UK Chancellor of the Exchequer George Osborne gave his Autumn Statement speech to the House of Commons on 5th December 2013, which was followed by some limited press releases and draft legislation. ThisAlert provides an overview of some of the key announcements. More provisions are anticipated in the Finance Bill 2014, to be published next week, which will be the subject of a further, more detailed Alert.
Partnerships with mixed members
Measures have been introduced with immediate effect that impact partnerships (including limited liability partnerships) with both individual and corporate members. The anti-avoidance rules are aimed at situations where individual members also control corporate members and allocate excessive profits to such corporate members, which the individuals still have the "power to enjoy." Since UK corporation tax rates are much lower than those applicable to individuals, these arrangements have proved popular. Going forward, the new rules mean that excessive profits given to corporate partners will be reallocated to the individual partners involved. Related provisions apply to excess loss allocations to individual partners.
Duane Morris comment – Partnerships are known to have been the focus of government anti-avoidance action, and this legislation is, broadly speaking, to be expected. However, many parts of the draft legislation appear unclear, and terms such as "reasonable to suppose" will need examining on a case-by-case basis. Those using partnership structures involving both individual and corporate partners should consider whether or not the rules might apply to them. Private equity firms should note that, while standard profit-sharing arrangements in their structures are unlikely to be affected, any planning previously done in this area may need to be reviewed.
Disguised employment through intermediaries
In the Finance Bill 2014, the government intends to strengthen measures aimed at counteracting the use of intermediaries to disguise employment relationships and reduce tax and national insurance costs. There will be a short consultation period on this issue. The use of so-called "personal service companies" has been the focus of HM Revenue & Customs' ("HMRC") attention for some time.
Duane Morris comment – The government has stated that it does not intend to target the genuinely self-employed so that any legislation will need to be tightly drafted. It seems likely that draft rules will be published next week for comment and consultation. Those using service companies should consider whether or not their activities will still be regarded as genuine self-employment in the light of any new rules.
Dual contract arrangements
Individuals who are resident in the UK but are not domiciled there may use the remittance basis of tax on income from employment exercised wholly outside the UK. This means their income from overseas employment is taxed in the UK only if it is "remitted" (brought in) there. This has resulted in internationally mobile executives entering into "dual contract" arrangements in which they have one employment in the UK and another, separate, employment overseas—the earnings from the latter not being subject to UK tax and often arising in a low-tax jurisdiction. HMRC has long been sceptical of such arrangements being truly separate employments, save in very limited circumstances. It now seems to be the case that such scepticism will be put on a statutory footing in the Finance Bill 2014. From April 2014, overseas earnings from dual contract arrangements will be taxed in the UK, unless a tax charge comparable to that in the UK is paid in the overseas jurisdiction.
Duane Morris comment – Those involved in dual contract arrangements should consider reviewing them in the light of any draft legislation. HMRC guidance already means that it is unusual for such arrangements to be free of risk. It remains unknown what will be regarded as an acceptable level of overseas tax in the light of the new rules.
Capital gains tax – non-residents and UK residential property
It has been announced that non-UK residents disposing of UK property will be subject to UK capital gains tax on gains arising from such disposals. This will take effect from April 2015, and the government will consult on how it is to be introduced.
Duane Morris comment – This follows on from legislation introduced in the past year imposing tax obligations in relation to residential property of a certain value owned by "non-resident, non-natural" persons. Certain property fund structures may be affected, as may foreign individuals investing in UK residential property. As stated, consultation on this measure is anticipated.
In addition to the new rules on mixed partnerships described above, the government has confirmed that it will pursue measures to classify certain members of limited liability partnerships as employees rather than as being self-employed for tax purposes, which is the automatic position under current law. This area was the subject of consultation this year, and legislation will be published in the Finance Bill 2014.
Duane Morris comment – This is one of the most anticipated measures of the Finance Bill 2014, since limited liability partnerships are widely used in the UK. Legislation seems likely next week and will require thorough analysis. Interestingly, the government has stated that it received comment during the consultation process that investment fund managers would be impacted by any new rules to a greater extent than anticipated, but it has confirmed these changes will be going ahead.
Offshore evasion strategy
HMRC will, in early 2014, launch a project to ensure that it is ready to exploit data received under the various new exchange-of-information agreements it has entered into with other countries. Further details have not yet been released, but this proposal appears to be part of the government's strategy of aggressively pursuing those who seek to conceal assets offshore to avoid UK tax.
Duane Morris comment – Worldwide exchange of information between tax authorities is fast becoming the norm. Potentially affected UK taxpayers may want to address their situation at an early stage.
Initial consultation will be issued to explore how UK investment funds might enter into loan origination activities.
Duane Morris comment – This is mentioned only briefly in the Autumn Statement documents. It could be an interesting development for investment funds, depending upon the content of the consultation.
Corporate debt reform
Further legislation will be introduced in the area of corporate debt, reviewing, among other things, the application of the loan relationship rules to corporate partners in partnerships. There will be a short consultation period on this before introduction of any new rules in the Finance Bill 2014.
Duane Morris comment – The areas of interest taxation and corporate debt have been the subject of consultation recently, and the extension of this is not unexpected. We await the draft legislation with interest.
The government has introduced with immediate effect certain specific anti-avoidance measures to close down perceived "loopholes." Avoidance using total return swaps in which companies could pay their profits to an overseas company in the same group will be prevented. Similarly, schemes in which profits from UK intra-group lending could be transferred offshore will no longer be permitted. Modifications will also be made to the debt cap rules, and domestic tax relief rules will be amended so that relief for foreign tax is given only in genuine cases of double tax.
Duane Morris comment – These measures appear to derive from perceived abusive schemes.
Three new tax reliefs will be introduced to encourage indirect employee ownership. From April 2014, disposals of shares that result in a controlling interest in a company being held by an employee ownership trust will be exempt from capital gains tax. Transfers to such trusts will also be exempt from inheritance tax, provided certain conditions are met. From October 2014, bonus payments made to employees of indirectly employee-owned companies that are controlled by an employee ownership trust will be exempt from income tax (to a cap of £3,600 per year).
Duane Morris comment – These measures appear to reflect the government's desire to encourage what they see as "genuine" employee ownership.