Lexis®PSL Tax Analysis - Autumn Statement 2016

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ContentsKEY BUSINESS TAX ANNOUNCEMENTS 3BACKGROUND 3Office of Tax Simplification 3Budget timetable 3Definitions 4

BUSINESS AND ENTERPRISE 4Bringing non-resident companies’ UK income into the corporation tax regime 4Substantial shareholding exemption (SSE) reform 4Venture Capital Schemes 4Regulations implementing a new regulatory and tax framework for insurance linked securities 5Patent box rules 5Annual tax on enveloped dwellings 5Future developments 5Measures pre-announced 5

DEVOLUTION 6Northern Ireland corporation tax 6

FUNDS 6Offshore funds 6Authorised contractual schemes: reducing tax complexity for investors in CoACS 6Authorised investment funds: dividend distributions to corporate investors 6

EMPLOYMENT TAXES AND SHARE INCENTIVES 6Employee Shareholder Status (ESS) 6Salary sacrifice 7Disguised remuneration schemes 7NICs thresholds 7Not aligning the calculation of income tax and NICs 7Other new employment tax announcements 7Future developments 7Measures pre-announced 8

PERSONAL TAXES 8Personal allowance and higher rate thresholds 8Starting rate for savings 8Tax advantaged investment schemes: social investment tax relief (SITR) 8Measures pre-announced 8

VAT AND INDIRECT TAXES 9VAT flat rate scheme 9VAT groups 9Insurance Premium Tax (IPT) 9

TAX ADMINISTRATION AND AVOIDANCE 9Tax enquiries: Closure rules 9Penalty for participating in VAT fraud 9Tax on offshore interests—requirement to correct 9Requirement to register offshore structures 9Measures pre-announced 9

ENERGY AND ENVIRONMENT 10Oil and gas 10

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Sunaina Srai-Chohan, Solicitor

This analysis originally appeared on Lexis®PSL Tax.

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Autumn Statement 2016—Lexis®PSL Tax analysisA summary of the key business tax announcements made in the Chancellor’s Autumn Statement on 23 November 2016.

KEY BUSINESS TAX ANNOUNCEMENTS

Key announcements that were new for Autumn Statement 2016 include:

• significant narrowing of the scope of salary sacrifice from April 2017

• abolition of tax reliefs associated with employee shareholder status for shares acquired on or after 1 December 2016, and

• the possible inclusion of all non-resident companies in the UK corporation tax net (rather than some companies being within the income tax regime as they currently are)

Detailed government response documents to the tax consultations that have closed over the last couple of months, for example on loss reliefs, substantial shareholdings exemption, and interest relief, have not been published with the Autumn Statement. The responses are expected to be published alongside the draft legislation for inclusion in Finance Bill 2017 (FB 2017) on 5 December 2016 in the Overview of Legislation in Draft.

For the key Private Client announcements, see: Autumn Statement 2016—Private Client analysis.

BACKGROUND

The Chancellor of the Exchequer, Philip Hammond, delivered his first (and last, for which see below) Autumn Statement on Wednesday 23 November 2016.

The watchword was ‘productivity’, in particular investing in infrastructure and innovation to provide the foundations to reduce the productivity gap in the UK, which lags behind many of our trading partners. Given reduced growth forecasts and increased borrowing costs caused by sterling depreciation and uncertainty following Brexit, the Chancellor is keen to ensure our economy is resilient and match-fit as we exit the EU and transition to the UK’s new status.

From a tax perspective, the government focused on certainty and, as has now become customary, shutting down a number of perceived abuses of the tax system. On the certainty front, the government reconfirmed its commitment to the Business Tax Roadmap, published in March 2016, which includes reducing the rate of corporation tax to 17% by 2020. For more on the roadmap, see News Analysis: The business tax road map—heading in the right direction?

Office of Tax SimplificationAlongside the Autumn Statement, the government has also published correspondence with the Office for Tax Simplification (OTS), providing its response on two recent OTS recommendations:

• confirming that they will not go ahead with the recommendation to annualise National Insurance contributions (NICs) and that the proposed SEPA vehicle for sole traders may be considered, subject to investigating non-tax consequences (such as insolvency), and

• establishing two new areas for review: the VAT system, with a particular focus on small and medium size enterprises (SMEs), and stamp duty on share transactions

Given that the government response to the two most recent OTS reviews has hardly been a wholehearted adoption of recommendations, some might start to question the value of OTS reviews.

Budget timetableThe reason this was the Chancellor’s last Autumn Statement is because the budget timetable is being amended from 2017, so that there will be only one ‘fiscal event’ a year. The plan for the next few years is:

• 2016-17 tax year: Budget as normal in March 2017, followed by the FB 2017 parliamentary process, with Royal Assent expected in July 2017

• 2017-18 tax year: Autumn Budget 2017 followed by publication of Finance Bill 2018 which will go through its parliamentary process and obtain Royal Assent before April 2018

• spring statement 2018 will be a review of the Office for Budget Responsibility’s report, but should not, barring emergencies, include any tax announcements

• 2018-19: legislation for Finance Bill 2019 will be published in the summer of 2018, followed by Autumn Budget 2018, with Finance Bill 2019 going through parliamentary process and obtaining Royal Assent before April 2019, and

• future years will follow the same process as 2018-19

It has not been made clear what legislation will be published in the summer from 2018 onwards if no tax announcements are made at spring statement time. It may be that this will be legislation that follows consultations that were announced at the previous Autumn Budget, for implementation in the following year (although that would result in a lead time

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of approximately 21 months between announcement of a tax measure and the enactment of legislation). If the government is going to stick to its promise of one fiscal event, it must avoid the temptation to make significant announcements on ‘legislation day’.

DefinitionsThe tax announcements have been made, unusually, in two documents:

• the Autumn Statement 2016 document (AS 2016), and

• Tax updates and technical changes (TUTC 2016)

The second document is stated to be a supplement to the AS 2016 document with updates on tax consultations, confirmations of standard uprating changes and technical changes where there is no substantive policy change.

BUSINESS AND ENTERPRISE

Bringing non-resident companies’ UK income into the corporation tax regimeThe government will consult at Budget 2017 on bringing all non-resident companies receiving taxable income from the UK into the corporation tax regime. The stated rationale is to subject all companies to corporation tax rules, and in particular the new restrictions on corporate interest and loss relief that will come into effect in April 2017.

Until 5 July 2016, non-resident companies were only subject to UK corporation tax if they had a UK permanent establishment through which they carried on a trade. From 5 July 2016 the corporation tax net was extended to catch offshore property developers who trade in or develop UK land, whether or not they have a permanent establishment. Other (non-trading) forms of UK-source income received by a non-resident company may be subject to UK income tax.

The government appears to be concerned that non-resident companies within the charge to income tax (rather than corporation tax) will not be within the new corporation tax restrictions applying to interest expenses and carried forward losses. The impact of the change would be limited to non-resident companies that have UK-source income but that are not already within the corporation tax net.

Property companies will be particularly affected by this change, as under current rules non-resident companies investing in UK property are liable to UK income tax on the rent, but can set interest expenses against this charge. The measure could also catch companies trading in the UK but not through a permanent establishment, as well as companies with non-trading income from, for instance, intellectual property or other investments. On the positive side, companies that are caught by this provision should benefit from the future planned decreases in UK corporation tax rates.

No date is given for implementation of this measure, although with the consultation beginning at Budget 2017 it seems unlikely it would be for FB 2017.

See: AS 2016 (para 4.26).

Substantial shareholding exemption (SSE) reformThe SSE rules will be simplified, including removing the ‘investing requirement’ and extending the exemption for companies owned by qualifying institutional investors. This follows a consultation that ran from 26 May 2016 to 18 August 2016, for which see News Analysis: The reform of the substantial shareholdings exemption regime—a relief for companies?

The consultation included a number of options for reform. As expected, the more radical suggestions (such as removing all requirements regarding the trading status of the companies involved) appear to have been rejected. Instead the government has announced that it will remove the investing requirement, meaning that it will no longer be necessary for the disposing company or group to satisfy a trading status test. This is a welcome development because assessing the activities of the entire disposing group (which could be international) can pose significant practical difficulties. The ‘investee requirement’ (the trading status test for the target company) will, presumably, be retained.

The consultation included some further options that have not been mentioned in AS 2016, including replacing the trading test with a requirement to carry on some sort of active business (that might or might not be a trade), and removing the requirement for both the disposing and target companies to be trading immediately after the sale. These options may have been rejected, although we may find out more when the draft legislation and/or consultation response is published.

The consultation document also considered the case of sovereign wealth funds and pension funds, which are generally exempt from UK corporation tax on gains. This exemption does not extend to UK resident companies owned by these tax-exempt funds, and these companies cannot generally benefit from the SSE because the groups of which they are members will normally fail the trading test. AS 2016 confirms that the SSE will be extended to cover these institutional investors. At this stage, it would appear that these companies would be covered by the removal of the investing requirement generally, so it remains to be seen whether there will be any special provisions applying to this category of investor.

The reforms will take effect from April 2017.

See: AS 2016 (para 4.28).

Venture Capital SchemesFollowing wholesale changes from November 2015 and small tweaks in Finance Act 2016, the government will include in FB 2017 further changes to the Enterprise Investment Scheme (EIS), Seed Enterprise Investment Scheme (SEIS) and Venture Capital Trust (VCT) regimes to:

• clarify the rules for share conversion rights in EIS and SEIS with effect from 5 December (ie the date of publication of draft clauses for FB 2017)

• provide additional flexibility for follow-on investments made by VCTs in companies with certain group structures to align with EIS (with effect from 6 April 2017), and

• give government the power to make regulations in the context of share for share exchanges in the VCT regime

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The government also announced:

• it will release a consultation into the options for streamlining and prioritising the advance assurance service. It is not clear if this is alongside or instead of the commitment (from the July 2015 consultation response (para 2.17)) to introduce a new digital process for EIS and SEIS investors by the end of 2016, and

• it will not, currently, be extending the regimes to allow ‘replacement capital’ (ie enabling relief for secondary investors, rather than subscribers only), but will keep it under review

See: TUTC 2016 (para 2.8).

Regulations implementing a new regulatory and tax framework for insurance linked securitiesAt Budget 2015 the government announced that it would develop a new competitive corporate structure and tax regime for insurance special purpose vehicles (ISPVs) that issue insurance linked securities (ILS). ILS are a means of transferring insurance risk to capital market investors. The government consulted on its overall approach to the framework for ISPVs in March 2016 (see: Lexis®PSL Tax weekly highlights—3 March 2016).

The government has considered responses to the initial consultation and has now launched a further consultation on its proposed regulatory framework for ILS. The consultation includes draft regulations on

• the tax regime (The Risk Transformation (Tax) Regulations 2017), and

• a new corporate structure

The draft regulations include an exemption from corporation tax for the profits from the activity of insurance risk transformation and remove the obligation to deduct an amount representing income tax on interest paid to investors. The consultation closes on 18 January 2017.

See: AS 2016 (para 3.37), Regulations implementing a new regulatory and tax framework for insurance linked securities and Policy paper—tax regime for insurance linked securities.

Patent box rulesLegislation will be included in FB 2017 to ensure that companies that undertake R&D in conjunction with others under a ‘cost-sharing arrangement’ do not benefit or lose out under the patent box rules by organising their R&D in this way. The specific provisions will have effect for accounting periods starting on or after 1 April 2017.

See: TUTC 2016 (para 2.3).

Annual tax on enveloped dwellingsThe annual tax on enveloped dwellings (ATED) will only rise in line with inflation for the 2017 to 2018 chargeable period. The previous increase (on 1 April 2015) was much greater.

See: TUTC 2016 (para 2.6).

Future developments• Hybrids: the government announced that FB 2017 will make

minor changes to the hybrid rules, which will have effect from 1 January 2017 (when the hybrid rules take effect), to ensure the rules work as intended. See: TUTC 2016 (para 2.5)

• Review of R&D: the government announced that it will review the tax environment for R&D to look at ways to build on the

introduction of the ‘above the line’ R&D tax credit (see Practice Note: R&D expenditure credit). The aim is to help the UK to increase its competitiveness in this area. See: AS 2016 (para 3.30)

• Stamp duty on shares: the government has asked the OTS to carry out a review of stamp duty on share transactions, particularly on how stamp duty is collected on share transactions, ie physical stamping of documents. The information available in the letter to the OTS indicates that the review might only cover stamp duty and not extend to stamp duty reserve tax (SDRT), but this remains to be seen. See: AS 2016 (para 4.43) and the Letter dated 23 November 2016 from the Financial Secretary to the Treasury to the OTS

Measures pre-announced• Tax deductibility of corporate interest expense: following

an initial consultation at the end of last year and a further more detailed consultation this summer (see News Analyses: Understanding the corporate interest expense restriction and Budget 2016—Lexis®PSL Tax analysis), the government will proceed with its proposal to introduce rules restricting corporation tax deductions for interest expenses from April 2017. The announcement is short on detail but confirms that the rules will limit deductions for net interest expenses to 30% of UK taxable earnings, subject to the ability for multinational groups to deduct net interest expenses up to a higher level based on the net interest to earnings ratio for the worldwide group. Only groups with net interest expenses of more than £2m annually will be affected and the proposed exclusion protecting the provision of finance for public infrastructure projects will be widened. Importantly, the government has confirmed that banking and insurance groups will be subject to the new restrictions in the same way as groups in other sectors. See: AS 2016 (para 4.24)

• UK bank levy reform: as first announced at Summer Budget 2015, the government confirmed that the bank levy charge will be restricted to UK balance sheet liabilities from 2021 and that there will be an exemption for certain UK liabilities relating to the funding of non-UK companies and non-UK branches. Details will be included in the government’s response to the 2015 consultation, ‘Re-scoping of the Bank Levy’, and legislation is expected to be included in FB 2017-18. See: AS 2016 (para 4.27)

• Corporation tax—reform of loss relief: as announced at Budget 2016 and following consultation this summer (see News Analysis: Creating a flexible loss relief regime), legislation will be included in FB 2017 that will provide more flexibility on the types of profit that can be relieved by losses incurred after 1 April 2017 and also restrict the amount of losses than can be carried forward to 50% (of profits above £5m) from 1 April 2017. See: AS 2016 (para 4.25)

• Clarification of tax treatment for partnerships: following a consultation that ran until November 2016 (see News Analysis: Splitting the pot—clarifying the tax on partnerships), the government has confirmed that it will publish draft legislation to clarify certain areas of partnership taxation which will ensure fair calculation of partner profit allocations. See: TUTC 2016 (para 2.7)

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DEVOLUTION

Northern Ireland corporation taxThe government intends to make amendments in FB 2017 to the Northern Ireland corporation tax (NICT) regime (set out in the Corporation Tax (Northern Ireland) Act 2015) to:

• give all small and medium size enterprises (SMEs) trading in Northern Ireland the opportunity to benefit, and

• make other changes to ensure the regime is not open to abuse

The NICT regime is not yet in force and can only be brought into force when the Northern Ireland Executive demonstrates its finances are on a sustainable footing. No further detail is included on the SME extension but it may be to remove the requirement in the existing rules that an SME must also be a ‘Northern Ireland Employer’.

See: TUTC 2016 (para 2.1).

FUNDS

Offshore fundsOffshore funds are resident in, or based in, a territory outside the UK.

The exact CGT treatment of a participant in an offshore fund depends on whether the offshore fund is a ‘reporting’ fund or a ‘non-reporting’ fund. If the fund has ‘reporting’ status (so that income and gains are reported to HMRC on the participant’s self-assessment), gains realised on disposal of an investment are treated as subject to CGT. UK participants are also subject to UK income tax on ‘reported’ income (even if it is undistributed).

However, if a gain is realised on disposal of investments in a ‘non-reporting’ fund, the gains are known as offshore income gains and are taxed as income.

At AS 2016, it was announced that the government will introduce legislation to ensure that performance fees incurred by offshore reporting funds, and which are calculated by reference to any increase in the fund’s value, are not deductible against reportable income from April 2017. Instead, the fees will reduce any tax payable on disposal gains. This measure will align the tax treatment of onshore and offshore funds.

See: AS 2016 (para 4.32).

Authorised contractual schemes: reducing tax complexity for investors in CoACSAs announced at Budget 2016 and following consultation (see: Consultation ACS: reducing tax complexity for investors), the government has confirmed that it will introduce legislation in FB 2017 and secondary legislation to clarify the rules on capital allowances, chargeable gains and investments by co-ownership authorised contractual schemes (CoACS) in offshore funds, as well as information requirements on the operators of CoACS.

Authorised contractual schemes (ACSs) are collective investment schemes that have no legal personality. Participants in an ACS account for tax (and therefore, where appropriate, claim capital

allowances) in respect of their investment. ACSs can take one of two forms (a partnership or CoACS). ACSs were introduced in 2013. The consultation related to:

• capital allowances and CoACs (as the usual partnership provisions apply to partnership ACSs), and

• the type of information all ACSs should be required to give to investors and HMRC to enable tax obligations to be met

TUTC 2016 suggests that the new rules on information requirements will only apply to CoACSs (and not partnership ACSs).

See: TUTC 2016 (para 2.4).

Authorised investment funds: dividend distributions to corporate investorsIn a move likely to be welcomed by pension funds and other exempt investors, the government has announced that the rules governing the taxation of dividend distributions paid by authorised investment funds (AIFs) are going to be modernised in a way that enables exempt investors to obtain credit for any tax paid by such funds. Draft legislation is expected in early 2017.

See: AS 2016 (para 4.29) .

EMPLOYMENT TAXES AND SHARE INCENTIVES

Employee Shareholder Status (ESS)The ability to offer tax-favoured employee shareholder shares or ESS (commonly used in private equity company arrangements) has been removed with almost immediate effect. The government has announced the removal of the following reliefs in relation to ESS shares:

• the income tax and NICs relief which applies to the first £2,000 worth of ESS shares received by an individual

• the capital gains tax exemption in respect of all or a portion of the ESS shares, and

• the provision which ensures that, when a company buys ESS shares back from an employee shareholder, the consideration is not a distribution in the shareholder’s hands

The changes are in respect of any employer shareholder agreements made on or after 1 December 2016. (For further details of the reliefs and CGT exemption, see Practice Note: Employee shareholder shares—shares for rights.)

Any individual who has received independent advice regarding entering into an employer shareholder agreement before 23 November 2016 has the opportunity to enter into the agreement before 1 December 2016 and still receive the beneficial income and CGT tax advantages. Any individual who has received independent advice on 23 November 2016 before 1:30pm will have the opportunity to receive the tax advantages currently available provided they enter into the Employee Shareholder agreement on or before 1 December 2016. Since there has to be a minimum seven clear days’ notice between the employee

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receiving such advice on the implications of employee shareholder status and the issue of the shares, this effectively means that unless employees have already received that advice, no further issues of ESS shares will be possible from today.

The announcement comes following evidence suggesting that the employer shareholders status is being used for tax planning purposes instead of for its originally intended use of supporting a more flexible workforce.

The measure does not affect the availability of the status itself; it simply removes most of the tax benefits associated with accepting the status. However, the government has announced its intention to close the status to new users at the earliest opportunity.

See: AS 2016 (para 4.31) and Policy paper and draft clause.

Salary sacrificeFrom April 2017, the tax and NICs benefits of salary sacrifice schemes will no longer apply except for those schemes relating to pension arrangements, pensions advice, childcare, Cycle to Work and ultra-low emission cars (see Practice Note: Salary sacrifice—basic principles). Therefore, unless the scheme falls under one of these exemptions, employees swapping salary for benefits under a salary sacrifice scheme will be subject to income and NICs as if the benefits had been paid as salary. Arrangements that are in place before April 2017 will be protected until April 2018, and arrangements for cars, accommodation and school fees will be protected until April 2021.

See: AS 2016 (para 4.13).

For HMRC’s consultation on the tax treatment of salary sacrifice schemes, see: Consultation on salary sacrifice schemes.

Disguised remuneration schemesThe changes announced in Budget 2016, and consulted on in August (see: Consultation on disguised remuneration and News Analysis: Tackling disguised remuneration avoidance schemes) for tackling the use of disguised remuneration schemes by employers and employees will now be extended to also cover the use of such schemes by the self-employed.

Employers will also be denied tax relief for an employer’s contributions to such schemes, unless tax and NICs are paid within a specified period, in order to deter them from using disguised remuneration schemes.

See: AS 2016 (paras 4.46 and 4.47).

NICs thresholdsAs suggested by the OTS in its March 2016 report entitled: The closer alignment of income tax and national insurance, the government has announced the primary and secondary NICs thresholds (being the amounts at which NICs are paid by employees and employers respectively) will be aligned.

The alignment, which will take place from April 2017, will require both employers and employees to begin paying NICs on weekly earnings above £157 (removing the current £1 difference). This is intended to simplify the payment of NICs for employers.

See: AS 2016 (para 4.7) and Letter dated 23 November 2016 from the Chancellor to the OTS (para 2, first bullet).

Not aligning the calculation of income tax and NICsIn correspondence released on 23 November 2016, the government has responded to the reviews published by the OTS during the autumn, including on aligning the calculation of income tax and NICs. In a letter, the Chancellor announced that the government would not pursue the OTS’s recommendation (as published in OTS reports earlier in 2016) that employee NICs should be amended to operate on an annual, cumulated and aggregated basis of assessment along the lines of income tax so that the NICs outcome would be the same regardless of whether an individual had two part time jobs or one full time job. The reason given for not pursuing these recommendations is that the change would be ‘a major upheaval’ and that it was not the right time to make such changes.

See: AS 2016 (para 4.43) and Letter dated 23 November 2016 from the Chancellor to the OTS (paras 4 and 5).

Other new employment tax announcementsThe following employment tax measures were also announced at AS 2016:

• Assets made available without transfer of ownership: FB 2017 will contain provisions that clarify that employees will only be taxed on business assets for the period of time the asset is made available for the employee’s private use. This clarification will take effect from 6 April 2017. See: TUTC 2016 (para 1.3)

• Removing NICs from the effects of the Limitation Act: from April 2018, NICs will be removed from the effects of the Limitation Act 1980. This will ensure the time limits and recovery process for enforcing NICs debts and other taxes are aligned. The government will consult on the details in due course. See: AS 2016 (para 4.9) and Letter dated 23 November 2016 from the Chancellor to the OTS (para 2, second bullet)

Future developments• Valuation of benefits in kind: the government has announced

it will consider how to value benefits in kind for tax purposes. A consultation on employer-provided living accommodation will be published at Budget 2017 alongside a call for evidence on the valuation of all other benefits in kind. See: AS 2016 (para 4.13)

• Employee business expenses: following the OTS’s March 2016 report highlighting the differences between the income tax and NICs treatment of employee expenses, the government will publish a call for evidence on the use of income tax relief for employees’ business expenses, including those not reimbursed by the employer. This call for evidence will be published at Budget 2017. See: AS 2016 (para 4.13) and Letter dated 23 November 2016 from the Chancellor to the OTS (para 2, fourth bullet)

• Reform of employer NICs: in his letter to the OTS, the Chancellor confirms that, following the OTS setting out options for reform of employer NICs, officials will consider the details of the options and keep the topic under review. See: AS 2016 (para 4.43) and Letter dated 23 November 2016 from the Chancellor to the OTS (para 6)

• Taxation of different forms of labour: the government will ‘consider how the system could be made fairer between

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workers carrying out the same work under different arrangements’ (AS 2016, para 4.13). In his letter to the OTS dated 23 November 2016, the Chancellor reiterates that the government will ‘look at how it can ensure that the taxation of different ways of working and different forms of employee remuneration is fair, sustainable and efficient’. In particular, higher rates of incorporation (which includes an increase in single person incorporations), which reduce the effective rate of tax, have a negative impact on the government’s tax receipts. See: AS 2016 (paras 1.39, 4.13 and 4.43) and Letter dated 23 November 2016 from the Chancellor to the OTS (para 7)

Measures pre-announced• Termination payments: as announced at Budget 2016, all

post-April 2018 termination payments over £30,000 which are subject to income tax will be subject to employer NICs. Following the technical consultation on the draft legislation (see News Analysis: All change, please—proposed amendments to the tax and NICs treatment of termination payments), and presumably in response to negative feedback on its proposals, the government appears to have backtracked from its original intention of subjecting all pay (including expected bonuses) due during a notice period to tax by announcing that only the equivalent of an employee’s basic pay in respect of an unworked notice period will be subject to tax. The announcement is light on detail, but it is expected the updated draft legislation, which is likely to be published on 5 December 2016, will confirm this position. The government will monitor the change and will ‘address any further manipulation’. See: AS 2016 (para 4.10)

• Off-payroll working rules: following its consultation on changing the way IR35 applies to public sector bodies (see News Analysis: Examining the IR35 consultation), the government has confirmed the reform will go ahead as planned with effect from April 2017. This reform will shift the responsibility for determining whether IR35 applies to a particular engagement from the personal service company involved to the public sector body, agency or other third party paying the worker’s company. However, the government has confirmed the 5% allowance (which can be deducted when calculating an IR35 liability) will be removed for those operating in the public sector to take account of the fact that those personal service companies will no longer bear the administrative burden of ascertaining whether IR35 applies. There was no indication of whether a similar reform will take place for the private sector. See: AS 2016 (para 4.11)

• Simplifying the Pay as You Earn Settlement Agreement (PSA) process: as announced at Budget 2016 and following a consultation, FB 2017 will simplify the process for applying for and agreeing PSAs. These changes will have effect in relation to agreements from 2018–19. See: TUTC 2016 (para 1.1)

• Dates for ‘making good’ on benefits in kind: as announced at Budget 2016 and following a consultation, FB 2017 will ensure an employee who wants to ‘make good’ (ie make payment) on a non-payrolled benefit in kind (in order to reduce its taxable value) will have to make the payment to the employer by 6 July in the following tax year. This legislation will have effect from April 2017. See: TUTC 2016 (para 1.2)

PERSONAL TAXES

Personal allowance and higher rate thresholdAS 2016 confirms that the personal allowance will rise to £11,500 and the higher rate threshold will increase to £45,000 in 2017-18. By the end of this parliament in 2020, the personal allowance is set to increase to £12,500 and the higher rate threshold to £50,000. In order for personal allowance increases not to be eroded by inflation going forward, once the personal allowance reaches £12,500, it will then rise in line with CPI.

See: AS 2016 (paras 4.5 and 4.6).

Starting rate for savingsAS 2016 confirms that the band of savings income that is subject to the starting rate of 0% will remain at its current level of £5,000 for 2017-18.

See: AS 2016 (para 4.19).

Tax advantaged investment schemes: social investment tax relief (SITR)From April 2017, the amount of investment social enterprises aged up to seven years old can raise through SITR will increase to £1.5m. SITR is the government’s tax relief for social investment. It comprises both income tax and capital gains tax relief. It was introduced to encourage individuals to support social enterprises and to increase the funding options available to such enterprises. The individual and the organisation must meet certain criteria to be eligible for the relief.

See: AS 2016 (para 4.34) and social investment tax relief factsheet.

Measures pre-announced• Property and trading allowances for individuals: as

announced at Budget 2016, from April 2017 there will be two new £1,000 allowances for property and trading income for individuals. The trading income allowance will now also apply to certain miscellaneous income from providing assets or services. See: AS 2016 (para 4.14)

• Class 2 NICs: as announced at Budget 2016, Class 2 NICs will be abolished from April 2018. Following that abolition, self-employed contributory benefit entitlement will be accessed through the payment of Class 3 and Class 4 NICs. The government has confirmed that all self-employed women will continue to be eligible to access the standard rate of Maternity Allowance. In addition, self-employed individuals with profits below the Small Profits Limit (£5,965 for 2016–17) will be able to access Contributory Employment and Support Allowance through Class 3 NICs, with support being provided for those individuals during the transition. See: AS 2016 (para 4.8) and Letter dated 23 November 2016 from the Chancellor to the OTS (para 2, third bullet)

• Reforms to the taxation of non-domiciled individuals (non-doms): the government confirmed that it will implement previously announced reforms to the taxation of non-doms (see Practice Note: Deemed domicile for tax from 6 April 2017). Although many practitioners had lobbied for a delay in the

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implementation of these changes, they will now take effect as planned from 6 April 2017. The reforms include treating individuals who have been resident in the UK for at least 15 of the past 20 tax years as UK domiciled for tax purposes and changing the rules for the Business Investment Relief (BIR) scheme (see Practice Note: The remittance basis—business investment relief—qualifying investments) to make it easier for non-doms who are remittance basis users to bring offshore money into the UK for the purpose of investing in UK businesses. See: AS 2016 (para 4.15)

VAT AND INDIRECT TAXES

VAT flat rate schemeFrom 1 April 2017 there will be a new 16.5% VAT flat rate for businesses with limited costs, such as labour only businesses. This rate is higher than the existing flat rates and anti-forestalling provisions apply from 23 November 2016.

The VAT flat rate scheme applies to businesses with a turnover of no more than £150,000 a year (excluding VAT). The purpose of the scheme is to simplify VAT record keeping for small businesses. The scheme allows the tax payer to apply a fixed flat rate percentage to gross turnover to arrive at the VAT due. The fixed rate percentage varies depending on the type of business. Businesses within the scheme will now need to determine whether they fall within the definition of ‘limited cost trader’ to establish if the new rate will apply to them. Draft legislation will be published on 5 December 2016 for comment.

See: AS 2016 (para 4.51) and Tackling aggressive abuse of the VAT flat rate scheme- technical note.

VAT groupsThe government has confirmed that it will consult on the rules relating to VAT grouping. This consultation was expected following the Larentia + Minerva and Marenave and Skandia cases and Revenue and Customs Brief 3 (2016).

See: AS 2016 (para 4.41).

Insurance Premium Tax (IPT)Following the increase in the rate of IPT to 10% with effect from 1 October 2016, the rate will further increase to 12% from 1 June 2017. This change is expected to be made by regulation, rather than in FB 2017.

See: AS 2016 (para 4.40).

TAX ADMINISTRATION AND AVOIDANCE

Tax enquiries: Closure rulesThe government has announced that it will legislate to provide earlier certainty on individual matters in large, high risk and complex enquiries. No further detail is provided on this announcement but it is likely to address issues that were highlighted following a 2015 consultation which proposed a new power for HMRC to achieve early resolution and closure (see News Analysis: Tax enquiries—new rules should work both ways).

The proposals included payment of any aspect of a tax enquiry even where other issues were left open, and the proposal that only HMRC, and not the taxpayer, would be able to seek partial closure was met with ‘overwhelming’ disagreement. HMRC stated that it would develop some alternative models to achieve this result.

See: AS 2016 (para 4.44).

Penalty for participating in VAT fraudAs previously announced in Budget 2016 and following consultation that ended on 11 November 2016, the government will introduce a new and more effective penalty for participating in VAT fraud in FB 2017. The penalty will apply to businesses and company officers when they knew or should have known that their transactions were connected with VAT fraud. The new penalty will be a fixed rate penalty of 30% (option A in the consultation) and will be implemented following Royal Assent of FB 2017.

See TUTC 2016 (para 6.2).

Tax on offshore interests—requirement to correctFollowing its consultation which closed on 24 October 2016, the government has confirmed that it will introduce a new legal requirement to correct (RTC) a past failure to pay UK tax on offshore interests by 30 September 2018 (see Practice Note: Offshore penalties, sanctions and criminal offences—outline — New legal requirement to correct past offshore tax non-compliance) . Those who do not comply with this new RTC will be subject to sanctions. This measure will have effect from Royal Assent of FB 2017.

See: AS 2016 (para 4.53), AS 2016: policy costings (page 28)

Requirement to register offshore structuresThe government has announced that it will consult on introducing a new legal duty for intermediaries arranging complex structures for clients holding money offshore to notify HMRC of the structures and the related client lists. Although this measure was not pre-announced, it is a continuation of the government’s policy to crackdown on offshore tax avoidance and evasion.

A similar reporting requirement already exists under IHTA 1984, s 218, which provides that any person in the course of their trade or profession (unless they are a barrister) who has been concerned with the creation of a settlement of which:

• the settlor is UK domiciled, and

• the trustees of the settlement are not/will not be resident in the UK

must make a return to HMRC within three months of the creation of the settlement stating the names and addresses of the settlor and the trustees.

See: AS 2016 (para 4.54).

Measures pre-announced• Updating the VAT Avoidance Disclosure Regime: as

announced at Budget 2016 and following consultations earlier this summer and in 2014 (see News Analysis: Consultation on disclosure of tax avoidance schemes for indirect taxes and

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IHT), legislation will be introduced in FB 2017 to strengthen the rules on disclosure of avoidance of indirect tax. The government has confirmed that the regime will be extended to include all indirect taxes, with scheme promoters being primarily responsible for disclosure to HMRC. See: TUTC 2016 (para 6.1)

• HMRC data-gathering powers: as announced at Budget 2016 and following a consultation in August 2016, the government will legislate to extend HMRC’s data-gathering powers (see Practice Note: HMRC data-gathering powers. The extension will enable HMRC to collect data from money services businesses (businesses that provide money transmission, cheque cashing or currency exchange services) and is part of the package of measures aimed at tackling the ‘hidden economy’. See: AS 2016 (para 4.55)

• Enablers of tax avoidance: following a consultation, ‘Strengthening Tax Avoidance Sanctions and Deterrents’, that ran from 17 August 2016 to 12 October 2016 (and for which see News Analysis: Strengthening tax avoidance sanctions), the government will introduce new penalties for persons who enable other persons or businesses to use tax avoidance arrangements that are later defeated by HMRC. See: AS 2016 (para 4.48)

• Reasonable care defence: the government is implementing its proposal, described in the ‘Strengthening Tax Avoidance Sanctions and Deterrents’ consultation, to remove the ‘reasonable care’ defence for inaccuracy penalties in certain avoidance cases. Taxpayers who use marketed tax avoidance schemes that HMRC has defeated, and who are faced with a penalty for submitting an inaccurate tax return, often argue that it was reasonable for them to rely on information they received from the scheme promoter or other enabler. In these circumstances, HMRC is proposing to prevent taxpayers from citing generic advice or marketing material to demonstrate that they have taken reasonable care. See: AS 2016 (para 4.48)

ENERGY AND ENVIRONMENT

Oil and gasThe government is ‘recommitting’ to ‘Driving Investment’, a consultation document that was published in July 2014 (under the Coalition government). This is described as a long term plan for the oil and gas ring-fence fiscal regime. The original consultation proposed a number of reforms, some of which have already been implemented (such as the introduction of a new investment allowance). The document is out of date in several respects (most obviously, it pre-dates the effective abolition of petroleum revenue tax (PRT)), so it remains to be seen which of the original proposals the government now intends to implement.

Since 1 January 2016, PRT has been charged at a zero rate, but it has not been abolished, largely to enable companies to create losses that can be carried back to recover past PRT paid. As the tax still exists, various administrative requirements remain. The government has now announced that it will significantly simplify the process for opting out of PRT, and for companies that do not opt out, various reporting requirements have been removed.

The PRT simplifications allow companies to opt out from 23 November 2016 (ie the date of AS 2016) to take effect for periods beginning on or after 1 January 2017. The reporting requirement simplifications come into force immediately, although the HMRC forms won’t be updated until a later date. In the meantime companies can leave the relevant sections of the forms blank.

See: AS 2016 (para 4.38) and HMRC policy paper: Petroleum Revenue Tax: cutting administration costs for the oil industry.

Autumn Statement 2016 Tax updates and technical changes

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