On Monday 20 March, the Finance Bill 2017 was published following the Spring Budget delivered by Chancellor of the Exchequer Philip Hammond earlier this month. Despite promising a small Budget, the Finance Bill runs to an impressive 762 pages, making it the longest Finance Bill ever. Royal Assent is likely to be received in July 2017, but some of these rules will be in force in just a couple of weeks’ time.
Since the Spring Budget, much of the media attention has been focused on the tax gap between employees and the self-employed. Whilst the Chancellor announced at the Spring Budget his intention to align the national insurance contribution (NIC) rates between the employed and the self-employed, this policy has not made it into the Finance Bill.
This alert seeks to cover what has changed due to the Finance Bill 2017 and does not reiterate comments made previously. Please see our Autumn Statement 2016 alert and our Spring Budget 2017 alert for information on issues not covered here.
Disguised Remuneration Rules
With HMRC appearing in the Supreme Court last week to contest the latest chapter of the Rangers tax case, the Government’s determination to tackle tax avoidance on remuneration, both current and historic, has never been stronger. The latest draft of the disguised remuneration legislation released on 20 March 2017 further demonstrates this determination. The legislation needs to be considered carefully by any individual or business that has utilized loan arrangements as a means of providing remuneration as far back as 1999 unless these loans have been fully repaid.
The first draft Finance Bill 2017 released in December 2016 contained detailed provisions expanding the disguised remuneration rules. The extension of the rules to self-employed individuals will also mean that partners in LLPs will need to assess the impact of the rules for current and historic remuneration structures. A charge to income tax will be imposed on both employed and self-employed individuals who have loans outstanding as of 6 April 2019. This charge will also apply where individuals seek to repay the loans or they are written off in an attempt to avoid a tax charge. Self-employed individuals will also be taxed on relevant benefits provided after 6 April 2017.
The latest draft released on 20 March 2017 incorporates several changes including a significant amendment which extends the scope of the legislation even further. While the first draft was not strictly retrospective legislation, it could in some cases act to impose a tax charge to historic remuneration structures not previously subject to UK taxation as if they still existed. However, the latest draft appears to go further, suggesting that the legislation may now even apply where loans were removed prior to the introduction of the legislation, dating back as far as 1999. Anti-avoidance rules broadly operate such that repaying loans now will not extinguish a liability where there is a tax avoidance motive. Furthermore, HMRC has already signaled their intentions to investigate any attempts to circumvent the loan charge in HMRC Spotlight 36 released in February 2017.
Other relatively small changes include the removal of the proposed close company gateway for employees as announced previously, expected to be deferred until 2018. For self-employed individuals, the provisions have been re-ordered in places and feature the ‘enjoyment conditions’ now synonymous with other avoidance legislation. Those familiar with disguised investment management fees (DIMF), mixed member partnerships and transfer of assets abroad (TOAA) legislation will be familiar with these.
Whilst some limited HMRC guidance has been issued on the revised disguised remuneration rules, none is yet available for the sections dealing with self-employed individuals. Those affected by the changes should seek to understand how and when a tax liability may now arise. However, as is HMRC’s stated intention, little scope appears to be left for taking remedial action.
DIMF and Carried Interest
Unfortunately, no further clarity was provided on the DIMF and carried interest legislation. The final guidance is long overdue given that the legislation applied for the fiscal periods commencing 5 April 2015. However, we understand this is now expected in Summer 2017. The legislation can potentially look through corporate structures to tax individual UK-based investment managers on income as it arises despite a corporate structure sitting between them and the income. An informal consultation closed in January 2017 and HMRC are yet to release anything further. The draft guidance released as part of the process confirmed that the legislation is far wider ranging than first envisaged and impacts 2015/16 personal tax returns meaning taxpayers may need to re-submit. The legislation is extremely complex and could potentially capture several commercial scenarios leaving individuals with an unexpected tax liability.
Much of the non-dom legislation has been published in various stages with a later publication following the Finance Bill made on 21 March 2017 and an acknowledgement of issues that will be legislated for in a future Finance Bill. There have been no amendments to the legislation regarding the mixed fund cleansing rules. To date, the legislation refers to cleansing of mixed funds accrued from 2007/08, however the budget announced that the cleansing would be extended to income and gains arising before 2007/08. We await further detail of this extension.
There has been some uncertainty surrounding the rebasing of gains from offshore funds for non-domiciled individuals who become deemed domiciled on 6 April 2017. Based on the draft legislation published in December, rebasing was to only apply to capital gains, i.e. gains from reporting funds. However, further draft legislation was issued in January 2017 which clarified that rebasing will also apply to income gains from non-reporting funds. This has been further confirmed by the latest draft of the Finance Bill such that rebasing provisions now apply to offshore funds regardless of whether they are reporting funds. This is a generous concession and will enable individuals who become deemed domiciled on 6 April 2017 to uplift the base cost of their foreign gains to their 5 April 2017 values.
For individuals where rebasing is available, it may be appropriate to seek an independent valuation to support future disposals, particularly where there is no active market for the asset. Rebasing will reduce future tax liabilities where the current value exceeds acquisition cost. Seeking a contemporary valuation now is less likely to be challenged by HMRC in the future. As the market leading valuation advisor, Duff & Phelps can assist with the rebasing of assets to 6 April 2017 assisting clients across the spectrum of assets including majority and minority equity holdings, real estate, and limited partner interests for assets located globally. For assistance with the changes to the non-domiciled rules, please see our Non-Dom Surgery or contact the Valuations team direct.