A&M Taxand London Asset Managers Briefing Note: Volume 2
Volume 2: September 2020
Market updates, call for evidence on Capital Gains Tax (CGT), pension tax relief, guidance on DAC 6, changes for non-resident company landlords, 30-day limit for paying CGT on UK residential property.
Market update from Daniel Parry, Managing Director
As activity starts to pick up again after people grabbed what summer holiday they could where they could, valuations are still topical. We are seeing a number of funds issuing carry to members and employees or restricting carry allocations and undertaking fiscal valuations now in the expectation that they will be low following dips in the market since the COVID-19 pandemic. In our Funds Webinar on Wednesday 9th September, Richard Bibby, Managing Director in charge of our valuations team, talked through commercial and fiscal valuation approaches and the effect of the pandemic on them.
As funds start to regenerate their plans to raise capital, fund structures are a popular topic. We held a good discussion on this topic with colleagues from Atoz Taxand, William Fry Taxand and Sarah de Ste Croix from Stephenson Harwood in our Funds Webinar, covering the tax, legal and perception issues around choice of jurisdiction. We discussed, amongst other topics, the potential conflict between DAC 6 reportable structures and the arguments for Treaty access based on a Principle Purpose Test, investor concerns about DAC 6 reporting and how substance in multi-jurisdictional fund structures can be affected by the restrictions on executives’ travel due to the pandemic.
In terms of popularity of structures, Luxembourg seems to be a strong favourite in the upper mid-market, particularly where there will be material EU marketing to be done or certain EU bodies investing. However the UK is still popular for smaller funds investing in the UK or those without the need for EU marketing. The number of fund manager vehicles being set up in Jersey is still rising year on year and some are wondering whether it or the UK might become an alternative to Cayman for fund vehicle location if the blacklisting issues in Cayman cannot be resolved.
Office of Tax Simplification’s (“OTS”) “Capital Gains Tax - call for evidence”
In July, the Government instructed the OTS to issue a call for evidence to review the UK capital gains tax (“CGT”).
The OTS have split this call for evidence into two sections and have requested views on the following:
- The principals of CGT and whether its scope and reach in the context of the wider tax system continues to be appropriate (“section 1”); and
- Simplification opportunities across a number of areas which commonly affect individual tax payers, business owners and investors including rates, reliefs and exemptions and how it interacts with other parts of the tax system (“section 2”).
A&M have submitted a response to section one of the call for evidence and are due to submit a response to section two by 12 October.
Pensions tax relief administration: call for evidence
In July, the Government also issued a call for evidence to review the administration of pensions tax relief.
The government has expressed concerns regarding the potential for low-earning individual’s take- home pay to be affected by the method of pensions tax relief operated by their pension scheme.
The call for evidence seeks to gather views on the operation of the two ways in which pensions tax relief is administered, being net pay and relief at source, and what improvements can be made to address the discrepancy in outcomes for low earners.
Guidance on DAC 6 implementation and reporting
In May 2018, the ECOFIN Council adopted Council Directive (EU) 2018/822 (“DAC 6”), which amends Directive 2011/16/EU by introducing a mandatory and automatic exchange of information obligation in the field of taxation in relation to reportable cross-border arrangements. These are arrangements that concern more than one EU country or an EU country and a third country. For this purpose, the UK is still within the scope of the rules. DAC 6 imposes on intermediaries the obligation to report cross-border arrangements that meet at least one of the hallmarks specified in the Directive.
The categories of hallmarks are listed below:
- Generic hallmarks linked to the main benefit test;
- Specific hallmarks linked to the main benefit test;
- Specific hallmarks linked to cross-border transactions;
- Specific hallmarks concerning automatic exchange of information and beneficial ownership; and
- Specific hallmarks concerning transfer pricing.
DAC 6 is widely drafted with certain hallmarks being subject to a main benefit test, where one of the main benefits of the arrangement is the obtaining of a tax advantage, whilst others do not have this main benefit test.
Member states have enacted DAC 6 into their local legislation with the rules taking effect from 1 July 2020. However, the rules will apply retrospectively to cross border arrangements which meet the disclosure conditions and are implemented from 25 June 2018 onwards. Therefore, it will apply to arrangements implemented since 25 June 2018 with the first reporting due by 28 February 2021 (delayed from 31 August 2020 due to COVID-19). For arrangements which were made available for implementation, or which were ready for implementation, or where the first step in the implementation takes place between 1 July 2020 and 31 December 2020, reports must be made within the period of 30 days beginning on 1 January 2021. Reportable arrangements from 1 January 2021 must be reported within 30 days of the earlier of; the date when the arrangement is made available, the date it is ready for implementation or the date when the first step is implemented.
Should there be a reporting obligation, the information to be reported includes details of the taxpayers and intermediaries, outline of the arrangements and date of first implementation, relevant local law and applicable hallmarks, identification of the member states that the arrangements affect or relate to and the value of the arrangements. It should be noted that the information reported will be exchanged between the relevant member country tax authorities.
Under certain circumstances, the obligation to report the arrangements may rest with the taxpayer e.g. where the relevant intermediary is subject to legal professional privilege.
Changes for non-resident company landlords
From 6 April 2020, non-UK resident company landlords (including non-resident companies investing via a collective investment vehicle) will need to pay corporation tax instead of income tax on profits from UK property.
If you are affected you should be automatically registered for corporation tax and sent a Company Unique Taxpayer Reference (“UTR”) if you have an existing UK property business as of 5 April 2020.
If you have not received your UTR yet or you already have a Company UTR, you should contact HMRC directly. Without a UTR, you cannot submit a UK corporation tax return.
Moving from the income tax basis to the corporation tax basis leads to many additional considerations:
- Corporation tax return deadline;
- Corporation tax payments;
- Corporate interest restrictions;
- Derivatives;
- Hybrids; and
- Tax losses.
Additionally, there are transitional rules to consider when calculating your corporation tax if you have an existing UK property business.
New 30-day limit for paying CGT on UK residential property
From 6 April 2020, UK residents disposing of UK residential property which cause a chargeable gain and subsequently a CGT liability will need to be reported and paid within 30 days of completion.
The UK resident can use a reasonable estimate to calculate the chargeable gain and CGT due if the information is not yet available, with amendments within 12 months to the CGT return allowed by HMRC.
The CGT return must be completed using HMRC’s new online service for CGT on UK property.
If the deadline is missed, late filing penalties and interest will likely apply.
However, due to COVID-19 HMRC did not issue late penalties on any transactions completed between 6 April and 30 June 2020, provided the gain was reported and any tax due paid by 31 July 2020. Anyone who completes the sale of a property from 1 July 2020 onwards has 30 calendar days to report and pay the tax due.
Transactions completed from 1 July 2020 will receive a late filing penalty if they are not reported within 30 calendar days.
Interest will be charged if the tax remains unpaid after 30 days for all transactions from 6 April 2020.
