Business Alert January 2011
Corporate Recovery acquisition strengthens SM services, new tax avoidance measures from the Government and latest on the VAT rate change.
17.01.2011
Corporate Recovery acquisition strengthens SM services, new tax avoidance measures from the Government and latest on the VAT rate change.
Please click on the links below to read the articles in our January Business Alert.
The VAT Rate Change – Implications for you
Corporate Recovery acquisition by Scott-Moncrieff
As a member firm of Moore Stephens UK, accountancy firm Scott-Moncrieff has acquired the Glasgow based Corporate Recovery practice of Moore Stephens LLP. This move strengthens and deepens the resources of the UK network at a time when the need for restructuring has never been greater. The 15 staff will be based in Scott-Moncrieff’s Glasgow office in Bothwell Street where they will be assimilated into the firm’s Corporate Advisory Group, led by Corporate Finance partner Stewart MacDonald, effectively doubling the group’s size.
Stewart MacDonald comments:
“We have been advising on many business turnaround assignments, including business restructuring, refinancing and debt recovery. Looking forward I see this being an area that will continue to grow, so when the opportunity arose to acquire an experienced corporate recovery team we moved to bring them in house.
“For the past two years there has been an increase in the number of requests from businesses asking for assistance on turnarounds, help with cash flow issues etc and there is no question business leaders value the advice of trusted business advisers in challenging circumstances. The additional resources we can now offer from the expanded team will be welcomed by those in need of support.
“As well as covering our offices in Edinburgh and Glasgow, the expanded team will be looking to work with companies throughout Scotland.”
Click here to read more about our Corporate Recovery Services >more
Contact:
Stewart MacDonald, Partner
New tax avoidance measures from the Government
The government has announced a number of legislative changes designed to tackle tax avoidance, the most significant of which deal with “disguised remuneration” and the possible introduction of a General Anti-Avoidance Rule (“GAAR”).
The changes also cover group mismatches, derecognition, functional currency within investment companies, VAT supply splitting and the extension of the disclosure of tax avoidance schemes (“DOTAS”) regime to inheritance tax, as it applies to transfers into trust.
Disguised remuneration
The government announced on 6 December that it “will introduce legislation to tackle arrangements involving trusts or other vehicles used to reward employees, which seek to avoid or defer the payment of income tax or national insurance contributions….., including to provide a tax-advantaged alternative to saving beyond the annual and lifetime allowances available in a registered pension scheme.”
The new regime will therefore need to be considered carefully by employers with existing trust or other third party payment arrangements, or by those seeking to implement such planning, to ensure the impact of the rules is fully understood.
25 pages of draft legislation have been published together with 16 pages of explanatory notes. The aim of the new rules is to trigger a charge to income tax and national insurance contributions where an employer makes, in substance, a payment of emoluments to an employee via a third party. The implications of the new rules are wide-ranging and will have an impact not only on trust arrangements but also unapproved pension schemes or other “third party” arrangements. It is expected that these measures will increase tax receipts by up to £500 million per year.
The legislation will have effect from 9 December 2010 although the way in which it operates will be slightly different, depending on whether a “relevant step” which gives rise to a tax liability is taken between 9 December 2010 and 5 April 2011 or after 5 April 2011. Existing arrangements may be caught by the anti-forestalling provisions if certain relevant steps are taken after 8 December 2010. These include the payment of cash distributions, the making of loans and the provision of readily convertible assets for the purpose of securing the payment of sums (including loans). The employment income tax charge in this case will be treated as arising on 6 April 2012, and the taxable amount will be reduced by any amount repaid by the employee before this date.
The provisions will apply to arrangements which result in a payment of money or the provision of an asset by a third party (such as a company or a trust) to an employee or certain other persons, such as family and nominated recipients. In particular, liabilities to income tax and national insurance contributions (payable through the PAYE system) will be triggered where a third party:
- makes loans of money or assets, or
- earmarks money or assets, or
- makes outright payments of money or transfers assets to an employee under a “relevant arrangement”.
The amount subject to income tax/national insurance contributions as employment income is the value of the payment, loan or asset. There are specific exclusions which include tax advantaged share and share option schemes and approved pension schemes.
The provisions are widely drafted and include such phrases as “it is reasonable to suppose that, in essence….”, “it does not matter if the person taking the relevant step is unaware of the relevant arrangement”; “all relevant circumstances are to be taken into account in order to get to the essence of the matter” and “A person (“P”) takes a step …. if P earmarks (however informally) any sum of money or asset….”. These terms are likely to cause a degree of uncertainty for taxpayers in the absence of detailed guidance from HMRC.
Examples
An example of the more general type of arrangements that would be caught by the provisions is as follows:
- an employee (“A”) settles an offshore trust with a nominal amount of capital (e.g. £100);
- the trustees set up an offshore company (“C Limited”) with nominal issued share capital (e.g. £100);
- the employer subscribes an amount equal to the intended “remuneration” (e.g. £1 million) for shares in C Limited;
- C Limited makes a loan to the trustees (in this example, £1 million);
- the trustees use the proceeds of the loan to purchase lifestyle assets (e.g. a yacht, airplane etc) which are made available toA and/or make a loan to A.
An example of a specific arrangement that will be caught is the Employer Funded Retirement Benefits Scheme (“EFRBS”). These unregistered pension schemes became popular after the introduction of the annual and lifetime caps for UK approved pensions schemes on 6 April 2006 and the subsequent introduction of the 50% income tax rate and the restrictions on tax relief for pension contributions. Generally, an EFRBS is set up as an offshore trust to which an employer contributes cash or assets to provide retirement benefits to its employees. Under the previous rules, it was possible for payments to be made to employees free of national insurance contributions; however, the new rules will provide for a charge to arise.
HMRC has been aware of these planning arrangements for several years and it is surprising that it has taken so long to change the legislation. However, HMRC believes that some of the types of transaction that will be caught by the new provisions (including the earmarking of funds in a discretionary trust) are not effective under the present law and HMRC will continue to challenge them, including in litigation “where necessary”. Indeed, the Government announced in June’s emergency Budget that it was scrutinising remuneration planning strategies which sought to avoid tax charges, and the statement on 6 December represents the outcome of HM Treasury’s review.
General anti-avoidance rule
The introduction of a GAAR has been considered, and rejected, by previous administrations (including the last Labour Government). The possibility was resurrected in June’s emergency Budget. In his statement on 6 December, David Gauke, the Exchequer Secretary to the Treasury, announced that, following informal discussions over the summer, he was instituting a study to consider whether a GAAR could be framed to meet the objectives of deterring and countering tax avoidance in a fair way. The group carrying out the study will be led by Graham Aaronson QC and will inform Ministers of its conclusions (and, if applicable, provide model provisions and explanatory notes) by 31 October 2011.
A number of countries (including Australia, Canada, New Zealand and South Africa) have a GAAR within their tax law. These countries have similar legal systems to the UK and the US, neither of which have (to date) enacted a GAAR but which do have strong bodies of case law which effectively include an anti-avoidance doctrine.
The main concerns relating to a GAAR are the increased uncertainty and complexity, and therefore costs, which may result.
Other anti-avoidance announcements
Legislation will take effect from 6 December 2010 to counter tax avoidance schemes that aim to reduce a group’s liability to corporation tax through the asymmetrical tax treatment of intra-group loans or derivatives. In addition to countering specific group mismatches from 6 December, it is intended to tackle such arrangements by using a principles-based or generic approach which will come into force from the date of Royal Assent to Finance Bill 2011.
A general anti-avoidance rule will apply from 6 December 2010 to “derecognition schemes” i.e. when a company is party to tax avoidance arrangements and, in accordance with GAAP, amounts are not fully recognised in its accounts. In addition, a company will be denied relief for a loss arising on derecognition of a loan relationship or derivative contract where it is party to tax avoidance arrangements.
Draft legislation has been published to counter avoidance involving changes in the functional currency of investment companies. The legislation will apply to accounting periods beginning on or after 1 April 2011.
Draft legislation has also been published to counter VAT avoidance relating to the supply of services where arrangements have been made for the supply of printed matter that is ancillary to those services to be made by a different supplier.
The DOTAS regime is to apply for inheritance tax purposes on transfers of assets into trust, with effect from 6 April 2011. The DOTAS rules for other taxes incorporate a series of
“hallmarks” which must be present in order for planning arrangements to be disclosable to HMRC; however, in the case of inheritance tax, the provisions will apply to more or less any circumstance where property is transferred into trust, where the main benefit of the arrangements is a reduction or elimination of a charge to IHT on the transfer of that property into trust. HMRC is to publish a list of schemes where no disclosure is required.
Contact:
Paul Renz, Head of Tax
John Walker, Director
The VAT Rate Change – the implications for you
What VAT Rate applies?
Options for Supplies spanning the change of rate
Credit Notes
VAT Fraction
Deposits received before 4 January 2011
Construction contracts
VAT on expenses & overheads
Stock on hand at 4 January 2011
VAT returns
Quotes, contracts and price lists
Changes to the Flat Rate Scheme
Businesses accounting for VAT on an invoice basis should apply the rate of VAT in force at the time they issue (or are obliged to issue) a VAT invoice. Invoices issued before 4 January 2011 will be liable to VAT at 17.5% and invoices issued on or after 4 January 2011 will be subject to VAT at 20%. It is important that tax point rules are recognised as well as the requirement to issue an invoice within 14 days as both will impact on the rate of VAT.
Businesses and organisations that use the cash accounting scheme are not liable for VAT on their supplies until they receive payment.
Options for Supplies spanning the change of rate
Where supplies span the change of rate you have a choice of VAT rates. Where a payment is received or an invoice is issued before 4 January 2011 for goods or services that are provided after 4 January 2011, you can,
- Charge VAT at 17.5%; or
- Account for VAT at the new rate of 20% on the amounts received or invoiced.
VAT credit notes or debit notes that contain a VAT adjustment must show the VAT rate in force at the time the original invoice was issued.
Accounting systems must be capable of referring to the VAT rate applied on the original invoice.
Businesses that need to calculate the VAT element of cash received should use the new VAT fraction of 1/6 to confirm the value of VAT at the 20% rate.
Deposits received before 4 January 2011
VAT should be accounted for on a deposit at the rate in force when it is received. If a deposit is received before 4 January 2011 for goods or services that will be supplied after the rate change, the supplier has the option of applying the 20% rate of VAT.
The tax point for construction contracts (which can include design, advisory and supervisory services) is the earlier of the time an invoice is issued or a payment is received. If you are carrying out work under a stage payment contract on 4 January 2011, any VAT invoices issued or payments received on or after that date will be liable to VAT at 20%. This applies even if some of the work was actually performed before 4 January.
Computerised accounting systems should be revised to record the new standard VAT rate from 4 January 2011.
This may require the introduction of a new tax code so that the system can process invoices showing the 17.5% rate and the 20% VAT rate. Consideration should also be given to the coding of services received from abroad that are subject to the reverse charge.
Stock on hand at 4 January 2011
VAT at the 20% rate should be applied to stock sold after 4 January 2011 even when 17.5% VAT was incurred on the purchase.
Businesses and organisations completing returns for a VAT return period including 4 January 2011 will have to account for VAT inputs and outputs at both the 17.5% and the new 20% rate.
Quotes, contracts and price lists
Businesses and organisations will have to consider revising price lists, web site information, publications and quotes or contracts that have been issued in advance of the VAT rate change.
Existing contracts may also need to be adjusted to correspond with VAT invoices and accounting procedures and to ensure that the reduced rate is recorded correctly.
Changes to the Flat Rate Scheme
HMRC has published new output tax percentages for the flat rate scheme these should be applied from 4 January 2011.
Edinburgh
Scott Craig: scott.craig@scott-moncrieff.com
Alan Glen: alan.glen@scott-moncrieff.com
Iain Masterton: iain.masterton@scott-moncrieff.com
Tel: 0131 473 3500
Glasgow
Greg McNally: greg.mcnally@scott-moncrieff.com
Anthony Cochrane: anthony.cochrane@scott-moncrieff.com
Tel: 0141 567 4500
