21 June 2024
On 17 June 2024, the G20/OECD Inclusive Framework on BEPS published a fourth set of administrative guidance on the implementation of the Pillar Two global minimum tax rules to further clarify their interpretation and operation. The Pillar Two rules are intended to ensure that large multinational groups pay corporate income taxes at a minimum level of 15% in every country in which they operate. The new guidance covers six distinct areas: recapture of deferred tax liabilities; divergences between Pillar Two basis and accounting carrying values; allocation of cross-border current taxes; allocation of cross-border deferred taxes; allocation of profits and taxes in groups including flow-through entities; and the treatment of securitisation vehicles. For further details, please see our alert.
Also on 17 June 2024, the G20/OECD Inclusive Framework published two additional guidance documents on Amount B. The Inclusive Framework’s February 2024 report set out the new Amount B approach for pricing baseline marketing and distribution activities, which seeks to streamline and simplify the application of the arm’s length principle from 1 January 2025. All businesses that sell goods, regardless of size, are potentially in the scope of Amount B if they carry out suitable marketing and distribution activities. This additional guidance finalises work on three elements of the February 2024 report. For further details, please see our alert.
HMRC have published the latest edition of their annual statistical publication Measuring tax gaps. The estimated ‘tax gap’ – HMRC’s best estimate of the difference between the amount of tax that should in theory have been paid, and what was actually paid – for the 2022/23 tax year was 4.8% (down from a revised estimate for 2021/22 of 5.2%), representing an estimated £39.8 billion of missed receipts out of total theoretical tax liabilities of £828 billion for the year. A breakdown of the tax gap by tax-type lists ‘income tax, national insurance contributions and capital gains tax’ and ‘corporation tax’ as both accounting for an estimated 34% of the total tax gap each, followed by VAT representing 20% of the gap. Broken down by taxpayer groups, an estimated 60% of the tax gap is attributed to small businesses, whilst the proportions attributable to mid-sized businesses and large businesses are both 11% each. ‘Failure to take reasonable care’ remains the main behavioural reason for missing receipts, representing an estimated 30% of the total tax gap.
The reduced value rule means that hotels and similar establishments need only charge VAT on part of the amounts invoiced to long-term guests (usually 20%, reflecting the services enjoyed by the guests but not the accommodation itself). In BLS1 Ltd, the Isle of Man High Court has ruled that the reduced value rule should apply to the provision of serviced accommodation in studio apartments at The Quarters in Swiss Cottage, London. BLS1 (established in the Isle of Man) arranged for the studios to be cleaned and for towels and linen to be changed weekly. Each studio had a basic kitchenette, a desk and a sofa, as well as a bed and bathroom. The High Court considered that the question of whether The Quarters was a “similar establishment” to a hotel did not depend (as the Manx VAT and Duties Tribunal had thought) on whether BLS1’s supplies would otherwise be exempt from VAT. The question of whether BLS1 was granting a licence to occupy land (a proposition rejected by the Tribunal) was not therefore relevant. The Tribunal should have limited itself to the straightforward question of whether The Quarters was a similar establishment to a hotel, and the associated statutory test of whether it was held out as being suitable for use by visitors or travellers. The Tribunal’s findings of fact showed that The Quarters was similar to a hotel, and BLS1’s appeal was allowed. It had correctly applied the reduced value rule to services provided to long-term occupants. (Contact: Ben Tennant)