The new Profit Diversion Compliance Facility- HMRC require much more than a transfer pricing report

Hundreds of multinationals will now have received a letter from HMRC, suggesting that they register for the new Profit Diversion Compliance Facility. Those who don’t register are more likely to receive formal enquiries from HMRC.

Those who receive the letter are groups that HMRC consider may have used incorrect transfer pricing in areas targeted by Diverted Profits Tax. HMRC say that they have a growing list of multinationals who could be diverting profits, and who they plan to investigate.

Although this tax was described as “the Google tax”, I know from my work leading KPMG’s response to Diverted Profits Tax back in 2015 that it has potential applications to a much wider group of companies than just technology companies. There are issues for retail groups selling high-tech products to industry and to individuals, fashion groups, investment funds, captive insurers etc. (The facility does not apply to groups where non-UK resident companies deal in or develop UK land).

The disclosure process

The opportunity to register is open until 31st December 2019 and registering immediately in response to a letter may not be a good idea. A group which registers will discover that it has 6 months to produce a report in the specified format, which includes calculations of tax, interest and penalties. The taxpayer is required to pay the tax due when they submit the report, while HMRC aim to respond to the report within 3 months. The breadth and depth of the required report makes 6 months to prepare it an extremely challenging target.

Before the Requirement to Correct deadline, we saw trusts and individuals making protective registrations where they were unsure of their technical or factual position, using the time before the disclosure report was due to finalise their analysis. But the amount of work which is required to make a disclosure under this new Facility is so extensive with such a tight time limit that this seems to be inadvisable here.

Which accounting periods would a disclosure under the Facility cover?

Diverted Profits Tax is an unusual tax, because amending your corporation tax computation to transfer pricing agreed by HMRC generally means that no Diverted Profits Tax is payable. This is referred to in the HMRC guidance. Since the DPT rate is higher than the corporation tax rate by 6%, most groups opt to amend the corporation tax return. However, this means that the group may end up having to amend returns or make voluntary disclosures for periods before the introduction of Diverted Profits Tax in 2015, because if they have used the same Transfer Pricing policy in earlier years’ computations, then these too may be regarded by HMRC as incorrect.

Because of the various assessing time limits, a group needs to establish how HMRC will characterise its behaviour before it can decide which accounting periods the report needs to cover- HMRC can assess earlier periods if the behaviour is “careless”, as that term is interpreted. The guidance specifically says that taking transfer pricing advice is not, of itself, sufficient to demonstrate that reasonable care has been taken.

Investigating your own transfer pricing

The most significant benefit of registering for the Facility is that any penalties should be calculated on the basis that the group has made an unprompted voluntary disclosure, i.e. at a lower level than would have been charged on penalties arising as a result of an HMRC investigation.

There is also a benefit in that HMRC will not launch an investigation. However, this in effect means that the group is required to investigate itself, to the same depth as HMRC would have investigated it. The Facility sets out the extensive scope of the report which is to be prepared, and the extent of the factual research which is required to support it; the scale of work required should not be under-estimated.

HMRC set out some of the areas where they have found groups’ transfer pricing policies and implementation to be inadequate. These include the following;

  • Transfer pricing that is out of date in relation to the group’s current business and functions. (This can occur in particular where a transfer pricing analysis relied on UK individuals working in another country, and they drift back to working in the UK).
  • Transfer pricing that is “old-fashioned” in relying on contractual allocation of risk to low-tax jurisdictions, rather than looking at significant people functions.
  • Transfer pricing analysis that is built on an incorrect factual foundation.

The guidance says that the action required includes interviewing staff and checking contemporaneous emails, not just producing the transfer pricing documentation.

The scale of the report which is required

In order to submit the required report, a group will need to;

  • Establish the accounting periods which it must cover
  • Undertake a review of facts and evidence
  • Provide the detailed transfer pricing analysis and quantify the tax adjustments
  • Include a detailed section of the other international tax matters HMRC require, including company residence in the UK, permanent establishments in the UK, deduction of withholding tax, treatment of CFCs, and indirect tax, which will withstand HMRC scrutiny.
  • Quantify any tax adjustments arising from this, again establishing which accounting periods HMRC can assess
  • Determine how HMRC will characterise the group’s behaviour for penalty purposes and calculate any penalties due, including failure to notify re Diverted Profits Tax

All these workstreams will have to be project managed carefully to produce the report within 6 months of registering.

Risks not covered by registering under the Facility

HMRC list certain actions which they may still take against a group which registers for the Facility but does not make a full and accurate disclosure, i.e. where HMRC consider that the disclosure report is inadequate or inaccurate. This includes launching a CoP 9 enquiry or making criminal charges.

The quality of the disclosure is important in protecting the Senior Accounting Officer given that the group may admit careless behaviour: HMRC say that the business is required to make a full and accurate disclosure and co-operate fully.

Use of advisors

Groups who use a team from their auditor for their transfer pricing advice may find that the audit firm cannot represent them in relation to the disclosure because of independence requirements.

Apart from the transfer pricing and Diverted Profits Tax analysis, a group would also require an advisor who brings the expertise to advise on:

  • The scope of the transfer pricing investigation necessary to prepare the report
  • The scope of the investigation into the other international tax issues necessary to prepare the report
  • The characterisation of the group’s behaviour for assessment and penalty purposes
  • The risks in relation to fraud and the position of the Senior Accounting Officer
  • Negotiation with HMRC

Once a group has registered, HMRC say that they are willing to meet with them to discuss in advance their plans for the review and report. Would you want to walk into such a meeting without an experienced investigations specialist by your side? Trident Tax would be happy to help.

Article written by Christine Hood of Trident Tax

On 4 December 2018, the House of Lords Economic Affairs Committee published its report ‘The Powers of HMRC: Treating Taxpayers Fairly’ (‘the report’).

 The report included a series of conclusions, recommendations and some stinging criticisms of HM Revenue & Customs (‘HMRC’) which were widely reported at the time (see for example: Tax Journal, ICAEW, BBC).

This article focuses on one key aspect of the report, the 2019 Loan Charge. In particular, a recommendation to change the current legislation. This recommendation, in our view, has been under-reported to date and requires HMRC and the Government to clarify their intentions urgently.

It is worth quoting the recommendation here in full:

We recommend that the loan charge legislation is amended to exclude from the charge loans made in years where taxpayers disclosed their participation in these schemes to HMRC or which would otherwise have been ‘closed’.

(Source: the report, paragraph 17, page 4, ‘Summary of Conclusions and Recommendations’).

This recommendation was made in the context of broader criticisms of both the 2019 Loan Charge legislation and HMRC’s approach to dealing with ‘disguised remuneration’ cases.

These included:

  • The retrospective effect of the legislation which undermines normal time limits for tax assessments and diverges substantially from established principles (notably those in the 2005-2012 Powers Review).
  • HMRC’s disproportionate approach to pursuing taxpayers (including inappropriate threats of bankruptcy) and failure to communicate its position in a clear or timely manner.

(Source:  the report, paragraph 75 et seq, page 29 et seq, Chapter 4: ‘The 2019 Loan Charge’).

The following simple example, which is not uncommon in our experience, illustrates why urgent clarification is required.

An individual entered into a ‘disguised remuneration’ arrangement in 2008. The arrangement involved the individual’s employer making a contribution into an Employee Benefit Trust (‘EBT’) the proceeds of which were then allocated into a sub-Trust specifically for the benefit of the individual. The sub-Trust then made a loan to the individual.

The law, as it was understood at the time, would prevent the employer deducting the contribution in calculating its taxable profits for the period but neither the contribution nor the loan would be taxable as the individual’s earnings from employment (although if the loan was interest free there would be a taxable benefit arising equal to notional  interest at HMRC’s official rate).

The arrangements were fully disclosed in the employer’s accounts and tax returns, and in the individual’s tax returns. However, HMRC failed to make an assessment on either the employer (for PAYE) or the individual (for Income Tax) within the statutory time limit for doing so.

 The loan remains outstanding and the individual is unable to repay the loan before 5 April 2019.

Under the 2019 Loans Charge legislation the unpaid loan is treated as becoming employment income on 5 April 2019, in respect of which the employer must account for PAYE & NIC. If the employer does not pay, it is expected that HMRC will issue a Regulation 80 Determination for the PAYE. If it becomes clear the employer cannot pay, HMRC will seek a Direction under Regulation 81(3) to make the individual borrower personally liable for the Income Tax. If the employer entity no longer exists, the individual must declare the unpaid loan as employment income on their 2018/19 personal tax return.

To avoid the 2019 loans charge arising and within the terms of HMRC’s settlement guidance, the individual must agree to make ‘voluntary restitution’ of the Income Tax on the original amount allocated to the sub-trust as if it were earnings (even though HMRC cannot collect the tax in law) before 5 April 2019, otherwise a charge to Income Tax will arise on that date (possibly at higher rates). Additionally, although there is no legal mechanism to transfer the liability, HMRC’s settlement terms also require the individual to settle the Employers’ NIC.

The Lords Committee recommendation (above) clearly states that in their view the legislation must be changed so that an individual in these or similar circumstances will not face a 2019 Loan Charge: either because a full disclosure was made at the time; or that the period in which the EBT contribution was made is now ‘closed’; or both.

In light of the above some key questions arise, including the following:

  1. Should an individual in these or similar circumstances agree to make ‘voluntary restitution’ to prevent a 2019 Loan Charge which the Lords’ Committee states should not arise?
  2. Is it appropriate, in these circumstances, for HMRC even to enter into agreements for ‘voluntary restitution’ until the position is clarified?
  3. If the Government accepts the Lords Committee recommendation and changes the legislation to exclude these and similar cases from charge, what happens to those cases where individuals have already entered into ‘voluntary restitution’ agreements e.g. should HMRC repay the amounts to the individuals?

 At the time of writing this article, the only Government response which could be identified was reported by the BBC to be as follows (from a ‘Government Spokesperson’):

“On the loan charge in particular, it is important to bear in mind that disguised remuneration schemes are aggressive tax avoidance structures that allowed some people to avoid the taxes that Parliament requires them to pay.”

(Source: BBC)

The ICAEW reports that Mel Stride, Financial Secretary to the Treasury, did not give evidence to the Lords Committee but will respond to the Committee formally in writing: at the time of writing this article, no such response has been made public.

We therefore call on the Government and HMRC to make the position clear urgently to provide certainty for advisors and taxpayers in this difficult and controversial area.

If you would like help with any of the issues raised in this article, contact us here.

 

HMRC guidance on cryptoassets means that all 2017/18 profits should be shown on the tax return and tax paid at the end of next month

HMRC have issued updated guidance, and presumably this means that they expect 2017/18 returns to be submitted on this basis, and capital gains tax liabilities to be paid on this basis on 31st January 2019. This tax is due even where one currency was exchanged for another in 2017/18 and the currency acquired has fallen dramatically in value, so the individual may not have cash proceeds to meet the tax. Crypto losses in 2018/9 cannot be set against the gains to reduce the tax payable.

The most significant statement in the new guidance is “HMRC does not consider the buying and selling of cryptoassets to be the same as gambling”. Their previous guidance said “Therefore, depending on the facts, a transaction may be so highly speculative that it is not taxable or any losses relievable. For example gambling or betting wins are not taxable and gambling losses cannot be offset against other taxable profits.” This had led some owners to believe that they did not need to report gains.

The new guidance makes it clear that most gains are subject to capital gains tax, and “only in exceptional circumstances” will a gain be subject to income tax. Both gains and income need to be reported, and there is no de minimis. This then means that losses will be capital losses, and so in particular, losses realised in 2018/19 may be difficult to use, as they can only be carried forward against gains in later tax years or offset against gains on other assets in 2018/19.

The guidance repeats HMRC’s previous comment in the Capital Gains Manual that gains on cryptocurrencies should be calculated on a “pooling” basis. Owners may not agree with HMRC’s comment that this “allows for simpler Capital Gains Tax calculations”. It requires that all transactions in one currency are calculated by pooling all of the acquisition costs, and then each sale or gift of currency is treated as a part-disposal of the pool. In particular, this means that owners who held a currency at 6th April 2017 will need to calculate the pool for earlier years in order to complete their 2017/18 return. Online “Crypto calculators” may well not use this method and thus cannot be used for UK returns.

There is a section on record keeping as follows.
“Cryptoasset exchanges may only keep records of transactions for a short period, or the exchange may no longer be in existence when an individual completes a tax return.
The onus is therefore on the individual to keep separate records for each cryptoasset transaction, and these must include:
• the type of cryptoasset
• date of the transaction
• if they were bought or sold
• number of units
• value of the transaction in pound sterling
• cumulative total of the investment units held
• bank statements and wallet addresses, if needed for an enquiry or review”

“Value of the transaction in pound sterling” may be a difficult calculation. HMRC say “If the transaction does not have a pound sterling value (for example if bitcoin is exchanged for ripple) an appropriate exchange rate must be established in order to convert the transaction to pound sterling.

Reasonable care should be taken to arrive at an appropriate valuation for the transaction using a consistent methodology. They should also keep records of the valuation methodology.”

The key point here is that capital gains tax is due even where one cryptocurrency has been exchanged for another, and the owner has received no cash.
On normal rules, where a gain is taxed on the basis of the value of the new currency, there is no deduction in this calculation for the further transaction costs that could be incurred in actually receiving this value into a UK bank account.

In our previous article (click here), we talked about groups setting up DLT companies in jurisdictions which already have a regulatory framework, such as Gibraltar. A group which is working on applying DLT to its business will be creating intangible assets, and will therefore need to look at the tax issues which apply to such activity. There are a number of countries which have specific innovation regimes. However, one of the key factors is where the group has staff with the capability to develop these intangible assets, since transfer pricing within the group will focus on where the functions which create value are actually being undertaken. If it is not possible to move the staff to the countries offering an “innovation box”, then the tax benefits will be difficult to access.

This article considers the situation where the staff within a group who will develop DLT are located in the UK, while the ownership of the technology is in the DLT company in, for example, Gibraltar.

If UK staff within the group work for the Gibraltar DLT company, then HMRC may consider that the Gibraltar company has a UK permanent establishment, to which taxable profits should be attributed. There is a further issue specific to the UK. If the Gibraltar DLT company has “avoided a taxable presence in the UK”, while there is UK activity in relation to sales, then it could be subject to UK corporation tax at a higher rate of 25%, under the Diverted Profits Tax, if the group is “large”.

If a UK company participates in developing the intangible assets of the Gibraltar DLT company then HMRC are likely to argue that it should be reimbursed by a share of profits, rather than on a “cost plus” basis. For a UK company which is “small or medium sized”, transfer pricing does not generally apply. However, it does still apply to provisions between the UK and “non-qualifying” territories. In particular, transfer pricing would apply to work on developing DLT undertaken in the UK, where the DLT company is located in Gibraltar or Cayman, which have DLT regulatory frameworks.

For example, if a group is considering using staff of a UK company to develop the DLT software for the Gibraltar DLT company, then there are likely to be substantial UK taxable profits arising if the DLT business is profitable. It is then worth considering whether research and development (R&D) tax relief is likely to be available. There is no requirement that the UK contracting company should own the IP which it develops. In general, a UK company which is contracted to provide services to a group DLT company can claim RDEC (R&D expenditure credit), and this claim can be made even where the company is not yet making taxable profits.

For R&D relief to be available on software, the development must directly contribute to achieving an advance through the resolution of scientific or technological uncertainty, and there must be an advance in overall knowledge or capability in a field of science or technology, not just the company’s own state of knowledge or capability alone. Pioneers in DLT technology may well expect to meet these conditions.

In conclusion, if the technology for a Gibraltar DLT company is being developed in the UK, then the profits attributable to the UK activity need to be considered on transfer pricing principles, even for a small or medium sized group. Equally, the potential tax benefits of R&D credits in the UK should not be overlooked; they could be particularly valuable to the group in the pre-revenue stage of its development.

Does the government, or more importantly, HMRC, take any notice of what the House of Lords has to say?

Thousands of employers and individuals who used disguised remuneration schemes and are facing a new tax charge on 5 April 2019 will be hoping so. The Economic Affairs Committee of the Lords has delivered a hard-hitting critique of HMRC’s conduct in relation to disguised remuneration schemes, amongst several other topics.

As many have previously commented, the Lords found the retrospective effect of deeming loans made up to 20 years ago as employment income on 5 April 2019 to be unacceptable. The committee noted that the effect of the new charge is effectively to walk around the statutory time limits that HMRC have failed to meet in many cases. It seems clear that the intention of HMRC was to ensure that it had a second bite at the cherry where it had failed to open enquiries or make protective assessments within the specified time limits.

In advance of the DR loans charge, we have also seen examples of HMRC making Regulation 80 PAYE Determinations in disguised remuneration cases very close to the end of the 6 year time limit which applies where there has been a loss of tax due to careless behaviour. However, when the issues are properly evaluated it appears that in some cases HMRC are seeking to make generic assumptions about the conduct of taxpayers and/or their professional advisers without sufficient evidence to support such a view.

The Lords also considered that HMRC sometimes aggressive pursuit of taxpayers was not proportionate and diverged substantially from the principles on which it should operate according to the Powers Review. The evidence given by HMRC was that only 5,000 of an expected 50,000 cases had already reached settlement. The average employer settlement was £525,000 whilst the average individual settled for £23,000.

One positive to take from this is that if HMRC can be persuaded to take a more proportionate approach, there are many taxpayers who could still benefit from this.

In particular, the Lords were “disturbed to hear accounts of HMRC threatening individuals with arrangements that could result in bankruptcy, where individuals clearly have no assets to settle liabilities. Whether these threats were explicit or perceived, they have caused considerable anguish for a number of individuals.”

The Lords made a number of very specific recommendations, including

– that the loan charge legislation is amended to exclude from the charge loans made in years where taxpayers disclosed their participation in these schemes to HMRC or which would otherwise have been “closed”

– that HMRC urgently reviews all loan charge cases where the only remaining consideration is the individual’s ability to pay

– that HMRC establishes a dedicated helpline to give those affected by the loan charge advice and support. Such action should take place well in advance of the loan charge coming into effect in April 2019.

Although the conclusions and recommendations of the Lords will be welcomed, whether they will have any practical effect is a question that will be answered by the approach of HMRC in the coming months. However, it is only right that these points are made to HMRC in the course of correspondence and discussions with HMRC when negotiating settlements and time to pay in disguised remuneration cases.

If you would like to discuss a disguised remuneration case please contact us.

One of the key conditions for Entrepreneurs’ Relief on shares or an interest in shares is that the company needs to have been the individual’s “personal company” in the period of a year leading up to either the sale of the shares, or the company ceasing to be a trading company or the holding company of a trading group. For disposals from 6 April 2019, the one-year period is extended to two years. Simple enough, but unfortunately the same can’t be said about the changes to the definition of a personal trading company.

Before Budget day, an individual needed to have 5% of the ordinary share capital and 5% of the voting rights of a company in order for it to be a personal company.

From Budget day, they would also need to be beneficially entitled to at least:
• 5% of the company’s distributable profits
• 5% of its assets available for distribution to equity holders in a winding up.

The new legislation is said to be to combat abuse, where individuals hold shares which do not have such a 5% beneficial entitlement, but are “constructed” to comply with the current 5% tests. However, as explained below, it seems possible that the new rules could result in entrepreneurs’ relief being lost in cases where there is no abuse and no artificially constructed arrangements.

The Finance Bill provides that the new tests are to be defined by the “equity holders” tests in the Corporation Tax Act 2010. These tests look at what the individual would receive if there was a distribution or winding up at the time, but then say that if there are no distributable profits, or no assets for distribution, a hypothetical amount of £100 is to be considered. There are some provisions which apply where some shareholders hold shares with limited rights or temporary rights.

This is potentially problematic for entrepreneurs who hold shares in companies which have decided to use growth shares in order to incentivise employees. This is relatively common in a start-up business, where the aim is to incentivise the employees to build up the company to an exit, and the entrepreneur shareholders can then go on to their next project. Growth shares may give their holders an entitlement to a share of proceeds on a disposal of a company where the proceeds are above a specified hurdle.

The 5% test is applied on the basis of a winding-up, and the value of a company on a winding-up will often be below the sale value, for example where the sale price is based on earnings not assets. However, once a sale is completed, proceeds above the hurdle will cause the growth shares to dilute existing shareholders, and this may cause them to fall below 5% at the last minute, denying their expected entitlement to entrepreneurs’ relief.

HMRC have expressed their view that when option-holders exercise their options on the day of sale, this does not dilute the existing shareholders for the purposes of testing whether the company has been their personal company up to the date of disposal, click here. It may be that they will apply a similar approach to growth shares, since the hurdle proceeds don’t arise until the day of disposal.

The position is unhelpful in that although the Finance Bill has provisions to provide relief to shareholders who have qualified for Entrepreneurs’ Relief but are then diluted below 5% by new investment, those provisions have a commencement date of 6th April 2019.

It does appear that entrepreneurs who currently hold 5% of the ordinary shares in a company, where growth shares are being used for commercial reasons as an incentive, could be put into an uncertain position. It is to be hoped that HM Treasury will listen to representations on this point.

We have been researching the position both for entrepreneur shareholders, and for partners investing in a trading group through a partnership with waterfall or carry provisions, and considering practical ways to deal with this. If you would like to discuss the application of this draft legislation to your own potential exit, please contact us at Trident Tax.

With a few notable exceptions for retail and institutional investors, non-UK resident residents who dispose of UK residential property interests are subject to non-resident UK capital gains tax on the growth in value of the property from April 2015 onwards.

From 6th April 2019, this regime is being extended beyond residential property, so that overseas investors will also need to ensure that tax is paid on;

  • Gains on disposing of UK commercial property and undeveloped land
  • Gains on “indirect disposals” of UK real estate interests in both residential and commercial property and undeveloped land, for example a disposal of shares in a non-UK resident subsidiary company whose main asset is UK real estate.

Rebasing

In all these cases, the asset will be rebased at 5th April 2019. This means that overseas investors who own companies holding UK residential property may need to obtain a valuation of the property, even where they expect the disposal to be structured as a disposal of the shares rather than the property itself.

Investors who own UK property directly or indirectly may therefore want to obtain professional valuations at this date to minimise the scope for valuation disputes with HMRC many years later, following a disposal. The Brexit deadline of 29th March 2019 may of course have a significant impact on UK property valuations at this time, increasing the risk of valuation disputes.

Selling a company

In recent years, UK residential property prices have been depressed by both Brexit and the increases in Stamp Duty Land Tax. Where a UK residential property is held in a non-UK company, this would still offer an SDLT saving to a potential purchaser, and it may mean that it’s worth investors looking at whether the company can be sold before or shortly after April 2019 to maximise the proceeds after payment of non-resident capital gains tax.

However, purchasers are often wary of acquiring a company instead of the property directly and there are two common reasons for this. Firstly, a prospective purchaser of a company will be concerned about the history of the company and is likely to require due diligence that would not be required for a property acquisition. Secondly, in addition to the normal checks for potential claims and creditors of the company, the purchaser will also be advised to check potential tax liabilities of the company, hence the due diligence would include the tax residence status of the company, payment of UK income tax on any rental income to date, and the filing of ATED returns.

Property used by a beneficiary of a trust

The extension of non-resident capital gains tax to share disposals will apply to shares that derive 75% or more of their value from interests in UK real estate.  There have been many changes to the taxation of UK property in recent years, including bringing UK residential property within the scope of UK inheritance tax.

Trustees may have re-evaluated whether UK residential property is still preferred as an investment, and decided to continue to hold UK residential property via a company. However, this should be reconsidered in the light of these changes, particularly where residential property is used by the beneficiaries. Here, it may be appropriate to consider distributing the shares before 6th April 2019.

Key actions

In our view, the key actions for overseas investors to consider in the six months before 6th April 2019 are as follows;

  • Consider whether investments in UK property are still the preferred option in each case, particularly for trustees; if disposals are to be made, there are advantages in making them before 6th April 2019.
  • Consider whether a better price could be obtained for UK property held in a company if sold before 6th April 2019. Ask a tax expert to check the tax position of the company in advance to minimise practical obstacles to completing a sale in time.
  • Make arrangements to obtain a valuation of non-residential UK real estate as at April 2019, including valuations of shares in companies that derive at least 75% of their value from UK real estate interests.

If you would like to plan ahead for the changes in non-resident capital gains tax, please contact us.

 

Several of our entrepreneurial clients are making significant investments in cryptocurrencies (such as bitcoin). Others are looking to participate in the launch of new cryptocurrencies, through Initial Coin Offerings. International clients in particular are looking at the opportunity to set up companies to develop the blockchain technology which backs up cryptocurrencies into new business areas, in those offshore jurisdictions such as Gibraltar which already have a regulatory framework.

This is an area where innovation is so fast that tax authorities are struggling to keep up, which means that it is very difficult to establish the correct tax treatment of profits or gains in this area. HMRC have issued two sets of guidance, but these are worded very generally and refer to the particular facts and circumstances of the taxpayer. They are clearly concerned not to set precedents which tie them to a particular treatment of something which hasn’t yet been invented. Regulators in many countries are struggling to categorise coins and tokens, and the characterisations used for regulatory purposes haven’t been adopted for tax (for example, HMRC say that gains on bitcoins should be computed under the pooling rules for securities).

We advise our clients on the basis of applying the evolving guidance and an understanding of the concepts in the legislation to their particular facts.

Many groups which are developing Distributed Ledger Technology are looking to set up companies in locations which have a DLT regulatory framework. Where the company is set up in a low-tax jurisdiction, transfer pricing is a key issue. Setting up a Gibraltar company to own the software, but using UK staff in the UK to do all of the development work on a cost plus basis will not result in all of the profits being treated as arising outside of the UK for tax purposes. Software falls within the tax intangibles asset regime, and it may also be necessary to consider the Controlled Foreign Company rules and Diverted Profits Tax, as well as looking at whether the UK company qualifies for any reliefs.

The taxation of DLT companies is also likely to be a changing area, as governments get to grips with taxing the digital economy, which may involve moving to revenue taxes (such as the proposed EU 3% tax and may introduce the value created by user participation into the transfer pricing considerations.

If you would like to discuss these tax issues in your circumstances, please click here or contact us to talk to a member of our team.

Today marks the passing of less than 3 weeks to go until the closure of the Requirement To Correct (“RTC”) window at midnight on 30 September 2018 and the worldwide adoption of the Common Reporting Standard (“CRS”).

The Finance (No. 2) Act 2017 in s.18 and s.67 created an obligation for anyone who has undeclared UK tax liabilities (involving income or assets outside the UK) to disclose those to HMRC as a final opportunity to allow clients, and their professional advisers, to voluntarily put things right before they are potentially discovered in any case via CRS information exchanges.

After 30 September 2018, the basic penalty is 200% of the tax due unless you have registered for the Worldwide Disclosure Facility (“WDF”). In the most serious cases the penalty can increase to 300%, together with a further penalty of 10% of the assets in question and potential naming and shaming.

The penalties can be mitigated in certain circumstances, but never less than 100% of the tax due even if the taxpayer discloses voluntarily. Where a taxpayer has not disclosed voluntarily the penalty will not be reduced to less than 150%, but HMRC will give reductions depending on the amount of assistance the taxpayer provides. In order though to obtain the full reduction the taxpayer must give HMRC full details of all offshore assets held and details of anyone, or any entity, who has encouraged, assisted or facilitated the tax evasion.

It is important to stress that, unlike the current penalty regime, the new penalties after this month will focus less on the taxpayer’s motives. HMRC’s view is that taxpayers will already have committed the original failure and failed to respond to previous publicity and previous disclosure opportunities (such as the LDF) and now finally have also failed to respond to the RTC legislation.

Furthermore, new legislation within s.166 of the Finance Act 2016 (Appointed Day) Regulations 2017 created a set of new statutory criminal offences that will make it a lot easier for HMRC to criminally prosecute offshore tax evasion cases from October 2018 onwards i.e. within days of the end of the RTC window. As the offences are statutory offences they do not require the prosecution to prove dishonest intent. This could have serious consequences both for individual clients, as well as any overseas service provider in relation to the corporate criminal offence.

There is a very limited window now left in which to regularise any outstanding liabilities before taxpayers become subject to the stringent new penalties.

 

What Can Trident Tax do to Help?

At Trident Tax we have developed a transactional diagnostic tool, on a completely anonymous basis and at no cost, that will review historical client structures within the current RTC window. The questionnaire can be completed and submitted electronically in a pdf format and normally takes about 20 minutes to complete.

Once the completed questionnaire is received we will conduct an initial review of the structure and produce a short report free of charge which will highlight any areas of concern and where irregularities are identified and outline further action required within what is left of the RTC window.

We have now produced hundreds of these reports and in our experience, irregularities have typically arisen entirely unintentionally in relation to simple administrative oversights caused by third parties or issues unbeknown to corporate officers or trustees, or simply because previously correct advice has since become obsolete or disqualified.

Regardless of the underlying reasons, the RTC window is the final chance to address undeclared UK tax liabilities from the past within the current penalty framework before the imposition of much more severe sanctions.

If you would like to arrange to arrange to receive a copy of the diagnostic tool for any of your clients, please contact us at diagnostic@tridenttax.com or call your local office.

Is it worth a £60,000 per year cost to be able to rollover taxable cryptocurrency gains when you move from one currency to another?

In our previous articles (click here), we have covered the tax treatment of UK resident individuals on their gains on cryptocurrencies. We’ve explained that in our view the majority of such individuals will be liable to capital gains tax, on the basis of HMRC’s approach as set out in their guidance and the CG Manual.

We pointed out the surprising result that when you convert from one cryptocurrency to another, this can give rise to a taxable gain, even though you have received no fiat cash. However, there is one group of individuals where this is not the case, and their cryptocurrency gains will become taxable only when cash is paid into a UK bank account or the proceeds are otherwise remitted to the UK. However, in some cases the individuals may need to pay up to £60,000 in each tax year to HMRC to achieve this result, so would need to have substantial gains. This treatment applies to individuals who are not treated as UK domiciled for tax purposes and who are taxed on the remittance basis.

“Domicile” is a complex concept but can be broadly explained as being the country which is your home. New legislation was introduced on 5th April 2017, which resulted in people who had lived in the UK for at least 15 of the preceding 20 tax years being treated as UK domiciled for tax purposes for the first time. However, there are still thousands of individuals who are UK tax resident but not UK tax domiciled. These individuals can claim the “remittance basis”, on paying a charge to HMRC of between £30,000 and £60,000 for a tax year, depending on how long they have been resident in the UK. If they have been resident for less than 7 out of 9 of the preceding tax years there is no charge to pay to be taxed on the remittance basis. The claim can be made after the end of the tax year, so you are able to calculate the cryptocurrency gains for the year before having to decide whether to claim for that year.

A non-UK domiciled individual who is taxed on the remittance basis may only be subject to UK tax on the gain on cryptocurrency when it is “remitted” to the UK. This is the case if the cryptocurrency being disposed of is considered to be situated outside the UK, and for this to be the case, it would need to be not subject to UK law at the time when it is created. Most cryptocurrencies are issued by non-UK companies with non-UK legal agreements.

This might be particularly significant where such an individual participates in an Initial Coin Offering (“ICO”). Often the subscription will be made in cryptocurrency. Without the remittance basis, there could be a taxable gain on the subscription for the ICO, which could mean that an individual’s investment has to be smaller.

The key questions are;

a) Are the benefits of being able to defer your tax liability while you continue to invest in cryptocurrencies worth paying HMRC up to £60,000 per year?
b) If they are, how do you establish whether you fall within these rules?

Even if you don’t fall within these rules, does your spouse? It may be possible to give your cryptocurrency to a non-UK domiciled spouse without a tax charge. Gifts between spouses do not give rise to a capital gains tax liability. However, gifts from a UK tax domiciled spouse to a non-UK tax domiciled spouse can give rise to an inheritance tax liability if they are worth more than £325,000, and if the spouse making the gift dies within 7 years.

Please contact us if you would like to discuss the taxation of cryptocurrencies.