TW Ed considers the Spring Statement in all its gory glory...
The Chancellor issued his Spring Statement on 13 March 2018. This article focuses on the tax aspects of his Statement that seem likely to be of interest to OMBs and their advisers.
From that perspective, the Statement was primarily about announcing a series of consultations on tax measures that the government is considering. In all, thirteen papers were published – mostly consultation documents, but also comprising updates on ongoing work, calls for evidence, etc.
Taxing the Digital Economy More Fairly / More Accurately
The government is aware how much value attaches to user participation in the digital economy – such as the data that users create simply by being involved. Essentially, “big data” firms have prized their IP in terms of their analytical tools, which can be far removed from the coal face and whose value can be taxed (or not) in a low-tax or no-tax jurisdiction. The consultation makes the point that the value in such analytics also relies heavily on the “raw material” – i.e., user input and participation. Mainstream news has cast this into sharp relief, in the last few days.
“…businesses …generate valuable data on users’ behaviours, interests and consumption habits through the intensive monitoring of their engagement with the platform.”
The government has realised that users should not necessarily be treated as “customers” in the conventional sense, such that a free service generates little or no taxable revenue in the UK, aside perhaps from advertising.
The government is therefore consulting on how best to tax the value creation of UK user involvement. “The preferred and most sustainable solution to this challenge, is reform of the international corporate tax framework to reflect the value of user participation” which will require co-operation at the OECD level but in the meantime, “there is a need to consider interim measures such as revenue-based taxes”.
While it is clear that the penny has dropped that nothing comes for free in a market economy, a revenue-based model, even on a temporary basis, must surely present broadly similar challenges to the current profit-based approach, while users physically pay nothing for many (nevertheless extremely valuable) services, and a multi-national may recognise revenue some distance away from its origins, just as with profits. Ultimately, International co-operation may well provide the mechanism to address this problem. Readers may note that, apparently, the EU is currently mooting similar taxing arrangements.
Extension of Security Deposit Legislation
This consultation is open to 8 June 2018. To take effect from April 2019.
The government has powers to require a business to provide a (monetary) security deposit in respect of:
- PAYE & NICs
- Insurance Premium Tax
- Landfill Tax
- Aggregates Levy
- Climate Change Levy
- Some gambling duties
These are intended to ensure that serial non-payers do not leave the Exchequer out of pocket if the business does not (or is put in a position where it cannot) pay its taxes. Criminal sanctions can be applied if the requested deposit is not paid, and the courts have powers to impose unlimited fines.
“The broad nature of these powers, and the criminal sanction attached to non-payment of a security when required, mean that securities are only appropriate in a small minority of cases and must be used in a very targeted way. Strict governance processes are in place to determine whether there is sufficient evidence that security intervention is necessary, and, if so, whether it would be proportionate and effective in the individual circumstances.”
The government intends to extend the security deposit regime to both Corporation Tax and to the Construction Industry Scheme (CIS).
According to the consultation document, HMRC estimates that extending security provisions to CT and CIS will result in an additional 400–500 cases in scope for securities action each year. Given that the government clearly understands that these measures are to be used only very sparingly, it is arguable that any substantive increase on that estimate might be cause for some concern.
VAT Registration Threshold
VAT Registration Threshold: Call for Evidence (Consultation open to 5 June 2018)
This is an open consultation on what should be done about the VAT Registration Threshold and the cliff-edge effect on business growth. My initial reading is that the government is asking for ideas (or justification) on how to make small businesses work harder and/or more efficiently, just so that they can afford to pay more VAT to the Exchequer.
Two points to consider:
Promising to mandate Making Tax Digital only to VAT-registered businesses, and then reducing the VAT registration threshold, would be a masterstroke worthy of Machiavelli himself. The government is on record as saying it is not minded to reduce the threshold – but that is not the same as saying it definitely will not be reduced.
The Call for Evidence appears to make some rather disquieting assumptions on behalf of small businesses, which may be exemplified in the following extract:
“If small businesses are restricting their growth, then they may also be hindering their productivity. It is likely that if businesses are suppressing their turnover to stay below the threshold, they may be limiting the natural size of their business:
- small businesses may not choose to invest in skills and capital as the growth this investment brings would push them over the threshold
- businesses may choose not to exploit new product lines or customer groups because the benefits of doing so are negated by registering for VAT
- businesses may spend a great deal of time managing their affairs to stay under the threshold, which is an unproductive use of their time
- businesses may adopt less efficient business models to ensure that they stay under the threshold. An example might be a tradesperson who asks customers to acquire the goods that the tradesperson then installs”
I am pretty sure that for most small businesses, their “natural size” is more likely determined by what they decide it is, rather than what some third party says it should be. It is not wrong for a business to choose to do less work, if it suits, even if it means that the country’s overall productivity suffers infinitesimally as a result. To say that a business is “unproductive” if it arranges its affairs to stay under the VAT Registration Threshold while missing the glaringly obvious point that it is rather more “productive” for the business owner’s bank balance, and to suggest that a business is being less efficient if it co-ordinates with its customers so as to yield greater net income to its owner…
I think this “Call for Evidence” would make a lot more sense if only I believed that small businesses existed primarily to grow, so as to generate more revenue for the Exchequer. On one page, the government asks for help to understand how and why VAT administration is so burdensome, and then says that Making Tax Digital will make life easier for businesses – particularly for those who do not already use software. The paper also notes that the EU are proposing to make life easier for small businesses by allowing those with an annual turnover of up to €2,000,000 to file VAT returns annually, (just as the UK is moving to “simplify” the annual tax return regime by forcing small businesses to return their details four times a year) but what do they know?
Getting Online Platforms to Make Citizens More Compliant
(Call for Evidence closes 8 June 2018)
The paper asks for input on how best to make sure that online marketplace-type websites make sure that their customers/users are complying with their tax obligations. The paper asks numerous questions, including, “What further opportunities exist for platforms to work together with HMRC to help users understand and meet their tax obligations?”
I suspect the lack of understanding of tax obligations is not limited only to online market places or their users. The call for evidence is partly founded on “Research on the Sharing Economy”, an HMRC report, which chose early on to define its work on the Sharing Economy only by reference to those parts which are undertaken “for profit”. I saw no evidence of an attempt to frame taxable activity on websites in the context of non-taxable activity; perhaps I am showing my age, but I rather suspect the latter must dwarf the former – at least in volume, if not importance to HMRC.
Of course, those who rent out an asset or provide a service for monetary reward are probably undertaking a taxable activity, but neither the call for evidence nor the aforementioned report acknowledged the fundamental importance of the “money or money’s worth” principle set out in Tennant v Smith 1892 (BIM40051) as would be relevant for those websites that operate on an exchange principle (although it should also be acknowledged that VAT might still be in point, whether or not there is money’s worth).
The report also said, “there is currently no threshold below which self-employed income does not need to be reported”, making me wonder what happened to the £1,000 Allowance announced a year before the report was published (nit-picking?) or TMA 1970 s 7 ss (3),(7) (not so nit-picking, and particularly not given that, with an eye to recent FTT cases, HMRC seems still to be struggling to grasp pretty fundamental legislation which is nearly fifty years old!)
In truth, I am quite concerned about the possibility of individuals being incorrectly advised that they should be paying tax “to be on the safe side”. Many advisers will be aware that this frequently happens in another area where HMRC has sub-contracted responsibility out to third parties: employment status. Our previous guidance to users of eBay and similar marketplaces in response to HMRC’s campaign of a few years ago, is set out here, and much remains relevant.
Getting Websites to Extract VAT Automatically for Imports
Alternative Method of VAT Collection – Split Payment (Consultation Document open to 29 June 2018)
Basically, the government wants online marketplaces to deduct or apply UK VAT on imported goods and pay it over to HMRC automatically, so that it does not need to rely on overseas businesses registering and accounting for UK VAT. The perception is that underpayment of VAT on imported goods is rife and making a significant contribution to the Tax Gap.
It could be argued that an automated approach bears similar risks to some of the above points about the Sharing Economy but at least in terms of the process I think it will make no tangible difference to the private UK consumer, who will see the same cost even if it includes VAT; if the overseas supplier risks losing a substantial part of its revenue stream then it will either contact the website and/or HMRC to explain why VAT is not due, or it will presumably raise its prices to compensate. UK consumers may be less than impressed if costs rise but this will simply reflect that the overseas vendor’s price was artificially low, and at least mainland suppliers should in turn be better able to compete if that artifice is removed.
In terms of implementation, the government has considered a range of options, including a small prepayment percentage, a broader flat rate, and lastly a net effective rate, whereby each overseas business will have a specified rate (based on the previous year’s activity and will reckon up annually if it wants to get some of its VAT back. HMRC seems to favour the last option, which is probably the fairest and most accurate, but it does beg some detailed consideration of how exactly repayments are going to end up back with the consumer.
Tax Relief for Own Costs of Work-Related Training
Taxation of Self-Funded Work-Related Training: Consultation on the Extension of Tax Relief for Training by Employees and the Self-Employed (Consultation Document open to 8 June 2018)
The government has asked for input on how the tax regime may be improved to assist the strategic aim of reducing the country’s skills gap. In particular, where individuals need to re-train in an entirely new field, to adapt to changes the work market.
Most readers will be familiar with the key rules as they currently stand:
In employment scenarios, the tax regime essentially assumes that the employer will fund training.
ITEPA 2003 Part 4 Chapter 4 – ss 250 et seq. ensures that this is not taxed on the employee where paid or reimbursed by the employer.
With regard to tax relief for the paying employer, readers may well also be familiar with the Inland Revenue guidance at Tax Bulletin 27 which is now 21 years old but seems reasonably well reproduced at BIM47080 (there are some differences when compared to the original text, which can be found at http://webarchive.nationalarchives.gov.uk/20110617054707/http://www.hmrc.gov.uk///bulletins/tb27.htm#expenditure – although the links in the document to BIM35660 are a complete red herring). It is perhaps worth reading (or re-reading) simply because it shows how much the nature of Revenue guidance has changed in that time. But in terms of the matter at hand, it confirms that employee training will be a deductible expense for the company:
- Even if and when not directly relevant to an employee’s current role with his or her employer.
- Even if the employee derives considerable enjoyment or satisfaction from the training (so long as the business purpose is paramount, of course)
- Even if the employer stands to derive a substantial and potentially long term benefit from the expenditure.
To my eyes, these stem from the seemingly logical ssumptions that an employer would not spend money on training unless it expected to get an economic return as a result, and that an employer cannot force an employee to remain in post for several years, so it would be imprudent to assume a substantive enduring benefit from training expenditure.
The rules are adjusted to accommodate situations where the relevant employee is also a director/shareholder in the business, etc., and there is therefore a real risk that a commercial motive is not paramount.
The rules for the self-employed and partners are more restrictive, with much more emphasis on distinguishing between simply keeping an existing skillset up to date, (allowable), or developing an entirely new skill which might result in an enduring benefit (a capital expense and not allowable against trading income). This time it is TB1 that is reproduced at BIM35660, which refers to Dass v Special Commissioner and Others  EWHC2491 (Ch) as authority for HMRC’s position. However, HMRC’s interpretation of the Dass case is open to challenge, as set out in the brief article, here.
It could therefore be argued that the current tax regime hinders self-motivated study because:
- There is, practically, no route for employees to get tax relief if they pay their own way (and are not reimbursed by their employer). (Technically, they can claim tax relief if the expense was incurred wholly, exclusively and necessarily in the performance of the duties of their employment, but the training must be an intrinsic part of the contractual duties of the employment – the bar is set so high as to be unachievable in most cases – see EIM32525).
- There is no route for the self-employed to get tax relief on their training expenditure unless it is wholly and exclusively for the purposes of their particular trade, and it must NOT result in an enduring benefit to the firm.
It seems reasonable to suggest that individuals should be able to respond as employment opportunities rise and fall, even if the new role substantively differs to whatever that individual did before. The consultation paper recognises that something needs to be done, and this may involve tax credits or a new approach to existing tax relief mechanisms, such as granting Income Tax relief where expenditure results in new income from a ‘fresh’ source within a suitable timeframe.
Entrepreneurs’ Relief Easement
(Consultation Document open to 15 May 2018)
Autumn Budget 2017 mentioned that the government wanted to look at ways to allow entitlement to ER to be maintained, in scenarios where shares were being issued to new investors such that the original director’s/shareholder(s) own holdings might then fall below the critical 5% threshold of eligibility. The government perceives that this might act as a barrier to natural growth for a business that needs or wants inward equity investment. The government proposes this be achieved through:
- a new facility that allows individuals to elect to be treated as having disposed of and reacquired their shares at the then-market value, just before the shares are “diluted” by subscription offering to other parties, and
- allowing individuals to choose to defer the taxation of this gain until an actual disposal of the shares
The intention is to allow the taxpayer to make a claim on the ER they would have had, and then to pay the tax when a real disposal event takes place and there are proceeds to pay off the tax.
It seems that the new mechanism will therefore apply ER only to the pre-dilution gain, and claimants will not be able to enhance their ER-eligible claim by reference to subsequent growth.
While the concept seems straight forward, the finer detail is starting to look quite complex. But this measure is enhancing a tax “break” in certain fairly specific circumstances, and it is arguable that if the change is necessary and worth having, then it is also worth a taxpayer making the effort to ensure that he or she complies, as and when the new regime comes into force.
Enterprise Investment Scheme (EIS) and Knowledge-Intensive Companies (KICs)
Financing Growth in Innovative Firms: Enterprise Investment Scheme Knowledge-Intensive Fund Consultation (Consultation Document Open to 11 May 2018)
In the Chancellor’s 2017 Autumn Budget there was much talk about “knowledge-intensive companies”, and helping to promote innovation. The government is considering special reliefs attaching to EIS investments into a qualifying KIC fund, such as:
- Exempting dividends received after a period of time of (say) five or seven years after subscription, to reward “patient capital” investing. Of course, prioritising dividends over reinvestment for future growth would be a potential issue.
- CGT Relief could be changed or enhanced from mere postponement or deferral to an outright exemption, along the lines of the measure available for SEIS investments.
- Extending the scope of the potential to carry back relief not just to the year before investment but even further back.
- Aligning reliefs by reference to when the investor contributes to the eligible fund, rather than when the fund invests in an eligible KIC, so that the investor gets tax relief at the point of his or her investment, broadly in line with investing directly into the KIC itself.
Business Rates to be Revalued More Frequently
The government announced in its Autumn Budget that there would be more frequent business rates revaluations and the published Summary of Responses reflects widespread support for moving to a triennial basis, which should more accurately reflect a property’s rental value, resulting in fewer appeals.
The Summary confirms that the next revaluation will be brought forwards by one year to 2021, and based on market rental values at 1 April 2019.
Measures to Prevent Plastics Pollution
(Call for Evidence Open to 18 May 2018)
The Call for Evidence asks for input on reducing the amount of single-use plastic waste, such as through increasing re-use and re-cycling. In his speech, the Chancellor confirmed that any measures would be to change behaviour, rather than being a means to raise revenue.
Impact of VAT and Air Passenger Duty on Tourism in Northern Ireland
(Call for Evidence Open to 5 June 2018)
The government is asking for input on how VAT and APD affect tourism in Northern Ireland. Many other countries in the EU adopt reduced rates of VAT for tourism and hospitality-based sectors, and with neighbouring Ireland’s rate at just 9%, it seems likely that the government will get plenty of evidence that it means Northern Ireland finds it difficult to compete.
Tax Treatment of Heated Tobacco Products
The consultation related to a new approach to heating, rather than burning tobacco, as an innovation in the tobacco sector. It does not relate to e-cigarettes, which do not contain tobacco. As well as summarising the responses to the earlier consultation, the paper says that the government is minded to create a new excise category for this sector.
Cash and Digital Payments
(Consultation Document Open to 5 June 2018)
The government has again called for evidence on the use of cash in what it refers to as the “New Economy”. The government says that it wants to understand how the transition from cash to digital payments impacts on different sectors, regions and demographics. The government has said that it wants to ensure that the ability to pay by cash is still available for those who need it, but wants to make life harder for those who want to use cash to evade tax or launder money.
The document notes that research suggests that around 2.7milion people in the UK are entirely dependent on cash, and that the average debit card transaction costs a merchant almost double in bank fees what it does to process cash (with credit cards costing considerably more). The government wants to know how to reduce barriers to the use of digital payments, although it says it also wants to explore how to ensure that cash remains accessible and secure for those who need it, being committed to making sure that the public’s legitimate cash needs continue to be met.
This is not the first such Call for Evidence on cash in the economy. Less than three years ago, HMRC issued a Call for Evidence on cash and the hidden economy, as we reported in the 2015 Autumn Statement. We noted at the time that the OECD was clearly concerned about the rise of manipulation of the digital economy, so we might actually be better off sticking with cash. The pro-cash sentiment was clearly reflected in the Summary of Responses, on which we later reported. Less than a decade ago, the general public received plenty of unwelcome evidence of just how fragile is the “New Economy”: it is quite the challenge to reconcile recent history with the government’s apparent resolve to embrace more of the same with open arms.