Brexit and the Route Map: Do all roads lead to Rome?

Brexit and the Route Map?

Do all roads lead to Rome?

Rome

Whatever people think of the merits or demerits of Brexit, if, as seems increasingly likely, we fail to agree on all aspects of a Brexit formula before March 2019 (now just a few months away) how are we supposed to advise clients?

It is the nature of our business that we often get asked about the more esoteric bits of tax practice, such as cross border matters and the impact of double tax.

Here is an example, which we have just looked at as part of researching advice for a client in respect of the Swiss/UK double tax treaty.  Of course, Switzerland is not a member of the EU.  However, Clause 18 (4) of the UK/Swiss Treaty only applies if the individual making the claim is “subject to the legislation of the Home State in accordance with the Agreement on the Free Movement of Persons”.

I appreciate this may only apply to a few people, although it should be noted the Governmental Authorities each thought the issue significant to incorporate specifically into the Treaty.  Anyway, are not individual citizens important?

Additionally, if EU concepts are so ingrained into UK tax procedure as to affect non-EU Treaty countries, surely there must be more issues lurking.

Professional bodies what are your views?

In this context, I commend the Article by Alistair Spencer Clarke in the August 2018 edition of ICAEW Tax Line.  Ownership of Spanish property is not an outlandish thought for many UK citizens, quite apart from many other cross border situations which are now common place in our shrinking world.

Please can we start a debate about how to approach this matter?  Here I am talking about practical reality and proper approaches for Tax Practitioners to ensure they are giving best advice to clients.  Constitutional jurisprudence is for another day!

Requirement to Correct – 30 September Deadline Looms

sun

The Weather Today – Scorchio!

 

BUT 30 SEPTEMBER DEADLINE LOOMS

 

WINTER IS COMING!

 

Requirement to Correct

 

Many people over the years of the world becoming smaller and more accessible may have acquired assets abroad.  For example, immigrants and emigrants may have UK interests, but also ones in other countries, whether because of family, work or just acquiring (and perhaps disposing of) a holiday home.

 

Sometimes (it may sound odd) it seems, perhaps when lying on the patio of their newly upgraded Spanish villa, the owner may reach for an escapist novel (such as Banker’s Draft by RG Lennon https://www.amazon.co.uk/Bankers-Draft-R-G-Lennon-ebook/dp/B07CW4JC1J) instead of the latest Taxes Acts.

 

The Taxes Acts would of course warn the reader of the forthcoming deadline of 30 September 2018.  This is to disclose any offshore liabilities (including say Capital Gains on the older villa used to help finance the new one) or the rent when you weren’t using it, or the sale of the home inherited from an uncle, or the apartment in Delhi where your Dad used to live and rental values have gone up so much it would be rude not to etc., etc.,

 

The world is small, families are dispersed; so are assets.  Thanks to automatic sharing of financial information across Governments – permitted in most international double tax treaties,  HMRC will receive bucket loads of data automatically.  Modern computers will allow this to be analysed.  No doubt HMRC will leap to conclusions and try to assess ‘evaded tax’.

 

Key points:

 

  1. Crucially, the time limit for assessment is planned to be extended to 12 years (going back from 4 years) which makes retaining records more important.

 

  1. There is to be a new criminal offence for ‘offshore evasion’, which means HMRC do not need to prove there was ‘deliberate intent’. This heightens the need for professional advice, because innocent ignorance is unlikely to amount to a successful defence.

 

  1. There will be new sanctions for ‘offshore evaders’ based on a penalty of up to 10% of the value of the underlying assets.

 

  1. Tougher sanctions come in for those who fail to disclose relevant offshore interests before 30 September 2018

 

IF IN DOUBT TAKE PROFESSIONAL ADVICE

 

Disguised Remuneration Schemes

 

Anyone involved or may have clients involved in what HMRC may consider to be caught in the new ‘disguised remuneration schemes’ should take independent advice soon, to ensure they can meet the deadline for any appropriate disclosure of 30 September 2018.  It is now less than 2 months away.

 

Settlement terms are available for appropriate disclosure made before the deadline.  After that date, HMRC are threatening more severe action.

Brexit and European Tax Law

Here are some interesting questions. Well, I think them interesting anyway!

1. If we ‘do Brexit’, will we persist with VAT?

2. If so, how will it be administered, bearing in mind the current cross-border arrangements?

3. Will the European Court remain supreme, in terms of judicial opinion and interpretation?

4. On direct taxes, will we revert to double tax treaties, rather than the various European Directives?

5. If so, from what date?

6. If we do leave the EU, will the Courts go back to the ‘literal’ approach to interpreting tax legislation, a la Justice Rowlatt, or will it continue to dabble in the ‘purposive’ approach?

7. In the context of the above how would anyone define ‘The Purpose of Parliament’, in terms of (say) the formulae in the Emloyee Security/Benefit rules?

Je ne sais pas?

Opinions, s’il vous plait.

Offshore Update – HMRC Clamp Down and Starbucks EU Tax Case

HMRC have recently purchased advertising pointing out that offshore income and gains may be taxable in the UK. This is true. In general, for UK domiciled residents, all worldwide income and gains are taxable (even where you reinvested the proceeds and did not remit them to the UK). For non-residents, UK source income may be taxable.

This is where it gets complicated (as if it was not before!). Like many other matters in the international tax world, circumstances can alter cases . Domicile, double tax treaties and all the new statutory residence test may all have an impact.

If you have offshore assets, review them now, before HMRC really clamp down next tax year. If in doubt, seek tax expert advice.

In an interesting twist to the European Question, the EU authorities have just issued a decision on the advance tax ruling given to Starbucks by the Dutch Revenue, helping Starbucks avoid tax in other jurisdictions. This was done by Starbucks having higher tax deductible costs with a lower tax rate in the Netherlands, thus meaning there was only immaterial profit in countries such as the UK, so minimal UK corporation tax. The EU Authorities feel this amounted to illegal State Aid, such that Starbucks should be enforced to repay it in full.

The political question is whether this is:

a) A good example to tax abuse by multinational corporations?

b) An unacceptable interference in Dutch sovereignty because tax is not supposed to be controlled at EU level?

Is that the smell of coffee or the protagonists’ lawyer preparing their morning shot of napalm?

Mr Anson (Taxpayer) Wins : Other Taxpayers look to lose

The complexities of Double Taxation loom gain in our multinational global economy.

Has every investor in a foreign entity thought through the implications of the case of Anson v Revenue and Customs Commissioners?

Historically, HMRC have treated entities such as Delaware LLC’s as legal entities separate and distinct for tax from the identity of investors in it.  Bearing in mind ‘LLC’ stands for ‘Limited Liability Company’, this was perhaps unsurprising!  However, the Supreme Court has now decided, in the Anson case, that in fact such entities are more akin to Partnerships.  This means Mr Anson was entitled to double tax relief on the tax paid by the LLC.  Significantly though, it also means, logically, that he should suffer UK income tax on the proportion of profits which would be ‘attributed’ to him.  Bearing in mind such investors may have historically followed what they thought to be UK HM Revenue and Customs guidelines, and only declared income for tax when ‘distributed’, where does that leave them now?

A review of individual circumstances would seem sensible ~ so as to come up with a strategy on how best to move forward.

When HMRC win they (obviously) say – well that was the ‘correct’ view of the law all along.  If (as here) they lose though, presumably no-one should be punished for following their original views?

Both US and UK advisors need to think about how best to report matters from now on.

THOUGHTS/OPINIONS WELCOME

Interpretation of Double Tax Treaty – Meaning of “Subject to Tax” TC02178

In the recent case of Paul Weiser v HMRC (TC02178) the first tier tribunal considered the interpretation of the double tax treaty between the UK and Israel and in particular the meaning of the phrase “subject to tax”.

Article XI of the UK-Israel double tax treaty provides that UK source pensions will not be subject to UK tax where they are received by a resident of Israel and subject to Israel tax in respect thereof. However under Israeli tax rules, UK pension income is excluded from tax in Israel during the first 10 years of residence.

HM Revenue and Customs therefore argued that because the pension income was exempt from tax in Israel it could not be said to be subject to tax.

On the other hand, the taxpayer claimed that he is within the charge to tax in Israel by virtue of living there even though Israel does not levy tax on his UK pension income because of the exemption.

Following the decision in Bayfine UK v HMRC (STS 717) the tribunal found that the double tax treaty should be interpreted using a purposive rather than a literal approach. The primary purpose of the double tax treaty is to eliminate double tax and prevent the avoidance of tax, the purpose is not therefore to enable the double non taxation of income.

The case therefore centred around the meaning of the phrase “subject to tax” and the difference in international tax treaties between this phrase and the phrase “liable to tax”.

HM Revenue and Customs presented various examples of case law from other countries and academic articles that examine the distinctions between the two phrases. The tribunal noted that whilst such authorities are not determinative they are relevant.

In HM Revenue and Custom’s view, the distinction between the two phrases is that the expression “liable to tax” requires only an abstract liability to tax (i.e. a person is within the scope of tax generally irrespective of whether the country actually exercises the right to tax) and therefore has a much broader meaning than the phrase “subject to tax” which requires that tax is actually levied on the income.

The first tier tribunal decided the case in favour of HM Revenue and Customs such that relief was not available under the UK-Israel tax treaty to exempt the pension from UK tax because the pension was not subjected to tax in Israel.

The tribunal’s interpretation of the UK-Israel double tax treaty and meaning of “subject to tax” will be of interest to taxpayers relying on double tax treaties and those practitioners who advise on double tax treaties.

Take Advice and then Action

The Tax Tribunal heard that Mr Shanthiratnam cashed in 1/3 of a bond as collateral for his business.

When he submitted his tax return HMRC enquired and corrected his tax return so that his tax bill was increased by about £20,000.  Had he gone about sourcing collateral from his bonds in a different way he could have avoided further tax.

The Judge said he sympathised with the taxpayers view that double tax had been suffered; but that he should have understood what the tax result of his actions would be, before proceeding.  The taxpayer’s appeal against the additional bill was dismissed.

Double Tax?

Eaves & Co Leeds, have advised recently on two areas where tax might have been paid twice on the same income:-

  1. A FURBS which paid tax on its income and the trustees suffered PAYE on the same income. Tax credit relief and ESC A68 may be available.
  2. Two cases where profits have been taxed in the US and our UK client wishes to avoid double tax by also paying UK tax.

If you have a case where tax may be payable twice we would be pleased to discuss how relief may be available.