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New year's (tax) resolutions

21 January 2020. Published by Ben Roberts, Senior Associate

It's that time of year when people are abiding by, (re)assessing and / or breaking their new year's resolutions. It's no different in the world of tax.

A number of important tax changes are due to take effect in the early part of the year. At least one of the planned changes has proved to be short-lived, and there are question marks as to the durability of others.

'IR35' and changes to off-payroll working rules

The so-called 'IR35' tax legislation is designed to stop a particular form of tax avoidance whereby individuals seek to avoid paying employment taxes by supplying their services though an "intermediary" (such as a personal services company or "PSC") and instead pay themselves dividends.

The IR35 rules, in basic terms, apply where the individual would – for tax purposes – be regarded as being "employed" by the recipient of the services (the 'client') if they had supplied their services directly, instead of through a company.

If the IR35 rules do apply then, under current law (For private sector clients. The rules changed for the public sector in 2017):

  • payments received by the PSC are treated as employment income for UK tax purposes
  • the PSC (not the client) will have obligations to account to HMRC for employment taxes 

From April 2020, these rules will change for "medium and large" companies in the private sector that receive services via a PSC. From April it will be the client (rather than the PSC) that:

  • is required to assess the "employment" status of the individual providing the services, and
  • is liable to pay employment taxes, if the individual/PSC is caught by the revised 'IR35' rules

This rule change will only apply to a client if it satisfies 2 or more of the following conditions:

  • annual turnover of more than £10.2m
  • balance sheet total more than £5.1m
  • more than 50 employees

For companies that fall below at least 2 of these thresholds ("small" companies) the rules from April 2020 will not apply. Any ongoing risk under the IR35 regime should therefore remain with the PSC.

Earlier this month the government launched a review into the implementation of these changes, given widespread concerns as to the financial burden of the new, extended regime.

Digital services tax (DST)

From April 2020, a new 2% tax will be applied to the revenues of social media platforms, search engines and online marketplaces. Also caught by the new DST will be revenues from carrying on online advertising businesses related to these activities.

The DST is apparently intended to be a 'interim' measure, to be withdrawn once an appropriate method of taxing these types of (typically multinational) businesses has been agreed at an international level.

There had been some speculation, given the way in which the French DST has been received in Washington (badly) and given the UK's obvious desire to agree a lucrative post-Brexit trade deal with the US, that the UK's DST might be shelved or at least watered down. At the time of writing however this seems like a new tax measure likely to survive the year.

DAC6

Regulations implementing the EU's mandatory disclosure regime for cross-border tax planning arrangements ('DAC6') in the UK are due to take effect on 1 July 2020. The regulations have now been laid before Parliament and further HMRC guidance is awaited as to how, in practice, taxpayers and "intermediaries" (including lawyers, accountants and others) are to comply with these rules.

The DAC6 rules have actually been in force since the end of June 2018, but reporting under the regime to a tax authority is not required before July 2020. There is now limited time left to fully get to grips with the reporting requirements under this new regime.

Extension of corporation tax to UK property income of non-residents

From 6 April 2020, non-UK resident companies will be charged to corporation tax (CT) (at 19%) on income (e.g. rent) from UK property. Currently, such companies are charged to income tax (at 20%) under the non-resident landlord scheme.

This is not necessarily the 1% giveaway it seems. The change is being introduced so that, from April 2020, such UK property income will be subject to relatively new CT rules such as (i) the corporate interest deductibility restriction and (ii) restrictions on loss relief.

Loan charge review

The so-called "disguised remuneration" rules in Part 7A of ITEPA 2003 introduced a tax charge on employment income and disguised remuneration loans provided through third parties. These charges only applied, however, to transactions entered into from 9 December 2010.

In 2017 a new one-off charge to tax was introduced on any remuneration provided by a third party in the form of loans from 6 April 1999. Where such a loan was still outstanding at the end of 5 April 2019, the amount of the outstanding balance was to be taxed as employment income (the "loan charge"). The deadline for filing self-assessment tax returns accounting for any loan charge due (where not accounted for by an employer via PAYE) is 31 January 2020).

Following intense criticism of the loan charge, from MPs as well as charities and professional bodies, an independent review of the tax was carried out.

Just before Christmas, the government published the findings of the independent review, together with the government's response. 

The review found that the loan charge could result in "life-changing" amounts of money now being demanded from taxpayers. As the scope of the loan charge looked as far back as to 1999, the review noted that (i) the personal circumstances of affected taxpayers may have changed significantly since the loan was granted, and (ii) taxpayers may have justifiably assumed that the arrangements were no longer open to challenge.

The government has accepted all but one of the review's recommendations. The accepted recommendations include that (i) the loan charge should not apply to pre-9 December 2010 loans, and (ii) the charge should not apply to loans made between 9 December 2010 and 5 April 2016, which were disclosed to but not acted upon by HMRC. Accordingly a number of taxpayers may now be due a refund from HMRC – a belated Christmas present!

Planned corporation tax rate cut

This one did not even make it to the new year. The long-planned cut to the rate of CT, from 19% to 17% and due to take effect from April 2020, was reversed by the Government before Christmas.

The above is a summary only, and is not to be acted upon. For detailed advice, please contact me. My contact details are listed above.