1.    Sovereign immunity reform consultation 

The UK government has recently issued a consultation (on 4 July 2022) to narrow the categories of sovereign immunity from taxation. Currently, heads of state, foreign governments and government entities i.e. central banks, sovereign wealth funds and government pension schemes are exempt from UK corporation tax, income tax and capital gains tax on all UK source income and gains. 

It is proposed that the exemption would be revised to cover UK source interest income only from April 2024 (provided this income does not relate to UK trading activities). If enacted, these changes are wide-ranging. Investments in UK real estate will be impacted as they are usually held through tax transparent entities such as partnerships or JPUTs. Investments in other assets will be impacted depending on the holding structures used. 

The UK government said it does not expect the proposals in the consultation to negatively impact overall investment. A&M has reviewed the proposals and is pulling together a detailed response to send on by 12 September 2022. 

2.    ATAD 3

The EU Anti-Tax Avoidance Directive 3 (“ATAD 3”) is proposed to take effect from 1 April 2024. Broadly, it seeks to address the misuse of investment structures that do not perform any actual economic activity, commonly known as shell companies. The focus is on legal entities involved in cross-border activities which in reality, do not conduct economic activity. It outlines gateway indicators which help determine whether an undertaking is at risk of being a shell company. If an undertaking is at risk of being a shell company, then it is subject to further reporting to determine that it meets minimum substance requirements. 

ATAD 3 could therefore affect EU resident holding companies which enjoy double tax treaty benefits but do not perform any actual economic activity. 

It is important for businesses to review their structures to determine whether ATAD 3 would have an impact and if so, how to deal with the impact prior to it taking effect. If you would like us to help you navigate through ATAD 3, please feel free to reach out to us to discuss. 

3.    Recent case on the salaried member rules, Bluecrest Capital Management v HMRC

The recent decision of the First-tier Tribunal (FTT) in BlueCrest Capital Management (UK) LLP v HMRC (29 June 2022) is the first case which considered the salaried member rules in the context of an asset management LLP. We have provided further details of the case here and how A&M can help. This is a significant case as so far, there has been no judicial consideration of the salaried member rules and businesses have had to rely on HMRC’s guidance only.

In summary, the FTT found that certain of BlueCrest’s members with responsibility for managing key investment portfolios, had ‘significant influence’ over the affairs of the LLP, even though their influence was financial rather than managerial. This decision is welcomed by asset management LLPs. It is yet to be seen whether HMRC will appeal the decision.

4.    British Venture Capital Association’s (“BVCA”) ongoing dialogue with HMRC regarding the changes to carried interest guidance

HMRC made an update to the Investment Funds guidance on 19 January 2022 to indicate that “tax” in relation to s. 103KE of the Taxation of Chargeable Gains Act (“TCGA”) 1992, which prevents carried interest from being taxed twice, is limited to UK taxes only. This means that UK taxes should be the only taxes which can be credited under the CGT carried interest rules. Fund executives who are UK / US taxpayers will be affected.  

We understand that the BVCA is in ongoing discussions with HMRC and is working on a solution for UK/ US taxpayers. 

5.    Basis period reforms coming in from April 2023 affecting unincorporated entities such as LPs and LLPs

The proposed reforms applicable from 1 April 2023 will change the basis period for all unincorporated businesses to the end of the tax year, currently 5 April. The reasons for the reforms are to simplify the assessment for trading profits and align trading profits with other sources of income as part of the government’s wider initiative for Making Tax Digital (“MTD”). MTD is mandatory for unincorporated businesses from April 2024. 

Currently, the basis period for a tax year applicable to all unincorporated trading businesses including sole traders, partnerships and LLPs, is the 12 months ending with the accounting date in that tax year. There are special rules for the opening and closing years and when there is a change in the accounting date. Overlapping basis periods can be created i.e. in the early years of a business or on joining of a new member which results in profits being taxed twice and these are reduced by way of overlap relief i.e. when the business stops trading or when a member leaves. Although complexity is increased, the current rules enable the deferral of tax when profits are rising.  

To discuss how these reforms will impact you or if you would like support in helping you comply with these changes, please feel free to reach out to us to discuss.

 6.    Recent update from Stonehenge Fleming on how they proactively manage private wealth for investment management professionals

We thank Nicholas Toubkin and Tristan Dolphin of Stonehage Fleming for providing an update to our private client team explaining how they proactively manage private wealth for investment management professionals. To find out more on how A&M work with private clients and their wealth advisors, please contact A&M Tax Director, Jonathan Brecker. 

7.    Demands and dynamics of payroll – update from the reward and employment team

With the escalating cost of living crisis backdrop and more news hitting the headlines of employers failing to deliver employee pay, there can never be a more critical time to maintain and sustain business processes and governance over payroll.

Our A&M experts lay out their wealth of experience and knowledge when it comes to pay and benefits, and how employers can head off unnecessary tension and worry from their employees here.