or be treated in the same way as they are in countries outside the EU, or even a combination of both.
At the very least we would advise that anyone importing or exporting, to or from the UK from the EU, should review the possible consequences of a ‘hard’ Brexit. The most obvious effect will be on importing from the UK and the increase of the amount needed for a deferment account.
Movement of goods within the EU – not always simple!
HMRC has been very active in pursuing businesses that do not hold full information in respect of their sales of goods in the EU.
The approach has been driven by a case heard at the European Supreme Court called ‘Facet’, where goods are sold outside of the UK and move around Europe. The UK, supplier needs to be able to demonstrate that VAT has been correctly accounted for in the chain. If not, HMRC uses a ‘fall back’ position where they raise an assessment for acquisition tax in the UK, but refuse to allow the business to deduct that tax on their VAT returns. This has led to very large amounts of VAT being paid to HMRC.
We have been very successful in reducing or cancelling those assessments so please contact us if you operate in this field. In addition, we will ensure you hold the necessary evidence to avoid any potential issues with HMRC in the future.