Upping the anti (avoidance)

Welcome to the first CAPITAL letters of 2019 – a year which promises, for our UK readers, much uncertainty. Will we have Brexit and, if so, what form will it take? Will there be a General Election and will Jeremy Corbyn win? What will happen to tax policy as a consequence of any of these developments? So many questions we are unable to answer.

It's easy to get caught up in these Brexit machinations and to forget that, away from our shores, life goes on pretty much as normal. As a good example of this, I would like to announce the establishment of our first private wealth team in the UAE, headed by my colleague Sunita in Dubai. We are excited by the possibilities in this increasingly important region, which are explained in Sunita's first e-bulletin, which you can read here.

There is no lack of new year resolution at HMRC, which has been pumping out anti-avoidance legislation with almost religious fervour. I will use this edition to give you an update on the measures contained in the Finance Act, due to be enacted on 6 April 2019, unless otherwise stated.

Offshore receipts in respect of intangible property

The Budget 2018 contained measures intended to tax income from intangible property held in low-tax jurisdictions to the extent that they are referable to UK sales. The rules are contained in Schedule 3 of the Finance Act and they have been described by the CIOT as “flawed and too widely drawn”. These rules are part of the BEPS project and are intended to prevent multi-nationals from avoiding tax on UK sales. However, the draft legislation seems to go beyond the policy objectives and will catch all sorts of businesses that have legitimate reasons for holding (for instance) intellectual property offshore, as well as other businesses who simply import goods or services into the UK.
Frankly, the legislation is a mess – probably reflecting the fact that it was a hastily drafted response to the public disquiet about large multinationals (like Amazon) with huge operations in the UK but relatively small taxable profits. We should expect further revisions to the rules before they are enacted.

Incidentally, HMRC has also launched a consultation on the introduction of a ‘digital services tax’ of 2% of the UK turnover of internet-based traders over a certain size. I’m still not clear how the DST would be lawful under current EU law – which does not allow turnover taxes other than VAT. 

Avoidance involving profit fragmentation

I have already commented on this measure at length and, despite my clearly articulated objections, the government, inexplicably, is still proceeding. Perhaps I need to send another copy to HM Treasury. 

The rules are contained in Schedule 4 of the Finance Act and even with the accepted amendments, it is still a flawed piece of legislation. At least the controversial requirement to notify and make advance payment to HMRC of any ‘fragmentation schemes’ has been dropped.

As a reminder, the rules are intended to catch any individual, partnership or company which has a UK trade and seeks to attribute the profits (or some of them) to non-UK entities. Whilst that might initially sound reasonable, it needs to be remembered that there will be all sorts of good reasons profits might arise to foreign companies. This is why we have transfer pricing rules and double tax treaties – to apportion and tax those profits in an equitable manner. Furthermore, we already have widely drawn anti-avoidance rules in the shape of the ‘transfer of assets abroad’ legislation, so it’s difficult to see why these new rules are even necessary. However, they send a clear message to UK traders – particularly consultants providing personal services – that any attempt to shift the profits offshore will be challenged. 

UK property and CGT

The main innovation is the extension of CGT to disposals of all types of UK property. Previously, non-resident CGT (NRCGT) was confined only to residential property. From April 2019 commercial property will also be taxed, but subject to a re-base at that date. 
On the same day we can look forward to the introduction of the ‘property rich company’ rules. Where you own such a company (defined as deriving 75% or more of its value from UK land or property) then you will be liable to CGT on the disposal of your shares, even if you are non-UK resident shareholder holding the land through a non-UK resident company. This represents a sea-change for foreign investors who have hitherto only had to concern themselves with CGT if the underlying property was actually sold.  
It needs to be remembered that similar, but subtly different, rules already apply to non-resident companies that are trading in land (i.e. property development companies). Where there is a disposal of the shares in such a trading company then there is an income tax charge on the shareholder, even if non-resident. However, unlike the CGT rules this charge is exempted if it can be shown that the trading profit will be brought into the charge to corporation tax upon realisation.

The combined effect of these measures is that any disposal of UK property, whether directly or indirectly, will be chargeable to CGT, even on non-residents. Where there is a trading profit on UK land then this is also caught. The stable door has been well and truly bolted now.

In future all companies – including non-resident companies – will be liable to corporation tax on capital gains and income. From April 2020 all individuals, trustees and PRs must make a payment on account of any CGT on residential property within 30 days of disposal.

The combination of these changes and the IHT reforms in 2017 mean that the offshore ownership of UK real estate is, in most cases, offering no advantage over domestic ownership. The one notable exception (which will surely not last long) is the IHT treatment of UK commercial property as it is still possible to avoid this tax by the use of offshore companies.

The EBT loan charge

The loan charge is due to come into effect from 5 April 2019 - cheekily one day before the end of the current tax year (meaning the tax becomes payable on 31 January 2020, rather than 2021). This egregiously retrospective piece of legislation has recently been challenged by MPs in parliament who are rightly concerned not only by the constitutional implications of this legislation, but the very real hardship it will cause taxpayers. One hopes that the government will finally see sense and consign this measure to the dustbin, where it belongs.

For those clients who are still wondering whether to settle with HMRC, repay their loans or suffer the loan charge, a further nerve-wracking wait is in prospect.