Below, Dr Michael Thoene delves into his own recent research to explain why many tax breaks governments offer as incentives can amount to little or no benefit to the intended purpose.
Tax breaks are when the government give you a reduction in your taxes. It can come in a variety of forms, such as claiming deductions or excluding income from your tax return, the main examples are pension contributions, charity donations and if you’re self-employed. They are an important, broadly applicable and potentially efficient instruments for creating incentives for private activities and promoting policy objectives, for example: transport policy environmental policy and many sectoral or horizontal areas of policy, however, I was intrigued to see how effective these tax breaks are because, firstly, tax breaks are not included in government budgets and secondly, have tend to exist for a long time.
I conducted a large-scale evaluation with the University of Cologne of 33 German tax breaks that add up to 7.4 billion euros, focusing on the reductions and exemptions provided for energy and electricity duty, car tax and income tax. These benefits have diverse objectives, including climate protection, housing, worker participation and more. Of these 33 tax breaks, 10 measures got an overall rating of ‘weak’ because they fell short of their expected objectives. These 10 measures add up to a total of just under one million to well over one billion euros per year.
When examining the weak tax benefits, my study found that the objectives of these measures are no longer appropriate in view of the current subsidy policy. In fact, nearly all of the weak tax benefits had been around for a while and it seems that they were introduced and more likely developed, despite it not working, rather than being replaced with a more effective system. Furthermore, the design of the concessions were not all suitable. If the tax benefits had existed for a long time, without explicit intervention, there will have been social and economic changes meaning that from an economic perspective there is no longer evidence to justify the need for state intervention and that these measures either no longer achieve the objectives of the benefits or were not the most cost-effective method.
The study also looked into the transparency of the tax reliefs and found that they were not accessible as they should be to the public. Transparency is needed to provide pressure to justify and control options in the systems, it is a way to provide politicians and the general public with a good basis of information so that politicians can make informed choices regarding policies. Without transparency, the benefits became ineffective as there is no way to keep them in check. In addition, the tax benefits were evaluated on sustainability. The ones that performed badly were the benefits that had no effect on the UN’s 17 Sustainable Development Goals. Climate change is a very important topic and now people are becoming more aware, they want governments to do something, which is why this new assessment weighs very heavily in the overall score of each benefit.
In sum, the study highlights that if not monitored correctly, most of the benefits miss their purpose or lead to deadweight effects. A singular recommendation on how to improve these tax benefits would be impossible, each concession has their positives or negatives but what can be said is that they need to be reformed or abolished urgently. In their current state, these tax benefits will be very detrimental, losing billions of euros that could be used elsewhere.
This week we learned that Flybe, though a tenth the size of Thomas Cook, is in a similar boat and facing the prospect of laying off over 2,000 employees to save its future. Sky News reported that UK-based Flybe is currently trying to secure financing so as to avoid the job cuts.
Administration and accountancy firm EY are currently on standby, but the BBC said chancellor Sajid Javid and the business and transport departments are due to discuss the possibility of a bailout, not by method of financing, but by potentially cutting air passenger tax duty.
Air passenger duty is charged per passenger on each flight and is a government taxation, which if removed could save the firm from its financial woe.
Flybe operates around 75 planes in over 70 airports around Europe. Almost two in five UK domestic flights are operated by Flybe. 2,000 are at risk if the company goes under. This news comes just a year after it was already saved by a consortium led by Virgin Atlantic.
Those who are against it say that it is a double tax and that it's a basic human right to provide for your children, which the government should have no say in.
A survey of 3,000 Brits by William May, retailers of luxury vintage watches and fine jewellery, questioned what people think the threshold should be on inheritance tax (currently at 40% on estates above £325k). Considering how rapidly house prices have increased over the past few years, many may argue that an inheritance tax free threshold of £325,000 doesn’t seem at all high, and that it should increase. They were also asked whether they think inheritance tax should exist at all.
It was found that overall, Brits feel the tax-free threshold should be raised to £679,000 – more than double the current value. And on average, nearly 3/4 (70%) do not agree with the principle of taxing people on their inheritance...
Interestingly, the survey also found that over half (58%) of respondents did not know what the current inheritance tax rate is.*
The survey found that 74% of respondents feel that personal possessions that might be included in the inheritance tax, such as jewellery, should be excluded.
Moreover, nearly two-thirds (60%) agree that the inheritance tax threshold should be correlated to house prices.
Nearly two-fifths (39%) of Brits admit they wouldn’t declare gifted jewellery from a parent in order to avoid paying the inheritance tax on it.
Respondents were also asked what items they would like to be exempt from inheritance tax and it was found that over one-third (34%) said land. 20% felt jewellery should not be taxed; 18% said artwork; 16% believed cars should be exempt; 7% said vintage watches, and 5% said shares should also be inheritance tax-free.
“Luxury possessions like fine jewellery and vintage watches are priceless in terms of sentimental value, and often in terms of physical value too,” says Nick Withington of William May. “If you’re thinking about investing in a timeless piece, it’s worth planning ahead so it can be passed down (legally) free of inheritance tax.”
*According to UK regulations, inheritance tax is defined* as a tax on the estate – this not only included property and money, but also personal possessions such as family heirlooms and jewellery. Potentially this means that people might be forced to sell items passed down of sentimental value, just to pay the tax on it. While there are exceptions, the current standard inheritance tax is 40% and is charged on the portion of the estate that is above the tax-free threshold of £325,000.
From the characteristics of MITC fraud arrangements to the tangible damage that such schemes can cause, below Jérôme Bryssinck, Head of Government Solutions at Quantexa, talks Finance Monthly through the options for fighting VAT carousel fraud.
Europol believes that missing trader intra-community (MITC) fraud (usually known as ‘VAT Carousel’ fraud) costs authorities around €60 billion annually. MITC is a highly sophisticated form of fraud which can be carried out due to the way that pan-European legislation means cross-border trade may be carried out VAT free. Due to the complexity of the schemes, MITC is hard to fight, and entire legal businesses frequently become unwitting participants in the carousel. Innovative technologies and new policies must be used to tackle this fraud robustly.
By its nature, the EU trading bloc enables the converging of regulations and standards and the removal of barriers to international export, in order to make trade within the bloc simpler and less expensive. MITC fraud works by taking advantage of the EU legislation around cross-border transactions- traders receiving services or goods from an entity in the EU do not have to pay VAT, as intra-community transactions are VAT exempt.
To create a ‘carousel’, a criminal will create or buy companies to acquire goods (let’s call them Company A in this example). These companies will next buy goods from a company in the EU (Company B). Company A will then purchase goods from Company B, with no VAT being due. Company A will then peddle these goods to a different company (Company C). This company could be a legitimate one, or a company managed and set up by the criminals. Here, VAT will be added to the sale price. Since the goods have been sold domestically, Company A must legally declare the VAT it has included on the goods, and pay this to HMRC. In the case of MITC fraud, though, Company A will vanish, and the VAT will not be paid. The goods will then be passed through many other companies which function as a buffer so as to complicate any potential investigation. Next, a company (Company D) will send these goods out of the EU and reclaim the VAT that was not in fact ever paid to HMRC. This loss of tax revenue negatively affects the provision of crucial public services for the country including education, policing and healthcare, and also increases the tax obligations of honest taxpayers.
Because millions of euros worth of goods are traded daily, it is hard to identify illegal activity amongst so much legal activity. Combatting VAT carousels is made more difficult by the way that member states need to coordinate across separate national borders. The data needed to investigate MITC fraud criminals will commonly be stored in different forms and will be owned by disparate regulatory or government bodies across the EU. In many cases, ‘carousels’ will already have dissipated by the time authorities realise criminal activity has occurred, allowing the criminals to remain unidentified and the money to have already been lost. Those seeking to fight MITC fraud are therefore unlikely to be able to act to prevent such crimes from being carried out.
Technology must be leveraged more effectively to empower tax departments to proactively tackle MITC fraud. A priority is to speed up the sharing and analysing of data at a European level. Data analytics technology should be used to better comprehension of the broader context of each individual company, so that tax departments build a bigger picture of the trades that are being carried out.
Technology must be leveraged more effectively to empower tax departments to proactively tackle MITC fraud.
Such technology would be able to identify anomalies and red flags, such as if a company with an annual turnover of €200K was able to order €2 million’s worth of goods. Under an improved system of data gathering and sharing, VAT information would be collated and interpreted by machines, and AI would be utilised to create risk models that would help improve the accuracy of identifying anomalous results. This information could be shared with a case handler, who would be able to act more swiftly to investigate criminal activity.
As well as this, each EU Member State needs to improve their operational and analysis capabilities. The pace at which each state reacts to the flagging of anomalous results needs to improve if action will be taken effectively. At present, many member states do not have the technical means required to enable them to bring together external data. Some member states must also grow the amount of information they are gathering from traders. VAT receipts, for example, could be collated in a machine-readable format which would improve data collection.
VAT Carousel fraud has so far proved difficult for EU Member States to combat. If we are to prevent criminals benefiting at the expense of the taxpayer, we will need a pan-European, multi-pronged approach. The amount of information gathered and collated about company and trade accounts must increase, and we also need to make use of innovative technologies which will facilitate the garnering of actionable insights from the vast amounts of data collected. Only by enacting such a systematic approach will be truly be able to tackle this crime.
Making Tax Digital (MTD) is the Government's ambitious plan to transform the way taxpayers interact with HMRC. With only a few exemptions, VAT-registered businesses trading over the VAT threshold of £85,000 are required to keep records in a digital format, ensure that the transfer or exchange of VAT information is digitally linked and submit their VAT return information to HMRC using MTD compatible software.
HMRC estimates that 1.2 million businesses are subject to the MTD rules, which became law for VAT periods starting on or after 1 April 2019 (or 1 October 2019 for organisations which are deemed to be more complex). Depending on their VAT return stagger, a significant number of these will be required to submit their first quarterly VAT return to HMRC using software by the 7 August this year.
Yet figures just released by HMRC show that the financial sector has been one of the slowest to sign up, with 75% of firms yet to register.
Commenting on the new figures, John Forth, the head of RSM's financial services indirect tax practice said: “While it's not clear why financial firms have been so slow to sign up, these figures are pretty shocking.
“It is possible that HMRC have overestimated the size of the problem due to the complexity of the VAT regime. Alternatively, they may have failed to recognise that many financial services organisations will be regarded as complex and will therefore be subject to the 1 October deadline. As a result, we may see this figure come down rapidly over the next few months.
“While HMRC have stated that they won't issue filing or record keeping penalties during the first year, financial firms should not see this as a reason not to register. MTD represents a major change to the way businesses report and pay their VAT, and businesses need to make sure they are ready.
“Currently, HMRC are dealing with 10,000 registrations every day. Clearly there are tens of thousands of VAT-registered financial businesses that need to get their skates on and register at the earliest opportunity.”
If you run operations across multiple jurisdictions you may need to invest in the support of an experienced tech companies that can help you connect the dots.
Steven Smith, Europe Proposition Lead, Corporates, at Thomson Reuters, looks at the challenges that businesses face in being tax compliant across indirect tax, corporate tax returns and year-end accounts across multiple jurisdictions.
Governments around the world are rapidly moving away from the established ‘old’ standard of gathering taxpayers’ information. These changes are not uniform and vary from country to country, with, for example, Spain requesting invoice details every four days, Hungary demanding them at the point of invoicing, and Italy adopting a clearance model (with Greece following suit in 2020).
Fraud and tax avoidance are the driving forces behind governments refining tax processes. By adding transparency to the invoicing process, tax authorities can quickly identify where one party or another may be cheating the system. In countries, such as India, goods and services taxes (GST) have been introduced, which enable authorities to see both sides of a transaction. China has also introduced a very similar process. It really boils down to compliance and data. If a multinational organisation is striving to comply across different jurisdictions, it must be sure that its data is correct, even before an invoice is raised. Are the buyer details correct? Does the invoice meet the criteria to calculate the correct VAT liability? All of this data needs to be present before the finance department starts raising invoices.
Tax avoidance in the UK is not on the same scale when compared to countries like Brazil and Poland. Indeed, HMRC believes that UK corporate taxpayers are far more compliant and as a result it is very unlikely to introduce intrusive reporting such as Security Industry Association (SIA), however, there is still a gap that needs to be filled so initiatives such as Making Tax Digital (MTD) are only the start of more detailed information requests.
But meeting MTD in the UK is just one thing. It’s a very different story for multinationals. Many are firefighting and taking a ‘sticking plaster’ approach to help meet the myriad of tax requirements across different territories. They tend to focus on one particular country at a time, and that focus is driven by audits. And then once that requirement has been met, they simply switch their ‘firefighting’ mode to the next country and wherever the greater risk for non-compliance rests. However, they’re missing a huge opportunity by taking this case-by-case approach rather than looking at the entire organisation’s global footprint.
Meeting MTD in the UK is just one thing. It’s a very different story for multinationals. Many are firefighting and taking a ‘sticking plaster’ approach to help meet the myriad of tax requirements across different territories.
The sticking plaster approach of hopping from one country audit to the next has left a huge mess and many organisations are now in the position where they could be much smarter in the way they store and utilise their tax data. Organisations need to review how much business they’re doing country by country and prioritise by compliance risks. Now is the time to clean up and identify and rectify problem areas before the authorities come calling.
No company is the same and so it is difficult for businesses to know which country to concentrate their efforts on at a particular time. What they can do though is connect the tax dots. By working with a technology partner that operates across multiple jurisdictions and by prioritising countries, organisations can work to meet immediate requirements and add other countries as they come onboard. Working with one partner to meet these requirements means there’s no need to repeatedly hire new people, partners or add different processes as all the tools are available in one place.
Connecting the dots isn’t just about working more effectively across multiple countries though. It’s also about how invoices and indirect tax relates to the company’s corporate tax position, about corporate pricing arrangements and corporate income tax. And it’s about connecting all that internal information and driving greater collaboration across the tax and finance departments so that all parties have a clearer view of the organisation’s financial position.
MTD is just a tiny piece of the indirect tax puzzle, yet keeping records digitally will not only help to ensure a business is compliant but will also provide far greater insight into operations. Global businesses will always have more important, more urgent things to focus on, but they’d be mistaken to ignore the opportunity digital tax has to offer the business, as well as the tax authorities.
For an update on tax in India, Finance Monthly speaks with Shipra Walia, Managing Partner & Lead Consultant at W S & Co. – a Chartered Accountancy firm, rendering comprehensive professional services. Based in Noida, Uttar Pradesh, the company offers statutory audits, GST audit and compliances, tax consultancy (direct & indirect including international and domestic law), valuation, advisory on issues covered under Double Taxation Avoidance Agreements, expat taxation, audit, management consultancy, accounting services, secretarial services, representations before various authorities including Set Com and DRP etc.
How is the corporate tax system structured in India?
India has a dual taxation structure. One is direct tax paid by the taxpayer directly to the government like stamp duty, income tax, etc. and the other one is the indirect tax that reaches to the government through supply chain which is GST/VAT/Excise Duty/Customs duty. While a resident is taxed on their worldwide income, a non-resident is taxed only on income that is received in India, or that arises or is deemed to accrue in India.
How complex is the tax system in India? Are tax disputes commonplace and how are disputes resolved?
Every tax system has some inherent complexities as per the economy of the country. However, the equivalent measures are also there to curb or meet any tax litigations. Further, there are various laws which help with resolving litigations or reaching an agreement at an acceptable level for both parties. Similar, provisions exist for solving conflicts in cross-border transactions. For example, the Double Taxation Avoidance Agreements between India and foreign companies provide for MAP i.e. Mutual Agreement Procedure.
As per the amended provisions, any company whose location and effective management is in India will be treated as an Indian company and will be subject to all domestic laws
Have there been any amendments to India’s tax legislation since we last spoke in 2017?
Recently, India has included the concept of Place of Effective Management (POEM) in our tax legislation. Previously, if the control and management of a company was not located wholly in India, this was considered as a foreign company.
As per the amended provisions, any company whose location and effective management is in India will be treated as an Indian company and will be subject to all domestic laws. The rules also clarify the computation of active and passive business activity, the adherence to global group policies on accounting, HR, IT, supply chain. Additionally, routine banking operations shall not lead to POEM in India and strategic and policy decisions should be relevant in determining POEM, as opposed to routine operational decisions for oversight of day-to-day business operations.
Similarly, a new Goods and Service Tax (GST) was implemented in India in July 2017. GST’s mission is to exclude the multiple individuals and authorities involved in the process and is seen as one of the most influential transformations in the field of tax.
What tax considerations must be taken into account for foreign businesses who wish to expand their business operations in India?
India is a prominent upcoming market. With the government’s focus on “Made in India”, there are various tax benefits available in the country - either based on the product or the activity of the specific business. Under the changes, the initiatives are also driven towards improving exports with various countries.
With the government’s focus on “Made in India”, there are various tax benefits available in the country.
Tax benefits for angel investors, flexible valuation norms, no tax on remittance of profits by a branch of a non-resident company to its Head Office, no dividend distribution tax on Limited Liability Partnerships are amongst the few inbuilt attractions for expanding your business operations in India.
What tax incentives are in place for investors operating in India?
Tax incentives provided in the Indian tax structure can be broadly classified into location-based incentive, industry-specific incentives and activity based incentives. There are various SEZs set up for special benefits to 100% export-oriented units, as well as special international financial services centres (IFSC) which also serve as a catalyst for foreign investors that handle cross-border financial products and services.
This initiative is called Making Tax Digital (MTD) and is part of the UK’s plan for a more digital future, but not all businesses are ready. If you’re one of them, here Damon Anderson, Director of Partner at Xero explains what you can do to avoid huge fines.
If your business makes more than £85k each year in taxable turnover, Making Tax Digital for VAT will apply to you from April 1. After this date you won’t be able to complete a paper-based VAT return, or complete your VAT return online at the HMRC VAT portal.
If you suspect your business will soon fall within the VAT threshold, keep records digitally using HMRC-compatible software to stay within the rules.
If you’re eligible, first you need to find an HMRC-approved software vendor. Xero has bridging software to make it even easier to make the switch and it’s MTD tools are now live, are free for Xero users and allow you to:
MTD for VAT will change to the way businesses file their tax, so there’s no escape. If you’re not sure where to turn, speak to an accountant who can advise you. To help small businesses and their advisers to comply, we’ve also created Dexter the digital tax adviser who is putting a friendly face to the legislation.
Keep in mind that some VAT-registered businesses have a deferred start date of October 2019. You can find more information on eligibility here.
HMRC can charge a maximum penalty of £500 for failure to keep the required VAT records. But don’t panic: HMRC understands Making Tax Digital is a big step, and while penalties will apply to record keeping requirements, it is expected to be sympathetic where the trader has made reasonable efforts to comply.
There’s no doubt that businesses are dealing with a lot at the moment and HMRC has said they will not pursue record-keeping penalties when businesses are doing their best to comply with the law. However, eligible businesses should still make the effort to comply by 1st April.
Millions of businesses already do so much of their business online, from banking, paying bills to interacting with their customers or suppliers, and many already using accounting software and are seeing the huge benefits. By moving to digital tax, many of the existing paper-based processes will be put to bed, allowing businesses and their agents to devote more time and attention to growing and nurturing their business.
Making Tax Digital will make tax filing simpler and more accurate. The sooner you get used to digital tax filing the more time you’ll have to grow your business.
Below, Finance Monthly hears from Kim Hau, Senior Proposition Manager for ONESOURCE Indirect Tax, Thomson Reuters, on preparing your business for MTD.
HMRC’s move is in-line with the global trend towards a more digital relationship between tax authorities and businesses, as well as increased regulatory guidance from the Organisation for Economic Co-operation and Development (OECD) for greater transparency in tax data.
The first stage of MTD for VAT mandates digital record keeping and filing for all VAT registered businesses with a turnover of £85,000 or more, providing a “soft landing” period for businesses before mandating the requirement to have digital links between their data. The ultimate aim is to improve the quality of record keeping, while reducing the mistakes often caused by manual processes and reducing the perceived tax gap – of which £12.6 billion relates to VAT.
A recent Thomson Reuters survey on MTD found that 79% of respondents keyed in submissions directly into the government gateway, something that will not be acceptable come April 2019, or, October 2019 for more complex businesses.
Instead, businesses will have to store and maintain all Accounts Payable and Accounts Receivable data in electronic form using functional compatible software. In other words, using technology that can store and maintain records, perform the required calculations, and submit the information to HMRC directly via their Application Program Interface (API). Those wedded to the use of spreadsheets will find that whilst they can continue to be used, they will require additional software to handle the digital submission piece and certain conditions must be met to ensure a digital trail.
The second stage mandates digital links, the requirement that any transfer or exchange of information in the VAT return process is made electronically between software programs, products or applications. This is a move to limit mistakes from manually inputting figures and comes into effect for all VAT registered businesses in April 2020.
The second stage mandates digital links, the requirement that any transfer or exchange of information in the VAT return process is made electronically between software programs, products or applications.
By far, this is anticipated to be the most complex and difficult requirement of MTD for VAT, forcing businesses to assess every single step of the UK VAT return process for each of their entities.
While there will be some flexibility in the first year of MTD going live there will be no bending of the rules. Connecting all digital records will not only help to ensure the business is compliant but will also future proof organisational systems and processes before penalties are enforced.
An obvious first step is for businesses to understand to what extent they are already compliant, focusing on where relevant data is collated, what kind of data is available via digital means and understanding the processes used for producing VAT returns.
At this stage, companies will be able to decide on what level of change is required. However, with further reforms expected after 2020 it is highly recommended that companies do not settle for a “sticking plaster” solution.
With further reforms expected after 2020 it is highly recommended that companies do not settle for a “sticking plaster” solution.
There are many solutions available to meet each gap of MTD for VAT compliance, however piecemeal solutions should be put in context of the general trend towards a digital tax agenda, and their long-term suitability.
Reviewing the options with internal and external stakeholders such as IT, software providers and external consultants will ensure that the most appropriate solution to meet operational needs is selected. This could include considering data security policies, compatibility with existing systems (e.g. ERP) and developing a tax technology strategy. After all, while MTD for VAT is a UK initiative, it is also worth considering the growing impact on tax teams of similar reporting requirements in other jurisdictions.
With the enforcement of IFRS 16 ahead of us, as of January 2019, Nick Turner, Country Manager UK & Ireland at Anaplan, discusses with Finance Monthly the potential opportunities therein.
There’s nothing quite like ringing in the new year. Along with the promises of fresh starts and renewed perspectives, it’s that time of the year that we can set—and dare not forget—lofty goals to achieve in the 365-days ahead.
Effective 1st January 2019, IFRS 16 marks one of the first significant changes to lease accounting standards in 40 years.
The new year represents more than an annual reset button and it ushers in more than new beginnings. It also brings deadlines. This rings especially true for corporate finance teams this year, as the IFRS 16 deadline looms.
Effective 1st January 2019, IFRS 16 marks one of the first significant changes to lease accounting standards in 40 years. If they haven’t already made the adjustments, businesses now have a very limited time to ensure that future accounting processes will meet compliance.
Unfortunately, for companies addressing these changes through spreadsheets and aging technology, time might be ticking even faster because these manual tools can turn such operations into a lengthy, burdensome, and complex undertaking.
Beginning on the first day of the year, new standard IFRS 16 will be implemented by the Financial Accounting Standards Board (FASB) and the International Accounting Standard Board (IASB). This standard will impact company balance sheets and how many businesses that rent or lease will operate in the future.
The changes are designed to make it easier for outsiders to compare the performance of different companies.
The new IFRS 16 requirements will eliminate nearly all off-balance-sheet accounting for lessees. Further, it will impact commonly used metrics such as EBITDA and gearing ratios. Why? The changes are designed to make it easier for outsiders to compare the performance of different companies.
Although the changes in performance metrics will make it easier to compare and contrast, they may also affect credit ratings, borrowing costs, and even stakeholders’ perception of a company. This makes it vital that companies understand and prepare for the effects of this new leasing standard.
Even though time is winding down on the IFRS 16 deadline, businesses still have an opportunity to implement a solution that can quickly fulfill its requirements—and many are turning to cloud-based, Connected Planning solutions.
Adhering to the new standard with spreadsheets and legacy tools quickly turns burdensome; in contrast, Connected Planning technology supports rapid implementation, easily interfaces with existing enterprise resource planning (ERP) databases, and calculates large volumes of data in real time. Connected Planning gives decision makers instant insight into how to optimise their company’s lease management strategy in context of the new regulations.
The deadline for IFRS 16 approaches and businesses have to determine the best way to comply with the new leasing standard soon. Connected Planning technology offers a way to tackle the complexity of the standard with ease.
Following the autumn budget announcement yetrerday, Finance Monthly has heard the initial reactions from experts at top accountancy firm Crowe UK. From Corporate Finance to Small Businesses and IR35, there are tax implications for many…
Matteo Timpani, Corporate Finance partner:
Entrepreneur’s Relief (ER) remains an attractive, and essential, tax incentive that drives UK innovation and entrepreneurship. That said, it is disappointing to see amendments made to the relief which may impact the ability of certain individuals to benefit from it in the short term. There will be a number of mergers and acquisitions (M&A) transactions currently in progress which will likely be put on hold to ensure participants are able to qualify for Entrepreneur’s Relief in due course.
This change only emphasises the importance of business owners taking specialist advice, and being prepared, long in advance of the time they are considering succession and exiting their business. We await the specific details of when this change will be implemented but anyone who is considering selling their business in the next 12 months, and is unsure if they, their management team and/or other shareholders will qualify for ER, should seek advice now and consider immediately the implications of this change.
Tom Elliott, Head of Private Clients:
It is not surprising to see The Chancellor reaffirm the government's commitment to Entrepreneurs' Relief, albeit with tighter conditions (qualifying period doubled to two years). However, it might have been more effective if the minimum shareholding requirement was abolished altogether – this would incentivise all employee shareholders and not just the C-suite.
The changes to Capital Gains Tax (CGT) reliefs for the sale of main residences look like an attempt at modernisation. Lettings relief has changed so as not to apply to the AirBnB model - relief applies only for shared occupation. The shortening of the ‘period of absence’ from 18 to nine months for Principal Private Residence relief will need to be monitored closely, as any slowdown in the housing market (where it may take more than nine months to sell) may result in an overall reversal.
Rebecca Durrant, Private Clients partner:
It was pleasing to see the personal allowance and higher rate tax brackets raised a year early, but it will be interesting to see whether the Chancellor treats this as a ceiling. Rates could now be frozen for following years, which would turn the tax cut into a hike very quickly. In the mid to long-term, this may not protect the inflationary impact that a no deal Brexit may have.
Phil Smithyes, Managing Director, Crowe Financial Planning
The move to raise the personal tax allowance to £12,500 and raise the higher rate tax threshold to £50,000 from 6 April next year is a move that should be welcomed by most pensioners, making their pension savings go that much further.
Under the pensions ‘freedom and flexibility’ rules, individuals could take up to £16,666 each tax year from their pension fund before they begin paying income tax. This is achieved through a combination of 25% tax-free cash (£4,166) and the new £12,500 personal tax allowance. Careful planning will help pensioners money go that further and minimise their liabilities to tax in retirement.
Susan Ball, Head of Employers Advisory Services:
In April 2017, the government reformed the IR35 rules for engagements in the public sector and early indications are that this has resulted in an increase in compliance within the public sector. This will now be replicated for the private sector, but a reasonable implementation period is vital so the effective date of 2020, and the fact the rules will only be extended to large and medium sized private businesses, are both sensible steps. The Chancellor clearly took on board the feedback from the consultation process over the summer. Engagers should start planning now based on the experience of the public sector in order to have an effective procedure in place for the start date of April 2020.
Laurence Field, Corporate Tax partner:
The Chancellor's statement was made against a background of political uncertainty, mixed economic signals and an increasingly protectionist agenda from many of our trading partners. Tax is one of the most politically high profile things a government can do, and this was one of the most political budgets a Chancellor has had to deliver for decades.
The UK doesn't raise enough tax to keep providing public services at the current level, especially given the aging demographic. A tax system that raises more tax will need to be more efficient, perceived to be more fair and find new 'pockets' of wealth or bad behaviour that can be taxed without political risk.
An autumn budget also has the advantage of kicking the can down the road given that the majority of changes will only kick in from April next year if not later. However, this is the first glimpse we have of the type of post Brexit fiscal landscape the government wants to create.
The announcement of a potential digital services tax (DST) makes sense. Global companies need to be seen to be paying their 'fair share'. They don't have votes, so are an easy target. Playing tough with the digital services tax is politically attractive even if this causes conflicts with other tax jurisdictions. It is unlikely such measures will find much opposition in Parliament given the ground has been well prepared. How our trading partners (and particularly the US) react will be the real challenge. Retaliatory measures will not help the British economy. Therefore by outlining a timetable to introduce measures in 2020 he has provided cover for trying to get international agreement. Talking tough, but deferring action makes other parts of the Budget more palatable.
Elsewhere, plastics have found themselves in the environmental firing line and it was an easy, and politically popular decision, to try and find ways of taxing its use. Requiring more usage of recycled plastics is a way of stimulating that industry while being seen to be tough on pollution. The challenge with all sin taxes is that if they are too effective, the source of revenue will dry up. The damage that plastics can do is all too obvious, the Chancellor is no doubt sincere in his desire to reduce our use, but would no doubt be grateful if industry doesn't take action too quickly.
To hear about tax planning and the things that need to change in the UK tax legislation Finance Monthly speaks with Adele Raiment, Director of the Tax Advisory team that specialises in entrepreneurial and privately owned businesses at Mazars LLP. Adele’s main area of expertise is working with privately owned businesses to develop and implement a succession plan, to ensure that any assets that the shareholders wish to retain are extracted in a tax efficient manner and she also works with all parties to assist in the smooth running of transaction.
What are the typical challenges faced by shareholders of entrepreneurial and privately owned businesses in the UK, in relation to the management of their finance?
I think the main concern on the horizon is the potential impact of Brexit on the UK economy and business confidence more widely. For privately owned businesses in the UK, many are still very cautious following the 2008/09 recession, and with the uncertainties surrounding Brexit, it is difficult to plan too far ahead. One of the main priorities of shareholders is ensuring that they have sufficient cash reserves to ride any potential downturn in the economy whilst recognising that they need to invest and innovate to thrive.
What is your approach when helping clients with tax planning?
My approach is to primarily understand the client’s commercial and personal objectives in priority to considering any tax planning. When planning for a transaction, I frequently find that the most tax efficient option isn’t always going to meet the key objectives of the shareholders or the business. It is important to consider the shareholders and the business as one holistic client, and therefore strike the right balance between personal, commercial and tax objectives. In respect of tax specifically, it is important to take all relevant taxes in to consideration whether it be corporate or personal. A good understanding of all taxes is therefore required.
My clients vary from FDs, to engineers, to self made entrepreneurs - all requiring different approaches. I believe that it is fundamental to get to know your client and adapt your approach to ensure that they understand you and what you are trying to achieve.
What are some of the day-to-day challenges of operating within tax planning? How do you overcome them?
As I predominantly work on transactions, I often work very closely with other professionals such as corporate finance professionals, lawyers and other accountants. The key challenge to this is making sure that the whole team is working collaboratively to achieve the best result for our client.
We are also under pressure to keep costs down, whilst ensuring that we provide quality advice. This can be difficult if the team has multiple transactions on the go at the same time and senior resource is constrained or if the project is wide-ranging, requiring several specialists to input in to the advice. The key to this is having a driven and supportive team, where teamwork and openness is pivotal to success. The working environment of my team at Mazars is incredible as we encourage open discussions on a variety of areas but one of the most useful ones is on technical uncertainties, which encourages consultation in times of uncertainty and technical development.
In your opinion, how could UK tax legislation be altered for the better?
Despite an exercise to ‘simplify’ UK tax legislation over more recent time, the legislation has increased in volume. A good example of this is that there are now two separate corporation taxes acts, when previously there was one. Having said this, the majority of the language used in more recent acts has made the legislation more user-friendly. However, there are still pockets of the legislation that seem to have been rushed through parliament and the practical use of the legislation was not considered fully prior to being enacted. This has resulted in several pieces of legislation being amended a year or two down the line. Although there does seem to be an element of consultation between Practice and HMRC prior to some legislation being enacted, I’m not always convinced that HMRC take on board the feedback. I therefore feel that a more rigorous consultation process should become standard to ensure that the commercial and practical elements of legislation are considered prior to enactment.
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