Draft Finance Bill 2019: compliance and enforcement

The draft Finance Bill 2019 contains a number of provisions related to enforcement and HMRC powers.

Mandatory disclosure rules

The draft bill contains a power to enable the making of regulations to transpose into UK law the disclosure regimes under the EU’s directive on administrative cooperation 2018/822 (DAC 6) and the OECD’s ‘model’ mandatory disclosure rules (MMDR).

Both regimes require qualifying intermediaries to report details of certain arrangements relating to the avoidance of common reporting standard (CRS) and automatic exchange of information reporting. However, DAC 6 also requires reporting in respect of arrangements where cross-border tax arbitrage may be involved.

The HMRC policy paper notes that the UK’s disclosure of tax avoidance schemes (DOTAS) overlaps to an extent with these new disclosure regimes, but no decision has yet been taken on how any new legislation will interact with existing legislation.

The government has not yet published the regulations, and will consult on these ‘during 2019’. DAC 6 needs to be transposed by member states by 31 December 2019; however, it will apply to arrangements the first step of which takes place after 25 June 2018. The final shape of the legislation will depend on the outcome of Brexit negotiations.

DAC 6 creates a regime for the exchange of information between member states. The primary reporting obligation falls on an EU intermediary, who reports to his home jurisdiction; and if there isn’t a qualifying intermediary or the intermediary can claim legal privilege, the reporting falls on the EU taxpayer.

Resolving double taxation disputes

EU Directive 2017/1852 requires member states to legislate to introduce new rules to resolve disputes involving potential double taxation. Currently, the EU Arbitration Convention establishes a procedure for the resolution of transfer pricing disputes by reference to the opinion of an independent advisory body if necessary. Going forward, the procedure will apply to non-transfer pricing disputes.

Anti-profit fragmentation rules

The government is pressing ahead with a new basis for taxing profits moved offshore by individuals carrying on a trade or profession. The rules are intended to come into force from April 2019.

In outline, the legislation applies where value in connection with a business subject to income is transferred to an overseas party and the value is more than would have been transferred between parties transferring value at arm’s length. The new rules will apply if the arrangements result in a tax saving of 20% or more and a related party benefits from the arrangements.

Where it is ‘reasonable to conclude’ that the arrangements were entered into to obtain a UK tax advantage, HMRC can issue a counteraction notice to remove it.

Taxpayers are subject to a notification requirement, which is broader than the actual basis for taxation so that HMRC has an opportunity to examine borderline cases. However, HMRC has listened to concerns and is dropping – for now – the requirement to pay any disputed tax upfront.

The measure is said to apply to 10,000 taxpayers. Some of them may be ‘non-doms’, who may find that income on which they currently enjoy the remittance basis of taxation may be treated as UK source under these provisions and therefore subject to tax.

Offshore time limit

The government has confirmed that, despite widespread opposition, it is going ahead with an extended 12 year time limit for underpayment of income tax, inheritance tax and capital gains tax relating to an offshore matter. However, corporation tax is not to be covered.

At present, the time limits are four years from the end of the year of assessment; or six years in the case of failure to take reasonable care. The 20 year limit for deliberate behaviour will not change.

The government has resisted calls to restrict the measure to jurisdictions not participating in the CRS. However, the extended time limit will not apply where HMRC receives CRS information before the normal time limit on the basis of which the HMRC officer could reasonably have been expected to be aware of the lost tax and it was reasonable to expect the assessment to be made before the time limit.

The new time limits will apply to years of assessment from 2013/14 onwards, where there has been careless behaviour and from 2015/16 onwards in all other cases.

SDLT

For those dealing with purchases of UK property, the reduction in the time limit that purchasers have to file a stamp duty land tax (SDLT) return and pay the tax from 30 days to 14 days will mean that they will have to be much more efficient to avoid penalties and interest.

The new time limit will apply to transactions with an effective date on or after 1 March 2019. A small crumb of comfort, though, is that improvements will be made to the SDLT return and we are promised that these will be in place when the new time limit begins.

Late submission penalties

A new points based system is going to be rolled out, starting with VAT from 2020; then income tax self-assessment from a date not yet confirmed. Corporation tax will not be included at this stage, although this is envisaged for the future.

Each tax will have a threshold for penalty points, depending on the frequency of the return submission obligation. Points will accrue each time a return is submitted late but no penalty will accrue until the threshold is reached.

Once the threshold has been reached, a fixed penalty will be charged and each further late submission will attract a penalty. If the taxpayer has filed returns on time for a set period of time, the points will be reset to zero, providing all outstanding returns have been filed. Points will generally expire after two years if the threshold has not been reached.

Late payment penalties

The rules for late payment penalties and interest for VAT, corporation tax and income tax self assessment are being aligned. The changes will be introduced first for VAT from April 2020.

The new late payment penalty will consist of two separate charges. The first charge will become payable 30 days after the payment due date and will be based on a set percentage (not yet announced) of the balance outstanding. The precise penalty will depend upon what payments are made or the time to pay (TTP) arrangements agreed during those 30 days. The second charge will be calculated on amounts outstanding from day 31 until the outstanding balance is paid in full. If a TTP is agreed in this period, penalties will be suspended from the date the TTP is agreed. Penalties will not be chargeable where the taxpayer can show a reasonable excuse.

The new regime will be a major change for VAT and will also mean penalties being imposed for the first time for late payment of corporation tax.

Security for corporation tax and CIS

The taxes for which HMRC can require taxpayers to provide security deposits, where it considers there is a risk of non-payment, will be extended to include corporation tax and tax accounted for under the construction industry scheme. At present, HMRC only has this power in relation to VAT, PAYE and NICs, insurance premium tax and some environmental and gambling taxes. The extension of the security rules in this way is aimed at those who deliberately break the rules, rather than those with financial difficulties.

Jason Collins is a tax disputes expert at Pinsent Masons, the law firm behind Out-law.com. This update is based on an article which was published in Tax Journal on 13 July 2018.