Deloitte UK Banking & Capital Markets Newsletter - November 2021



Banking Surcharge

At the Autumn Budget on 27 October 2021, the Chancellor announced changes to the bank corporation tax surcharge (Surcharge). The Chancellor stated the intention was to ensure that the UK banking sector maintained its international competitiveness.

The two headline changes announced were:

    • Surcharge Rate: 5% reduction in the surcharge rate, from 8% to 3%. This means that the combined rate of corporation tax and Surcharge will increase to 28% from April 2023 compared with the current level of 27%.
    • Surcharge Allowance: £75m increase in the surcharge allowance for each group, from £25m to £100m. This means that those groups with profits below the £100m threshold will cease to pay any surcharge.

The legislation is included within Finance Bill 2021/22 and the changes will apply from 1 April 2023 onwards.

Securitisation Companies

The Chancellor announced in the Autumn Budget that Finance Bill 2021/22 will introduce a power enabling HM Treasury, by secondary legislation, to make stamp duty and stamp duty reserve tax (SDRT) changes in relation to securitisations. Such changes would include those to enable the transfer of notes issued by securitisation companies and of securities to or by securitisation companies to be exempted if otherwise chargeable to stamp duty or SDRT.

Schedule 36 Finance Act 2008: Financial Institution Notices (FINs)

The Finance Act 2021 gives HMRC new powers to issue information notices to ‘financial institutions’ for the purpose of checking the tax position of a taxpayer. The FIN will ask for data on the financial institution’s customers, rather than on the data holder’s own affairs. Unlike other third-party information notices issued by HMRC, there is neither a statutory right of appeal against a FIN nor is HMRC required to seek taxpayer or tribunal approval to issue the FIN.

The scope of FINs is broad and includes any person classed as a ‘financial institution’ under the OECD’s Common Reporting Standard. In addition to a large number of banks and building societies, this scope may also include corporate trust companies, life insurance companies, and other types of entities.

It is important for institutions that are within the scope of FINs to consider the internal processes that may be required if a data request is received from HMRC. Deloitte are experienced in assisting clients navigate large information requests. If you wish to discuss how we can assist with FINs or other notices, please contact Annis Lampard and Morgan Harries.

Kwik-Fit: Unallowable Purpose

The First Tier Tribunal (‘FTT’) has handed down a new corporation tax decision, Kwik-Fit Group Ltd and others v HMRC [2021] UKFTT 0283 (TC), on the application of the loan relationship unallowable purpose rule.

In 2013, the five appellant companies took part in an internal reorganisation of intragroup loan balances. This included intragroup transfers of pre-existing debts, increasing the interest rate applied to those transferred debts and to existing (non-transferred) debts, and the creation of new loans. As intended, there would be increased/new interest expenses arising in the appellants, with the corresponding interest income arising in a specific group company which could utilise its carried forward non-trading loan relationship deficits (‘NTLRDs’) more quickly – in 3 years in contrast with 25 years under the pre-existing loan structure.

The FTT agreed with HMRC that the conditions of the unallowable purpose rule were met – the appellants were party to the loan relationships for (unallowable) tax avoidance main purposes (in addition to main commercial purposes, in the case of existing debts). In determining the required just and reasonable disallowances, the debits on newly-created loans, and the extra debits on the pre-existing debts arising from the increase in the interest rate, were disallowed (albeit the disallowed debits were capped by the level of NTLRDs utilised by the group company).

Whilst specific to the facts, as ever with unallowable purpose decisions, the judgment contains a number of points of wider interest to loan relationship transactions.

VAT: Target update

The Court of Appeal (‘CoA’) has published its judgment in Target Group Ltd v HMRC [2021] EWCA Civ 1043– a case that was mainly concerned with the VAT liability of outsourced loan services, but also has wider implications for payment processing and outsourcing more generally.

In considering the issue, the CoA was required to consider the broad body of case law on the matter, some of it EU case law (from SDC through to BookIt, DPAS and Cardpoint) and some of it UK case law (such as FDR and EDS). The CoA closely followed CJEU judgments, most notably DPAS, which it considered clarified that the Target group could not rely on FDR (indeed, para 93 of the judgment suggests that FDR should no longer be relied on in the UK) and instead it required to be considered if Target Group’s services, as a whole, fulfilled the essential functions of a financial transaction.

The judgment would seem to limit the extent to which an agent might be able to provide an exempt payment processing service, on the basis that the role of such an agent is unlikely to form a distinct whole with the characteristic of the transfer of a sum of money. If this was applied more widely, it could mean that many FinTech and card services no longer fall within the UK VAT exemption, creating a significant additional VAT cost in many banking groups.

It is currently unclear whether Target will receive permission to appeal to the Supreme Court. In the absence of a successful appeal, this CoA judgment will stand as precedent law in the UK, so taxpayers with similar services will need to review their own facts and consider if they should treat similar supplies as taxable in light of this judgment.

It was noteworthy that the CoA was clear that, in its view, had Target been involved in loan origination, this would have been a factor to support exemption. This is consistent with the outcome in the CoA judgment in EDS and HMRC’s VAT manuals. Consequently, the CoA judgment in Target would appear to be supportive of the view that arrangements aligned with EDS should continue to fall within the exemption.

Finally, this is yet another example of the VAT exemption being construed narrowly, especially for payment related outsourced services. More generally, businesses supplying or receiving such services should review these and consider the strength of any VAT position being taken in light of the potentially narrowing exemption as set out in Target. This could be of particular interest for businesses involved in payment services and Fintech, where functions within the payment chain are becoming more fragmented between legal entities and therefore it is arguably becoming harder to identify the transaction that is a ‘distinct whole’ that has the character of a transfer of money.

VAT: Partial Exemption Special Method (PESM) Update

HMRC has updated its Partial Exemption Notice (VAT Notice 706) to introduce a checklist of items that must now be included with an application for a new PESM. Many of these represent a significant new burden for businesses, especially around the additional financial modelling required, along with an explanation of why any particular method has been chosen over an existing method or the Standard Method of VAT recovery for partially exempt groups. While some areas will not be relevant to certain taxpayers (such as, for example, the way in which the activities of overseas establishments are factored in to UK VAT recovery), the new requirements will mean that groups will need to be comfortable that their existing VAT position is robust and can be defended, if required. Taxpayers that are still relatively small may wish to consider whether they can use alternative approaches (such as the easements around groups that have only recently become partially exempt, or the application of the Standard Method Override) while they assess the relative benefits of a PESM application.

OECD Inclusive Framework updates political agreement on taxing the digitalised economy and a global minimum tax rate

On 8 October 2021, the G20/OECD Inclusive Framework on BEPS (the ‘Inclusive Framework’) published a Statement on the components of global tax reform, agreed by 136 of its members. This is an update to the Statement published in July 2021.

Since 2017, the 140 member countries of the Inclusive Framework[1] have been jointly developing a ‘two-pillar’ approach to address the tax challenges arising from the digitalisation of the economy. Whilst the proposals are described as relating to the ‘digitalisation of the economy’, they will apply across sectors, with Pillar Two having potentially significant and far-reaching implications for the banking industry.

The Inclusive Framework Statement published on 8 October provides some useful clarifications (as set out below), but a number of important issues still need to be addressed. November 2021 will be a significant month for the project, as the OECD is expected to publish Pillar Two model rules and explanatory notes.

Key developments from the Statement

      • The updated Inclusive Framework Statement includes determination of the global minimum rate for the Income Inclusion Rule and Undertaxed Payment Rule as 15% (removing ‘at least’ in relation to the rate). The rate for the Subject to Tax Rule, the enhanced withholding tax for developing countries only, is agreed at 9% (removing the range 7.5%-9%).
      • Multinational groups with consolidated revenues of EUR 750 million will be in scope of Pillar Two, but countries will be free to apply lower thresholds to groups headquartered in their country. The allocation method for top-up taxes under the undertaxed payment rule, including in respect of low taxed profits in the country of the ultimate parent, remains to be agreed.
      • Implementation of the Undertaxed Payment Rule will be deferred by one year, to 2024, to allow time for countries to enable the Income Inclusion Rule to take effect in domestic regimes before the ‘backstop’ is invoked (learning from the implementation of country-by-country reporting and the complexities of local filing).
      • The Statement does not, however, address how timing differences will be dealt with (a modified deferred tax approach or excess tax credit carry forward being options under consideration) for the Income Inclusion Rule and Undertaxed Payment Rule of Pillar Two.

A recording of Deloitte’s EMEA Dbriefs series webcast from 25 October 2021 can be found here.

EU Tax Observatory Study

On 6 September, the EU Tax Observatory released a study on the use of ‘tax havens’ by 36 systemic European banks based on their available Country-by-Country (‘CbC’) data, titled ‘Have European banks left tax havens? Evidence from country-by-country data’.

The list of tax havens is built on two criteria: effective tax rate and profitability of employees. The list includes 17 jurisdictions among which are three EU Member States, i.e. Ireland, Luxembourg, and Malta. Similarly, the types of activities carried out in a given jurisdiction are not taken into account to comment on the tax data.

Findings of the report:

    • Profits in tax havens: €20 billion, or 14% of the banks’ total profits in tax havens each year. This percentage has been stable since 2014.
    • Around 25% of the profits made by the European banks in the sample are booked in countries with an effective tax rate lower than 15%.
    • Use of tax havens varies considerably from bank to bank, from 0% to a maximum of 58%. Mean percentage of profits booked in tax havens: 20%.
    • Productivity in tax havens is abnormally high: €238,000 per employee, as opposed to around €65,000 in non-haven countries. This finding suggests that the profits booked in tax havens are primarily shifted out of other countries where service production occurs.
    • Effective Tax Rate in tax havens: between 10 and 13%.

According to the EU Tax Observatory, the tax deficit (defined as the difference between what these banks currently pay in taxes and what they would pay if they were subject to a minimum effective tax rate in each country):

    • With a 15% minimum tax rate, €3-5 billion
    • With a 21% minimum tax rate: €6-9 billion
    • With a 25% minimum tax rate: €10-13 billion
    • Top countries benefiting: United Kingdom, France

The EU Tax Observatory is advocating for a global minimum taxation at rates higher than 15%, usually making simulations with 21% and 25% rates.

Withholding Tax (WHT) in the EU

The EU Commission aims to introduce a common EU-wide system for WHT on dividend and interest payments on cross-border investments to foster cross-border investment, tackle tax fraud, and simplify taxation. It will be coupled with a system for tax authorities to exchange information and cooperate with one another. The policy options currently under consideration are:

      • improving WHT refund procedures to make them more efficient;
      • establishing a fully-fledged common EU relief at source system (the correct WHT treaty rate is applied at the time of dividend / interest payment thereby not incurring double taxation); and
      • enhancing the existing administrative cooperation framework to verify entitlement to treaty benefits (reporting and subsequent mandatory automatic exchange of beneficial owner-related information, to reassure both the residence and source country that the correct level of taxation has been applied to the non-resident investor).

Public feedback is sought on or before 26 October on the roadmap published on 28 September, to be followed by a public consultation planned for Q3 2021. The new EU withholding taxes system is scheduled to be proposed in Q4 2022.

Remote Work Arrangements

As the global economic impact of the COVID-19 pandemic evolves, we are seeing increased scrutiny from certain tax authorities on what action companies are taking to ensure compliance from a personal and corporate tax perspective regarding official remote work arrangements. This can take a variety of forms including wage tax/payroll audits and also increased enquiries into an individual’s personal tax returns.

Additionally, current guidance and positions taken by some tax authorities regarding such arrangements is giving rise to increased complexity in determining an individual’s net tax position and also potential double tax situations. For example, most US states would seek to tax employment income that is earned within the state, i.e. linked to where the individual physically performs their duties of employment. However, some US states (including Connecticut, Delaware, Massachusetts, Nebraska, New York and Pennsylvania) are now actively seeking to impose ‘convenience of employer’ rules that would effectively deem days spent working outside the state (due to a personal driven remote working arrangements) as if they were spent working in that state.

To illustrate the potential issues in this regard, an individual with the following fact pattern and applying the current guidance from the New York State tax department is likely to be subject to unrelieved double taxation as the UK would tax 100% of the individual’s employment income and would not give a credit for the New York state income taxes that would also be applied on 100% of their employment income:

        • the individual’s primary office is in New York,
        • the individual is non-New York state resident,
        • the individual chooses to perform their duties remotely whilst physically resident in the UK (and is considered UK tax resident).

Further clarity and guidance are expected from tax authorities and also central bodies such as the OECD to help alleviate these complexities and potentially address double tax situations.

DAC8 – Reporting Requirements for Crypto-assets and Crypto-currencies

According to Commissioner Gentiloni, the EC proposal on DAC8 is now scheduled for Q1 2022, as opposed to Q4 2021 as initially indicated. As a reminder, DAC8 aims to amend the Directive on Administrative Cooperation to ensure that EU rules on tax transparency include crypto-assets and e-money.


[1] Mauritania joined the Inclusive Framework on 4 November 2021, becoming its 141st member