In line with expectations, the chancellor focuses the budget on key election issues and pulled few “rabbits out of the hat”. There was a focus on tax avoidance, with a number of new measures to identify and penalise individuals and companies involved in tax avoidance. To help enforce these rules the chancellor announced a large investment in data analytics to help assess tax risks and raise enquiries. Based on these changes we can expect greater scrutiny of offshore structures from HMRC.
The main announcements that will impact the Channel Islands are:
Diverted Profits Tax
It was no surprise to hear the Chancellor flag the proposed new Diverted Profits Tax in his speech. The UK Government is committed to introducing the Diverted Profits Tax and the Chancellor confirmed that this will apply from 1 April this year. This 25% tax will be applied to non-UK company profits which HMRC believe relate to UK activities. For example, any Channel Islands business with UK customers or significant UK operations, or even a business with employees who spend time travelling and working in the UK, could be caught by this new tax. Although originally anticipated to be narrowly focused and not aimed at Channel Islands residents or businesses, it is clear that there will be collateral damage for local businesses and it will be important to assess the impact of the final rules when they are released next week.
Common Reporting Standard Disclosure Facilities
The government has revisited the terms of the current tax disclosure facilities on offer for people with offshore accounts who are not compliant but who want to come clean. All existing facilities will close early, at the end of 2015 and that they will be replaced by a new but less generous facility that will run from the start of 2016 to mid-2017, when automatic exchange of information reporting under the Common Reporting Standard (CRS) will begin. This appears to confirm the UK views that UK FATCA will end with the implementation of CRS. HMRC expects to raise over £550 million from these changes over the next five years.
New Penalties for Tax Avoidance
The Chancellor announced new, tougher measures on serial tax avoiders, including special reporting requirements and plans for legislation that will allow these taxpayers to be ‘named’ publically. Also announced were enhanced civil penalties for offshore tax evasion and future legislation that will introduce tax-geared penalties for cases caught by the UK’s General Anti-Abuse Rules.
Investment in data analytics to identify avoidance
To help identify cases where penalties should apply, there will be an investment of £4 million in data analytics to maximise the yield from CRS data. This reinforces expectations that HMRC will be using the new data it will be collecting from various sources to start enquiries and raise assessments, including potentially those on Channel Islands individuals and companies.
Investment managers’ disguised fee income
As announced in the Autumn Statement 2014, legislation will be introduced to ensure that all sums which arise to investment fund managers for their services are charged to income tax. It will affect sums which arise to managers who have entered into arrangements involving partnerships or other transparent vehicles, but not sums linked to performance, often described as carried interest, nor returns which are exclusively from investments by partners. The charge on non-UK residents is restricted to UK duties. The changes will take effect in respect of sums arising on or after 6 April 2015, whenever the fund was set up or the arrangements were entered into. This could have a significant impact on asset managers, so it is important to review payments structures now.
Country by Country Reporting
The country-by-country reporting measure announced in the Autumn Statement has also been confirmed. This is new legislation that will require UK headquarted groups to report a variety of financial and tax information to HMRC, including revenues, profits and taxes paid, as well as indicators of economic activity in each country. So any Channel Islands company associated with a UK company may have its information provided for years starting after 1 January 2016. As noted above, HMRC plans to use the unprecedented level of information it will receive to raise tax revenues, with £30 million expected to be obtained from country-by-country reporting alone.
Corporation tax rate
The current government will legislate to keep the rate of Corporation tax in the UK at 20% for the financial year beginning on 1 April 2016 (2015 – 20%).
Annual Tax on Enveloped Dwellings (ATED)
As announced in the Autumn Statement 2014, there will be an increase in the annual charges of the ATED by 50% above inflation for UK residential properties worth more than £2 million for the chargeable period 1 April 2015 to 31 March 2016. This may mean that the Islands lose some structures where beneficial owners decide that it is not economic to hold UK residential property in this way.
Capital gains tax for non-UK residents disposing of UK residential property
As expected, from 6 April 2015 non-UK residents disposing of UK residential property may have to pay UK capital gains tax on any gains made. Broadly speaking, the new rules will affect non-resident individuals, non-resident trustees, certain non-resident companies and any of the above as partners in a partnership. Only that proportion of the overall gain that relates to the period after 5 April 2015 is chargeable. Whilst some exemptions and reliefs will apply, for local residents owning UK residential property, they will now be subject to UK capital gains tax when they dispose of the property. Once the rules are released the full impact will be known and consideration given as to the steps which can be taken to mitigate the charge.
Capital Gains Tax: private residence relief (PRR) on properties located in other jurisdictions
The government have announced a restriction in the relief available to individuals on the sale of their main residence where they are not resident in the jurisdiction in which the property is located. A 90 day test, for time spent in the property, will be applied in determining the amount of relief available. This will impact short term residents in the island, mainly expats, who plan on selling their homes and then returning to the UK within 5 years of leaving.
Capital Gains Tax entrepreneurs’ relief: contrived structures
In an attempt to tackle aggressive tax planning the government will deny entrepreneurs’ relief (ER) on the disposal of shares in a company if it is not a trading company in its own right. These measures will also be extended to the disposal of personal assets used in a business carried on by a company or a partnership, unless the assets are disposed of in connection with a disposal of at least a 5% shareholding/ 5% partnership assets. This will affect disposals from 18 March 2015. Islanders who are resident in the UK or who plan on returning to the UK after less than 5 years will need to plan ahead before making any such disposals.
The government has today announced that it will review the use of deeds of variation for tax purposes. Once further comments are released we will be in a position to comment.
Taxation of UK resident non-domiciled individuals
As expected, an increase in the remittance basis user charge has been announced for those who have been resident in the UK for 12 of the last 14 years from £50,000 to £60,000 as well as the introduction of a new remittance basis user charge for those resident in UK for 17 of the last 20 years, £90,000.
Personal tax compliance
In an attempt to move to the digital age, the government have announced the end of the tax return; taking much of the administrative burden away from individuals and small businesses. The next Parliament will be introducing digital tax accounts to remove the need for individuals and small businesses to do annual tax returns.
As always if you have questions please let us know and we will keep you informed as things develop. The Finance Bill 2015 legislation will be published on 24 March and expected to achieve royal assent on 30 March.
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If you would like any further information or clarification on any of the measures announced, please do not hesitate to contact a member of our Budget working party whose details appear alongside.