Autumn ‘Tax Day’
The rather ominous sounding "Tax Administration and Maintenance Day" took place on 30 November.
HM Treasury released various consultations, responses and a range of policy announcements and updates aimed at modernising the tax system. Here we mention three items of interest:
No major reform of capital gains tax (CGT) and inheritance tax (IHT)
The Treasury have responded to the Office of Tax Simplification (OTS) reports. On IHT, the government had already accepted that several administrative changes will go ahead (see forthcoming changes to excepted estates below).
In relation to the more substantive proposals for IHT reform, the conclusion is that none of the OTS recommendations will be taken forward. The government acknowledged the wide range of views on IHT (including those of the OECD and the All-Party Parliamentary Group on Inheritance and Intergenerational Fairness) and concluded that any potential changes should be considered in this wider context. There doesn’t appear to be much appetite for fundamental reform of IHT at present.
Separately, the government also appeared to confirm in a written answer that it will not be taking forward the proposals for the introduction of a one-off Wealth Tax.
The government’s response on CGT reform was a little more dynamic, although there will be no major restructuring or rate changes. Five recommendations from the OTS reports will be taken forward and five more will be considered further. These tend to focus on administrative and procedural aspects. The proposals to more closely align CGT rates with income tax and to abolish the CGT uplift on death will not be taken forward by the present government.
The following changes will be made: introduction of a single HMRC customer CGT account; clearer guidance on a range of CGT-related matters; extension of the ‘no gain no loss’ timeframe for transfers of assets between separating couples; and expansion of rollover rules in relation to compulsory purchase orders.
Recommendations to be considered further include: creation of a stand-alone CGT service which can be used by agents; a review of whether the same shares held in different share portfolios should be treated as separate share pools; a review of the operation of principal private residence nominations; clarification of the CGT rules regarding corporate bonds; and potential review of EIS procedural issues.
Finally the OTS itself was the subject of a five year review. While its role was praised and endorsed, various recommendations were made to improve its effectiveness. It may be inferred that the government would like the OTS to concentrate less on tax policy and more on fundamental simplification.
This proposes reforms to the way SDLT on mixed use purchases could work (currently if a purchase is mixed use the lower non-residential rates apply to the whole consideration) and also proposes reform of Multiple Dwellings Relief. The consultation is not a surprise – it is well known (and recited in the consultation document) that HMRC consider people are abusing these rules.
Mixed Use: The first proposal is that the consideration would be split between the resi and non-resi elements. The resi rates would apply (with the extra 3% additional rate and the 2% non-resident surcharge, where relevant) on the residential element. Non-resi rates would otherwise apply (typically of much lower value). An alternative is that the non-resi rates would only apply (to the whole) if the value of the non-resi land met a threshold e.g. more than half the overall value. If the threshold were not met, the resi rate would apply to the whole.
In either case the intention is that the 6+ rule will remain so a purchase of 6 or more dwellings remains a non resi purchase.
Multiple dwellings relief (MDR): HMRC do not like MDR being claimed when someone has in effect bought a house and the extra “dwelling” is a subsidiary to the main dwelling. The suggestion here is that MDR should only be claimed if all the dwellings are to be held for business use, i.e. rented out or redeveloped and sold. This would be checked through a 3 year post transaction period. An alternative would be to allow an MDR claim only for any dwellings held for a business use. The third option would say MDR could only be claimed if the part of the land said to be a separate dwelling had a value of a third or more of the total price (no need for business use). The final proposal is that MDR can only be claimed if 3 or more dwellings are acquired as part of the single or linked transaction (with no business use).
This is a consultation only at this stage (closing 22 February 2022), but some change must be expected during the course of next year.
CRS avoidance and ‘opaque offshore structures’
HMRC has launched a consultation on new, mandatory disclosure rules (MDRs) to replace the UK’s ‘DAC6’ Regulations. DAC6 is the EU’s disclosure regime for certain reportable cross-border arrangements. Following Brexit, DAC6 was introduced in the UK in a limited form on 1 January 2021. At the same time, the UK government confirmed that the rules would be fairly short-lived and would be replaced. The consultation on the new regime closes on 8 February 2022 and the new rules will take effect from next Summer.
The draft, new regulations more closely follow the OECD’s model MDRs. Indeed the key concepts of what is reportable and by whom are based on the definitions contained in the OECD model rules. Although there are key differences, HMRC say they will apply and interpret the new rules in a similar way to the existing regime. Nevertheless, anyone having to comply with these regulations will need to get to grips with an entirely new set of criteria and adapt their procedures accordingly. The compliance burden on firms will be onerous as there are some broad and uncertain concepts, tight reporting deadlines, and a need to disclose some historic arrangements going back this time as far as 2014.
One key difference is that the proposed new rules do not explicitly require the identification of a cross-border arrangement. However, this is effectively implicit as reporting relates to ‘CRS avoidance arrangements’ and ‘opaque offshore structures’. Broadly, these each involve parties resident in one jurisdiction with financial accounts or passive vehicles in another jurisdiction. For instance, the ‘Common Reporting Standard’ (CRS), is the system by which countries share information on financial accounts held by residents of another jurisdiction.
The precise definitions of ‘CRS avoidance arrangements’ and opaque offshore structures’ are detailed and nuanced.
- A ‘CRS avoidance arrangement’ is any action that it is reasonable to conclude is designed or marketed to circumvent CRS or exploit its absence. More subtly, the definition includes any arrangement which has the effect of circumventing CRS or exploiting its absence, although not an arrangement which simply results in no CRS reporting.
- An ‘opaque offshore structure’ is any structure that it is reasonable to conclude is designed to have, marketed as having, or which has the effect of allowing a natural person to be a beneficial owner of a passive offshore vehicle, while obscuring their beneficial ownership from relevant authorities. A passive offshore vehicle is broadly one established or tax resident in a different jurisdiction to where the beneficial owner is tax resident, which does not carry on a substantive economic activity where it is based.
The reporting obligations fall primarily on ‘intermediaries’ with a UK nexus. Where there is no intermediary or legal professional privilege applies, the reporting obligation falls on UK resident ‘reportable taxpayers’.
Intermediaries are classified either as ‘promoters’ (who design or market reportable arrangements and structures) or ‘service providers’ (who provide ‘relevant services’ and could be reasonably expected to know these are in respect of such arrangements or structures).
Crucially, the requirement to report pre-existing arrangements entered into since 29 October 2014, only applies to promoters and is further limited to CRS avoidance that hasn’t already been reported and where the value of the relevant financial account exceeded US $1million (or sterling equivalent). The deadline for disclosing these arrangements will be towards the end of 2022.
In all other cases, a far shorter 30-day reporting deadline will apply either from the first step in the arrangement or structure (for taxpayer reports) or from the time the arrangement is made available or advice is given (for intermediary reports).