The articles from the March edition of technical edge are listed below. To download a pdf version of the publication please click here
Deferring large tax payments
Changes to AIM Rules
iXBRL update
Capital gains on incorporating an overseas branch
Updated guidance on non-UK residence claims
VAT – good news on corporate finance deal costs
Proposals for CFC reform
Proposals for a Stewardship Code
PAYE and NIC penalties
New guidance for pension scheme trustees
VAT surcharge overturned as excessive
Deferring large tax payments
HM Reveune & Customs’ (HMRC’s) Business Payment Support service has been used by thousands of businesses seeking to spread the cost of their tax payments using a ‘time to pay’ arrangement. While the process is fairly quick, deferral of tax payments is not automatic as HMRC retains the right to refuse to offer a time to pay arrangement if it suspects that the taxpayer will not make the scheduled payments.
Although the scheme is intended to support small and medium-sized enterprises, there is no limit on the amount of tax that can be deferred. However, from 6 April 2010, HMRC will insist on a business supplying an Independent Business Review in support of an application to defer liabilities in excess of £1m.
The rationale behind this change is that such sums are usually owed by larger businesses and the decision making process for HMRC to approve such agreements should be on a more commercial footing. For example, where a commercial lender is approached for a loan for a similar amount, it is common practice for the lender to require the borrower to provide and bear the cost of compiling
an Independent Business Review to support the loan application. In common with other lenders, HMRC wants to be certain that the company applying for deferral will remain solvent and have sufficiently liquidity to make the tax payments throughout the agreement period.
When HMRC requires an Independent Business Review to be provided, the exercise must be conducted by a qualified Insolvency Practitioner or accountant. Detailed guidance on what HMRC will expect to see in such review reports is expected to be published during March 2010 but will at least include comment on:
- forecast cash flow, profit and loss account andbalance sheet
- bad debt provision, aged debtor & creditor lists
- details of bank lending (current and future)
- proposals for paying outstanding creditors
- analysis of the trading position of major suppliers and customers
- fixed assets – current valuations / realistic recovery details
- future trading plans and any restructuring plans.
Supporting businesses over many years, PKF’s corporate recovery and insolvency team can provide a comprehensive report on a company’s financial position and give advice on meeting HMRC’s criteria for deferral agreements.
If you would like to discuss support for a deferral application, please get in touch with our team through your usual PKF contact.
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Changes to AIM Rules
A new version of the AIM Rules was issued in February 2010.
Directors’ remuneration
Included in the changes are new requirements regarding disclosure of directors’ remuneration which are effective for accounting periods ending on or after 31 March 2010. Annual accounts must include details of directors’ remuneration earned in respect of the financial year by each director of the AIM company acting in such capacity during the financial year.
The details required are:
a) emoluments and compensation, including any cash or non-cash benefits received
b) share options and other long term incentive plan details, including information on all outstanding options and/or awards, and
c) value of any contributions paid by the AIM company to a pension scheme.
Electronic communication
Amendments to the guidance notes to AIM Rules 14 and 19 provide all AIM companies with the option to use electronic communication with shareholders. These changes have immediate effect.
For more information see http://digbig.com/5bbdsb
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iXBRL update
Respective responsibilities of management and auditors
The new requirement to file corporation tax returns, along with the tax computation and the company accounts, electronically and in iXBRL format applies for accounting periods ending after 31 March 2010 where the return is filed after 31 March 2011. The new rules have raised several questions surrounding the responsibilities of management and their advisers for ensuring the accuracy and
completeness of iXBRL tagging of financial information.
Responsibilities of management
Management is responsible for the completeness and accuracy of information filed with HMRC. However, where accounts are prepared (and tagged) by external advisers or where management uses proprietary software with in-built iXBRL tagging, it may not always be easy to establish the accuracy of the tagging. Management will need to consider the extent to which they want to perform or check iXBRL tagging themselves, or whether some sort of external confirmation of the accuracy of tagging should be sought.
HMRC has not yet made clear what action, if any, is likely to be taken in the event that a company’s filing contains iXBRL tagging errors, however, its has indicated it will operate a ‘light touch’ policy for the first two years of the new system.
Auditors’ responsibilities
Online filing in iXBRL format does not include an HRMC requirement for the entity’s statutory auditors to provide assurance on the iXBRL tagging of the information submitted. In addition, the Auditing Practices Board (APB) has issued Bulletin 2010/1 ‘XBRL Tagging of Information in Audited Financial Statements – Guidance for Auditors’ which explains that iXBRL tagging is not currently within the scope of an audit performed under International Standards on Auditing (UK and Ireland). A recent paper issued by the Staff of the International Auditing and Assurance Standards Board (IAASB) indicates that IAASB also takes this view.
Should management wish to obtain assurance on this matter from their auditors (or other advisers) they would, therefore, need to request that this be undertaken as a separate exercise to the audit.
For more details see http://digbig.com/5bbdjm
Responsibilities of preparers of accounts
Where accounts are prepared on behalf of the company by an external firm of accountants, they may enhance the service they provide by taking responsibility for ensuring that appropriate tagging is applied. This should not, however, be taken for granted: management should ensure that they have a clear understanding of the nature of the work that will be performed in respect of the accounts preparation, the costs involved and the respective responsibilities of management and the accountants concerned. These responsibilities should be clearly set out in an engagement letter to avoid misunderstandings and disputes.
Companies House
Companies may file with Companies House the same iXBRL tagged financial statements that are filed with HMRC. However, Companies House has announced that it has no plans at present to require iXBRL tagging of accounts or to make information available to its users in iXBRL format.
The future
Both the APB and the IAASB acknowledge that this situation needs to be kept under review and that expectations and responsibilities of auditors and accountants may change as the use of iXBRL evolves in response to the needs of the users of financial information.
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Capital gains on incorporating an overseas branch
It was announced on 6 January 2009 that changes will be made to rules which are designed to prevent capital gains arising on the incorporation of a UK company’s overseas branch.
Companies often decide to incorporate activities carried on by their overseas branches by transferring the trade and assets to a company operating in the same territory as the branch. In these circumstances, section 140 Taxation of Chargeable Gains Act 1992 (TCGA) is designed to provide for the postponement of any gains arising where the transfer is wholly or partly in exchange for securities consisting of shares, or of shares and loan stock in the transferee company.
Under existing rules, the corporation tax charge on the gain is postponed until the earlier of:
a) the disposal of the securities in the transferee company, without time limit, or
b) a disposal of the assets on which gains have been postponed by the transferee within six years of the original transfer.
If a) occurs before b), section 140(4) currently brings a proportionate part of the postponed gain back into charge by treating the postponed chargeable gain as additional consideration for the disposal of those securities.
The rule in section 140(4) produces the intended outcome if any chargeable gain on the disposal of the securities is chargeable to corporation tax. However, where the securities are exempt from tax, then, as the rules are currently worded, the postponed gain never falls into charge.
One of the circumstances in which the securities would be exempt is where they are shares which qualify under the substantial shareholdings exemption (SSE). There is, therefore, a provision in the SSE rules (paragraph 35 schedule 7AC TCGA 1992) which deems a separate chargeable gain to accrue on the disposal of the exempt share, equal to the gain previously postponed.
Another situation where no chargeable gain currently arises is where the trade and assets are transferred in return for qualifying corporate bonds (QCBs) in the transferee company. A disposal of QCBs is exempt from tax under section 115 TCGA. As there is no other provision which brings the postponed gain back into charge, any gain that has been postponed under section 140 which should be brought into account by section 140(4) will also be exempt. HMRC realised that this was a problem after receiving a non-statutory business clearance which set out planning involving a transfer of trade in return for the issue of loan notes.
HMRC has announced that revised rules will be introduced in Finance Bill 2010, applying to disposals of securities on or after 6 January 2010. These rules will deem a separate chargeable gain, equal to the postponed gain (or a proportionate part), to accrue to the transferor company at the time of any disposal of the securities. Any postponed chargeable gain that is deemed to accrue is in addition to
any gain or loss that accrues to a transferor company on a disposal of the securities themselves.
The overriding provision in the SSE rules referred to above will be repealed as this will no longer be required. For more details see http://digbig.com/5bbdjn
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Updated guidance on non-UK residence claims
HMRC has recently updated the guidance set out in its International Manual relating to companies claiming nonresidence in the UK. The updated guidance provides a useful reminder of the approach that companies and HMRC must take in respect of such claims.
Claims for non-UK residence often arise where the UK and another country both claim that the company concerned is resident in their territory. In order to resolve this conflict, double tax agreements (DTAs) often include a tie-breaker clause which determines in which territory a company is to be considered resident. The newly updated manual includes a list of DTAs (up to date as at 1 December 2009) signed by the UK which have a residence tie-breaker clause.
Where the tie-breaker clause refers to the company’s ‘place of effective management’ and the UK and overseas tax authorities disagree over the application of this concept, the company may face double taxation and must then seek a resolution under the mutual agreement article of the relevant treaty. In the meantime, the company must continue to selfassess its position. If it is confident that it is not UK resident then it may choose not to file tax returns during the mutual agreement procedure. However, if the company is eventually found to be UK resident it may then be liable to back-dated tax, interest and penalties.
Where a company claims non-UK tax residence HMRC will, as a matter of course, request a copy of a certificate of residence from the overseas tax authority. The Inspector must satisfy him or herself that the company should be regarded as resident overseas under the tie-breaker clause in the relevant DTA. The Inspector will also want to establish where the business of the company is carried on. If this is in the same territory in which the company has claimed residence, the claim is usually allowed. Where the Inspector finds that the business is carried on in a third country, he or she will investigate where the place of effective management of the company is. If the Inspector cannot establish that the place of effective management is in the territory in which the company is claiming residence, he or she may continue to treat the company as UK resident.
Where the company succeeds in demonstrating that it has migrated from the UK by virtue of transferring its place of effective management, the company must comply with the provisions of section 130 Finance Act 1988 to give notice of migration. This section requires that the company provides HMRC with:
- notice of the time that the company intends to cease residence in the UK
- a statement of the amount of tax it believes is payable in respect of periods beginning before that time (including PAYE and income tax it is required to deduct at source) and
- details of the arrangements in place for payment of that tax.
HMRC may dispute the amount of tax outstanding and may refer the matter to the Tax Tribunal. Once the amount of tax outstanding has been agreed, the company must put arrangements in place to pay the tax and HMRC must approve those arrangements.
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VAT – good news on corporate finance deal costs
Despite making no public announcement of a policy change, HMRC has recently begun to oppose recovery of the VAT incurred on corporate finance deal costs using a variety of different arguments. This has had the effect of substantially increasing costs in what is already a depressed market.
However, the taxpayer is fighting back. In October 2009, HMRC lost a tribunal case brought by My Travel in respect of deal costs incurred on tripartite contracts with banks/investors. HMRC has now been defeated in a case considering another aspect of corporate finance, this time brought by BAA Ltd.
The BAA Ltd case
BAA was taken over by Ferrovial, a Spanish transport infrastructure business. Ferrovial created a new company to act as a Special Purpose Vehicle (SPV) to acquire BAA and, once the deal was completed, the SPV was added to the BAA VAT group registration. BAA then attempted to recover VAT of £6.7 million on legal fees and other costs associated with the deal. HMRC disallowed the claim, arguing that there was no firm link between the SPV’s costs and the VATable activities of the BAA companies.
Finance deal costs an overhead
Happily, the Tribunal ruled that a VAT group, including an SPV and the company it has acquired, can treat corporate finance deal costs as overhead costs. Therefore, VAT on those costs can be recovered to the extent that the group’s activities as a whole are subject to VAT.
The tribunal and HMRC counsel also agreed a hypothetical point that the SPV’s VAT recovery would not have been challenged had it registered for VAT in its own right then invoiced the deal costs to subsidiaries as management charges. It was suggested that this might be a more robust structure to support VAT recovery than a group registration.
Can I get my deal cost VAT back?
If you have been denied VAT recovery in these circumstances in the last 3-4 years, you may be able to claim reimbursement from HMRC. HMRC is expected to appeal the BAA and My Travel decisions and a third case on deal costs (brought by Alliance Boots) is expected to be heard at tribunal shortly. This might delay VAT claims in the short term, but making a protective claim now will prevent any VAT in dispute falling foul of the relevant time limits.
Alternatively, if you are planning a corporate finance deal in the near future, you should ensure that the appropriate VAT registrations are put in place in time to secure entitlement to VAT recovery.
Please get in touch with your local PKF VAT contact for advice on appropriate VAT-efficient structures.
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Proposals for CFC reform
HM Treasury and HMRC published a consultation document on 26 January 2010 relating to ongoing proposals for the reform of the controlled foreign companies (CFC) legislation. Based on the proposals, it appears that the CFC rules are likely to operate in broadly the same way as they do currently, but with some changes introduced in order to better achieve the Government’s stated aims and objectives.
Significant emphasis would be placed on a redesigned exempt activities test which is intended to exempt genuine trading activities from the rules where there is little or no risk of erosion of the UK tax base. Whilst it is intended that the profits of such companies would be exempt from a CFC charge, a charge may apply to ‘passive’ income earned by such companies where this is not incidental or ancillary to the company’s main activities.
It is anticipated that there will be separate rules for finance and treasury companies, reinsurance and property subsidiaries and those holding group intellectual property outside the UK. In each case, specific rules have been proposed to help determine to what extent overseas profits from these functions are attributable to the UK.
Going forward, there will no longer be an assumption that activities are being carried on offshore for the purpose of avoiding UK tax. Indeed, it has been stated that the Government intends to take a pragmatic approach to ensure that the new regime is no more restrictive than the current one.
Many of the existing exemptions may also be simplified so that they are easier to understand and apply. For example, the current CFC rules only apply where the overseas company concerned suffers a ‘lower level of tax’. This is determined by comparing the actual tax liability in the territory where the company is resident with the tax it would have suffered in the UK, having recomputed profits under UK
tax law principles. A proposed new exemption would instead involve a comparison of the tax rates and rules in the UK and the host territory. It has been indicated that this new test would also allow the ‘excluded countries list’ to be repealed.
Draft legislation is expected to be published later in 2010 with a view to legislating in Finance Bill 2011. Comments on the proposals are invited until 20 April 2010 – for more information, see http://digbig.com/5bbdjj
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Proposals for a Stewardship Code
In November 2009, Sir David Walker published his final review of the corporate governance of banks and other financial institutions. As expected, the review recommended that the Combined Code should be split into a Corporate Governance Code and a Stewardship Code. It also recommended that the Code on the responsibilities of institutional investors published by the Institutional Shareholders Committee (ISC) should be used as the basis for the new code.
The Financial Reporting Council (FRC) agreed to take on responsibility for adopting and maintaining the proposed code and is seeking views on its implementation.
The FRC’s stated aim is to bring about more effective engagement between companies and shareholders. In announcing the consultations, the Chairman of the FRC,Sir Christopher Hogg, said that the benefits of the code ‘should lead to sustainable and enduring improvements in the governance and performance of UK listed companies and greater clarity in the respective responsibilities of asset
managers and asset owners, which will assist the ultimate owners to hold to account those acting on their behalf’. The proposed code sets out principles for institutional investors to apply in discharging their stewardship responsibilities. These encompass the disclosure of stewardship policies, the monitoring of investee activities and setting clear policies on voting activity.
The FRC is seeking views on the following questions:
- Whether or not the code published by the ISC in November 2009 provides a suitable basis for the Stewardship Code, in either its existing or an amended form?
- What the responsibilities for engagement of institutional shareholders and their agents are to the beneficial owners whose money they manage?
- How adoption of the standards in the code by UK and foreign investors can be encouraged?
- What information investors should disclose on their engagement policy and practice?
- What arrangements should be put in place to monitor how the code is applied?
Consultation ends on 16 April 2010 and the outcome of the consultation will be announced in May or June. For further details see http://digbig.com/5bbdjk
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PAYE and NIC penalties
For many years, if payments of PAYE and NIC were delayed but made by the end of the appropriate tax year, no penalties or interest would be charged as a result of the late payment. The only exception related to larger companies covered by the Mandatory Electronic Payment rules. That is all to change from April 2010 onwards.
New penalty legislation introduced by Finance Act 2009 covers most direct taxes including the following payroll taxes:
- Income tax and Class 1 NICs collected via PAYE
- Class 1A NICs on benefits
- Class 1B NICs
- CIS deductions
- Student Loan deductions.
Penalties must be assessed by HMRC, usually within two years of the missed deadline, although in limited circumstances, it could have a little longer. Despite the fact that the legislation says HMRC ‘must’ assess the penalty where the conditions are met, in its Frequently Asked Questions on this topic the Revenue has announced that ‘HMRC will apply penalties on a risk basis’ rather than
using an automatic assessment procedure. Whether or not such penalties become as commonplace as VAT default surcharges remains to be seen.
The first penalty notices will not be issued until April or May 2011. In the future, once the system is up and running penalties could be issued during the year as well.
Penalties
The penalties are based on the number of defaults (late payments) in the year and are shown in the table below.
|
| 1 | No penalty unless paid more than six months late * |
| 2 -4 | 1% | Total amount that is paid late in the tax year
(ignoring the first late payment in that tax year). |
| 5 -7 | 2% |
| 8 - 10 | 3% |
| 11 or more | 4% |
|
| Any number | 5% penalty on each amount of tax paid more than
6 months late. | Total amount that is paid late. |
| Any number | 10% penalty on each amount of tax paid more than
12 months late. |
It should be noted that for those employers that fail to make payments on a long-term basis, the additional penalties of 5% on amounts paid over six months late and 10% on amounts paid over twelve months late are on top of the penalties calculated on the number of defaults in a year.
Class 1A and Class 1B NIC
There is a separate regime for Class 1A and Class 1B National Insurance Contributions (NIC), which do not become due until after the end of the tax year.
For any payment that is not made within 30 days of the due date, there will be an immediate 5% penalty. There are then further penalties of 5% for amounts unpaid six months after the due date and 5% more for amounts still unpaid 12 months after the due date.
Reasonable excuse
No penalty will be charged where a taxpayer has a reasonable excuse for failure. In its Frequently Asked Questions, HMRC expresses a view that in order to qualify for this relaxation, there would need to be a situation that meets the following criteria:
- the situation should be unusual
- the taxpayer could not reasonably have known that the event would happen, and
- they could not do anything to prevent it.
The most obvious example might be a fire at the company’s premises.
Unusually, the legislation considers what would not constitute a reasonable excuse. In particular, it identifies:
- inability to pay
- where the employer relies on someone else to pay tax on their behalf
- a situation where a reasonable excuse existed but has ceased some time before.
However, it is accepted that if there has been a reasonable excuse and the reason for it has only just ended, no penalty need apply.
The fact that a company is in financial difficulties is not a good enough reason to forego the penalties. However, here a company is negotiating with the Business Payment Support Service, a penalty will not be charged if they have negotiated a ‘time to pay’ arrangement, provided that the employer is abiding by that arrangement. This exemption applies fromthe date that the taxpayer approaches HMRC, rather than the date that they sign the agreement.
The legislation allows appeals in circumstances where:
- you do not agree that you are liable to the penalty
- you disagree with the amount charged
- HMRC do not agree that you have a reasonable excuse.
Groups
This legislation does not envisage the existence of groups as such – it is predicated on PAYE references or registrations. Therefore, if a group of companies has a single registration, the penalty regime will operate merely on the basis of that registration. However, if each company in the group has a single registration then penalties will only apply to those that fail. There is no means of offset if one company overpays PAYE or NIC and another underpays it.
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New guidance for pension scheme trustees
Knowledge and understanding
The Pensions Regulator has issued a revised Code of Practice 07 Trustee Knowledge and Understanding which is now in force.
The original Code and supporting guidance set out the regulator’s view of what trustees needed to know and understand about their schemes. These requirements have not changed significantly. The revised Code, however, now makes it clear that:
- in order to know the essential elements of the scheme’s trust documentation, trustees are required to read it all thoroughly
- trustees are expected to use the Regulator’s trustee toolkit unless they can find an alternative learning programme.
An individual trustee is required to have a degree of knowledge and understanding that is appropriate for enabling him or her properly to exercise that function. The extent and depth of knowledge required will depend on individual scheme circumstances such as the benefits that schemes provide, the powers that are given to trustees by the trust deed, the size of the fund, the nature of the investments and the type of sponsor. Guidance supporting the Code has also been revised and is issued in three versions relating to:
- defined benefit schemes with associated defined contribution arrangements
- defined contribution schemes
- small (12-99 members) fully insured defined contribution schemes.
The principal change from previous guidance is a reduced requirement for trustees of small fully insured defined contribution schemes. Trustees of schemes with less than
12 members remain exempt from the requirements.
Internal controls
The Regulator has issued a consultation document on revised guidance to its Code of Practice 09 on internal controls. The code remains unchanged but the guidance has been revised to support smaller schemes, and to give more practical guidance and clarity about the Regulator’s expectations.
The Regulator identified seven risk areas where improvement was needed and which should be included in the trustees’ assessment of risk and subsequent controls framework.
These are:
- lack of knowledge and understanding
- conflicts of interest
- ineffective relations with advisers
- poor record-keeping
- deterioration in employer covenant
- investment risk
- ineffective retirement process.
The guidance addresses each of the risk areas and sets out the activities and controls that the Regulator would expect trustees to undertake.
Scheme records
The Regulator has also recently announced that it intends to take a tougher approach on poor record-keeping and has published a consultation document setting out standards for member records and requiring schemes that fall short to take steps to improve their performance.
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VAT surcharge overturned as excessive
A VAT tribunal has unexpectedly quashed a punitive default surcharge imposed on the late submission of a VAT return. Businesses that have been heavily surcharged by HMRC in the last 3-4 years may be able to get a refund.
Since 1986, HMRC has imposed default surcharges on the late submission of VAT returns and/or late payment of VAT. Penalties are calculated automatically, based on a flat percentage of the unpaid VAT. Late is late, and full penalties are applied even if a return or payment is only one day overdue.
The Enersys Holdings UK case
A large energy company, operating non-standard tax periods, misunderstood the due date of its VAT return and submitted the return and payment just one day late, resulting in a surcharge of over £130,000. In a surprising, yet very welcome decision, the tribunal has ruled that the penalty should be withdrawn, stating that no reasonable court or tribunal would impose such a high penalty for an error of this kind.
What could this mean?
This is the first time that a tribunal has quashed a default surcharge on the grounds of proportionality. There may now be an opportunity for businesses that believe they have been excessively surcharged in the past to seek recovery of those amounts from HMRC.
Matters are at an early stage. The Enersys decision does not set out clearly quantifiable limits to decide where the line should be drawn between a fair surcharge and an excessive one and HMRC may well appeal against the tribunal’s ruling. Despite this, prompt action is advised as this would at least ensure that a potential reclaim does not fall foul of the relevant time limits. If your business has incurred substantial surcharges since April 2006, speak to your local PKF VAT advisor to consider the viability of a claim.
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