Taxation NewsSummary of the latest news and developments in taxation
ATT urges caution over new company winding up rules
New rules relating to the winding up of a company and treatment of resulting distributions will apply to tax returns for the year ending 5 April 2017, leading the Association of Taxation Technicians (ATT) to warn taxpayers and their agents to “consider the impact” of the rules on their tax liability. Taxpayers could be affected if they received a distribution on winding up their company on or after 6 April 2016 and continue to be involved in similar activities, said the professional body. Such individuals would not be able to reduce their tax liability by converting the dividend into a capital payment by winding up their company. The new rules aim to prevent individuals from gaining a tax advantage by liquidating a company and carrying on the same activities by establishing a new company, but the ATT said that the legislation has a much wider application. “As these new rules are self-assessed, taxpayers have to decide whether they apply. They must therefore be considered in any situation where a taxpayer has wound up their company since 6 April 2016 and continues to be involved in similar activities,” said Yvette Nunn, co-chair of the ATT’s technical steering group.
The organisation has encouraged taxpayers and agents to “consider providing additional detail in the white space of the self-assessment return”, as extra information “may provide some protection for errors in returns”. Nunn added: “Deciding whether the rules apply is complicated by the subjective nature of the conditions, the lack of any clearance facility and the limited practical examples in HMRC’s guidance. It is unclear whether if a taxpayer genuinely believes that they do not apply, but HMRC concludes they do, penalties will be imposed. We have written to HMRC asking for further guidance on the application of the rules, including how HMRC will apply penalties if they consider an error has been made in a tax return. If there is any doubt as to whether these rules may apply, taxpayers and their agents should consider providing additional detail in the white space of the self-assessment return as this may provide some protection from penalties.”
05 Jan 18
HMRC appeal rejected in Tottenham Hotspur case
The Upper Tribunal has rejected an appeal from HMRC in a case relating to the taxation of termination payments made to football player employees of Tottenham Hotspur Limited. In 2016, the First-Tier Tribunal ruled that certain termination payments made to two players contracted to the football club – Wilson Palacios and Peter Crouch – were not taxable as earnings from their employment. The tribunal also found that the payments were not subject to national insurance contributions (NICs). Palacios and Crouch had received lump sum payments on early termination of their employment contracts, with both players joining Stoke City in a transfer deal. Palacios received £900,000 once the transfer was made, plus an additional £510,000 paid on 15 August 2012.
Crouch agreed a deal with Tottenham Hotspur under which he received a “termination payment” of £3m in three equal instalments following the termination of his employment with the club on 31 August 2011.
The Upper Tribunal said that the question was whether the payments were to be treated as general “earnings from employment” or an “emolument of the employment”, or as payment received in connection with the termination of employment. The Tribunal said that it was “common ground” that if the payments were “from an employment”, then the first £30,000 would be subject to tax, and the payment would be subject to NICs. HMRC had argued that the payments “represented earnings from the players’ employments” and were therefore subject to income tax and NICs.
Tottenham appealed HMRC’s decision in 2015, advocating that the payments “represented compensation for the early termination of the players’ contracts”, and were therefore not “from” employment. The Upper Tribunal upheld the decision of the First-Tier Tribunal. It said that there was a distinction between cases where “the entire contract of employment is abrogated in exchange for the termination payment” and cases where “the payment is made in pursuance of a pre-existing obligation to make such a payment arising under a contract of employment”. Both the cases of Palacios and Crouch “fell squarely” into the first category, the Tribunal said.
Last month, the High Court ruled in favour of HMRC in a case involving Newcastle United and the legality of the revenue authority’s seizure of documents during a raid of club premises in April this year. The raid had been carried out in relation to suspected income tax and national insurance fraud. In July this year, the Supreme Court ruled in favour of HMRC in a tax case relating to the remuneration of Rangers Football Club employees through an employee benefit trust between 2001-09..
29 Nov 17
How GOP tax reforms will affect multinationals and foreign earning
Hailed by the Trump administration as the most transformative tax reforms since Reagan, the hotly anticipated GOP tax plans promise a shake-up of the tax system that widely benefits multinational corporations. The Senate and House tax bills are currently under review, with the government aiming to have the final harmonised bill on the president’s desk by Christmas. Although the two bills do diverge on several points, there is a lot of common-ground reflecting traditional GOP goals to cut taxes and help businesses thrive. Touted by many as the tax bill for businesses, here are some of the key proposals likely to impact multinationals and their UK operations.
- Corporation tax
The centrepiece of both bills is the proposition to reduce corporation tax from 35% to 20%, although the Senate bill proposes introducing the rate in 2019, while the House bill proposes 2018. The current US corporate tax is the third highest in the world, compared with a global average of 22.5%. This is likely to somewhat negatively impact the UK as multinationals previously headquartering in the UK to escape gargantuan tax rates will no longer have that problem, now only having a rate difference of 3%. It is unclear whether this will incentivise the UK to reconsider further corporation tax reductions. Experts widely predict that these changes will balloon the deficit, adding $1.5 trillion in national debt over the next decade. This raises concerns over the bill’s survival due to the Byrd Rule, which permits Senators to block legislation that is expected to increase the federal deficit beyond a decade. Overturning this would require 60 senate votes rather than a simple majority of 51, and Republicans currently have 52 senators. Speaker of the House Paul Ryan labelled these “pro-growth” reforms, with Steve Mnuchin, Secretary of the Treasury similarly previously stating “the economic plan under Trump will grow the economy and will create massive amounts of revenues, trillions of dollars in additional revenues.”
- Territorial tax system
The US is the only G7 nation to abide by a worldwide tax system, under which American multinationals must pay US tax on all their profits, even if earned abroad. This has led to internal frustrations that US companies are unfairly disadvantaged against foreign competitors. A central proponent of both tax plans is to shift to a ‘territorial’ tax system, which would see American businesses only paying the tax in the countries where their profits are earned. However, to prevent companies from shifting their profits to countries with extremely low tax rates, the bill comes with a minimum tax on foreign profits of 10%. Under the new system US corporate shareholders who own 10% or more of a foreign corporation would receive a 100% exemption on the foreign-sourced dividends.
- Repatriation tax
To facilitate the new system, both bills support a transitional one time only tax on existing overseas earnings, although diverge on the rate – with the Senate suggesting 10% on cash assets and 5% on non-cash assets and the House suggesting 14% and 7% respectively. Whilst this measure directly impacts US shareholders, there will clearly be wider repercussions and impacts on financing decisions for multinational groups. It is estimated that US multinationals keep $3tn abroad, so Republicans are generally supportive of a low tax on repatriated earnings to bring money back into the USA.
- Excise tax
One of the potentially more disruptive measures in the bill is that of a 20% excise tax on payments made by domestic companies to foreign affiliates, essentially affecting cross-border transactions that are routine for multinationals. Experts suggest the proposal aims to undercut abusive behaviours such as transfer-pricing, where multinationals set their own prices for goods and services to move between national affiliates. This measure appears to be targeting certain business models where there is a perception of diverting profits offshore, and as currently drafted, would make items subject to the excise tax non-deductible in the US. This could have a significant impact on global supply chains for any multinationals with significant US activity.
14 Nov 17