Monthly Tax Update

Private Markets

This monthly briefing note summarises some tax and other news items of interest to UK-focused private companies and their management teams and shareholders.

United Kingdom  | Deloitte Private | 21/12/2021

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Finance Bill 2021-22

Finance (No. 2) Bill - Public Bill Committee - First and Second sittings

The Public Bill Committee scrutinising the Finance (No. 2) Bill 2021-22 had its first and second sittings on the morning and afternoon of Tuesday 14 December 2021. The transcripts from Hansard are available here and here. None of the clauses, schedules or amendments were subject to a division. The Committee then adjourned until the afternoon of Wednesday 5 January 2022. The Committee must report by Thursday 13 January 2022.

The amendment paper as at 15 December is here, and the official summary of the committee's decisions on 14 December is here

Some minor drafting amendments have been made to the Finance Bill in relation to the new Notification of Uncertain Tax Treatment and Qualifying Asset Holding Company regimes. The drafting amendments ensure that the rules operate as intended. The Financial Secretary to the Treasury has written a letter to the Committee explaining the amendments.

Scottish Budget

The Scottish Budget was presented on 9 December 2021. As expected, no changes are proposed to the five Scottish income tax rates applicable to the non-savings, non-dividend income of Scottish resident taxpayers (19%, 20%, 21%, 41%, 46%) for 2022/23. Inflationary increases are proposed for starter and basic rate bands, whilst the higher and top rate thresholds will remain frozen in cash terms at £43,662 and £150,000 respectively. The Scottish government’s summary factsheet on the income tax changes is here. No changes were announced on Land and Buildings Transaction Tax (LBTT) rates and bands. A call for evidence on the operation of LBTT’s 4% Additional Dwelling Supplement (ADS) was launched on 16 December 2021. Scottish Landfill Tax rates will be increased to keep them consistent with rates in the rest of the UK. On business rates, the 100% relief for businesses in the retail, hospitality, leisure and aviation sectors is still due to come to an end in April. To avoid a cliff edge, there will be 50% relief for those businesses for the first three months of 2022/23, capped at £27,500 per ratepayer. Full rates relief for some small businesses will be maintained for 2022/23. The full Budget documents are here.  

UK direct tax developments

Treasury responses to OTS CGT/IHT reports

Financial Secretary to the Treasury, Lucy Frazer QC MP, published a letter to the Office of Tax Simplification (OTS) last week on: 

  • Review of the Office of Tax Simplification and future work;
  • Office of Tax Simplification Inheritance Tax review: Simplifying the design of the tax; and
  • Office of Tax Simplification Capital Gains Tax Review.

The Chancellor indicated that on Capital Gains Tax, the government will implement some of the OTS’ recommendations and will consider others. These included rules concerning:

  • Share matching;
  • Divorce;
  • Principal Private Residence nominations;
  • Enterprise Investment Schemes; and
  • The Single Customer Account.

The letter also includes a response to the OTS’ second report on inheritance tax. Here, the government will not proceed with any changes at the moment but will bear in mind the points made if the government considers inheritance tax reform in the future.

UK indirect tax developments

HMRC reminder about full customs controls from 1 January 2022

HMRC have published a reminder to traders that, from 1 January 2022, they will have to make customs declarations and pay tariffs at the point of import, and will no longer be able to delay making declarations under the Staged Customs Controls rules. Unless goods have received customs clearance, they will in most cases not be able to leave the port, so traders that are unable to deal with the required declarations themselves should consider appointing a customs agent (if they have not done so already). The reminder also mentions the need for exporters to provide statements on origin and supplier declarations, and confirms that postponed import VAT accounting will remain available, and that UK tariff codes will be changing on 1 January 2022. 

Umbrella companies consultation

HM Treasury have published a consultation relating to the supply of staff through umbrella companies. In relation to VAT, HMT is concerned that mini-umbrella companies (MUCs) are being used as vehicles for abusing the VAT flat rate scheme, or for perpetrating missing trader fraud (echoing HMRC’s guidance published in May 2021). The consultation also mentions that some umbrella companies (for example those in the medical sector) have been incorrectly applying VAT exemption to their services, or have been purporting to set up joint employment contracts with agencies. In light of this, it is perhaps unsurprising that HMRC have updated Notice 701/57 to clarify that the nursing agencies’ concession “does not apply to umbrella companies supplying services of staff to a recruitment agency. It only applies to the direct provision of staff. For example nurses and nursing auxiliaries to a health provider by a business acting as a principal.” (para 6.6).

EU VAT Committee: Danske Bank

The working papers prepared for the meeting of the EU VAT Committee on 22 November revisit, amongst other things, the treatment of VAT groups by multinational businesses in light of Danske Bank. Unsurprisingly, given that Danske Bank followed the analysis adopted by the committee at earlier meetings, Working Paper 1025 proposes that the act of joining a VAT group should dissolve an establishment’s ties with the rest of the legal entity and make it part of the VAT group instead. Cross-border transactions between branches and head offices, or between branches, should therefore be subject to VAT if either establishment is in a VAT group. Although the committee’s guidelines (which will result from the meeting) are not binding on EU Member States, it will be interesting to see whether countries which currently include legal entities in VAT groups in their entirety (which is also how the UK applies VAT grouping) will feel pressured to change their approach if the committee follows the working paper’s approach. 

Ecosystem of Trust end-to-end pilot

Authorised economic operator (AEO) status was introduced in 2008 to provide businesses with an internationally recognised quality mark indicating that their customs controls and procedures are efficient and compliant, and that their role in international supply chains is secure. As part of its 2025 UK Border Strategy, the government is seeking to build on AEO through developments in technological capabilities, real time data, and trusted relationships. This Ecosystem of Trust is intended to deliver a more frictionless import/export experience, enabling government agencies to focus on higher risk traders. Expressions of interest have been invited from consortia (which will generally include a port, an importer with an accredited overseas trade partner, a carrier, a logistics firm, and a technology company) to develop and run pilot schemes which will be operated in a live port environment next year. Expressions of interest should be submitted by 31 January 2022. 

Gray & Farrar: VAT on international matchmaking consultancy – Upper Tribunal

Gray & Farrar International LLP (GFI) runs an exclusive matchmaking business. For an entry level fee of £15,000, GFI interviews prospective clients, establishes a dating profile, and connects them (at least eight times a year) with possible matches. Matchmaking at this level is for an international clientele, and if it was “consultancy” then UK VAT would not be chargeable to overseas clients. The First-tier Tribunal decided in 2019 that GFI’s liaison team provided a level of support and advice (acting as confidante) which was more than just expert advice, and which meant that GFI’s service could no longer simply be categorised as consultancy. According to the Upper Tribunal, the First-tier Tribunal had failed to identify the “predominant element” of GFI’s services. The predominant element of GFI’s supply was making the introductions, which involved the provision of expert advice (interviewing clients and establishing who might be their ideal match) and information (putting clients in touch with prospective dates). This service, judged from the point of view of the “typical” consumer by reference to objective factors, should be categorised as consultancy for VAT purposes. GFI had correctly treated its services as outside the scope of UK VAT, and its appeal was allowed. 

International developments

EU adopts Directive on public country-by-country reportin

On 11 November 2021, the European Parliament voted to approve the Directive for public country-by-country reporting in the EU. As a qualifying majority of the Member States approved the compromise proposal in September, the Directive has now been formally adopted. The Directive will require multinationals with worldwide revenues of more than EUR 750 million to disclose publicly, on a country-by-country basis, corporate income tax information relating to their operations in each of the 27 member states, as well as information for certain third countries on the EU list of non-cooperative jurisdictions. Both EU-parented groups and non-EU parented groups with large or medium-sized EU subsidiaries or branches will have reporting obligations. The reporting would take place within 12 months from the date of the balance sheet of the financial year in question. The Directive sets out the conditions under which a business may be able to obtain a deferral of the disclosure of certain commercially sensitive data for a maximum of five years. The Directive is due to enter into force in December (20 days after its publication in the Official Journal of the EU, which took place on 1 December 2021), after which Member States would have 18 months to transpose the Directive into national laws. Mandatory reporting under the Directive is expected to begin in circa 2025, but individual Member States have the option to implement the rules sooner.  

India and United States agree transitional approach on India’s equalisation levy and Pillar One

On 24 November 2021, the governments of India and the United States published press releasesannouncing a compromise agreement on a transitional approach to phasing out India’s equalisation levy regime. This follows on from the agreement in early October between 136 (now 137) countries of the OECD/G20 Inclusive Framework on the two-pillar solution to address the tax challenges arising from digitalisation. Pillar One of the two-pillar solution would reallocate taxing rights in favour of market countries, coordinated with the removal of all digital services taxes (DSTs) and other relevant similar measures. The India-US agreement will mirror the recent compromise reached between the US and five European countries with DSTs (including the UK). India will collect the 2% equalisation levy during the interim period prior to the commencement of Pillar One. However, for the largest and most profitable multinationals (i.e. those in the scope of Pillar One’s ‘Amount A’ rules), India is expected to subsequently allow a credit for 'excess' equalisation levy over their Amount A tax in the first year, to be set against the Indian Amount A tax liability. As part of the agreement, the US will terminate the trade tariffs on India imposed (but currently suspended) in response to the levy. Other smaller multinationals will continue to pay the equalisation levy in the interim period, and once Pillar One is implemented, these multinationals will no longer be subject to the levy and neither will they be in scope of Amount A. Turkey has also agreed a similar approach with the US to the phasing out of its DST. 

Other developments

HMRC: VAT and CT phonelines

HMRC are running a trial of reducing the hours on some of their telephone services so that they can dedicate the time to work through post that has built up over the past year. To test the approach, they will close their VAT and CT phone lines (with the exception of the bereavement line) on 3, 10 and 17‌‌ ‌December. HMRC say they have recently been able to move more resources back into their core tax activities now that the COVID-19 schemes have ended, and they are adding further capacity through temporary recruits. By April 2022, they expect to be delivering normal (pre-pandemic) performance on their core service lines in terms of the work they have on hand and their turnaround times.  

Environmental tax roadmap

In April 2021, the Public Accounts Committee (PAC) published its report on Environmental Tax Measures. In their response, the government stated that it would consider the pros and cons of setting out a longer term roadmap on tax and net zero. In a letter, published on 6 December 2021, Exchequer Secretary Helen Whately wrote to the Committee's Chair (Dame Meg Hillier MP) with further thoughts on this matter. Inter alia, the Exchequer Secretary states, "Roadmaps on tax can offer certainty to business and individuals to support future planning. However, it is not always appropriate for the government to pre-announce tax reforms given the issues caused by forestalling activity and wider market uncertainty. The Net Zero Strategy notes that there is a great deal of uncertainty inherent in any modelling as far into the future as 2050, which is highly sensitive to economic, societal, and technological developments. Given this, a tax roadmap could ultimately give a false sense of certainty.”  

Dbriefs webcasts

The next Dbriefs webcast is on Monday 10 January 2022 at 13:30 GMT / 14:30 CET on the topic of G20/OECD The Digitalised Economy – Model Rules For Global Minimum Tax (Pillar Two). During the webcast our panel of experts will discuss the implementation plan for the introduction of a global minimum tax (‘Pillar Two’), including the model rules to define the scope, mechanics and administration of the income inclusion rule and undertaxed payment rule, the associated commentary, and the model treaty to give effect to the subject to tax rule. For more information and to view past webcasts on demand visit www2.deloitte.com/uk/en/pages/dbriefs-webcasts.