Budget 2012 – OtherThursday, April 5th, 2012
Statutory Residence Test
At Budget 2011, the Chancellor announced that there would be a reform of the taxation on non-domiciled individuals and the introduction of a Statutory Residence Test. One of the reasons that this was prompted in the first instance was as a result of the long-running case involving Mr Robert Gaines-Copper and HMRC, where the UK Supreme Court ruled that he should be considered as UK resident for tax purposes, even though he met the guidelines in the IR20 for non-residence. The Test will seek to determine the tax residence of an individual (not a company) and a consultation was launched. This also looked at the reform of the concept of ‘ordinary residence’, which lacks clarity. It was hoped that the results of the consultation process would lead to a legislative change in Finance Bill 2012, backdated to 06 April, to provide simple and clear rules on this complicated and confusing area of taxation.
In a Ministerial Statement issued 06 December 2011, David Gauke, Exchequer Secretary to the Treasury advised that a number of ‘detailed issues’ were raised in the consultation, therefore, this Test would be delayed until Finance Bill 2013, to be effective April 2013. At this time, any reforms to ‘ordinary residence’ will also be made.
The Budget 2012 Report confirms that, effective 06 April 2013, Government will introduce a statutory definition of tax residence and the Test and that it will publish a summary of responses to the consultation together with draft legislation for comment. The Report also advises that the concept of ‘ordinary residence’ for tax purposes will be abolished but overseas workday relief will be retained and put on a statutory footing.
Budget 2011 also announced reforms to the taxation of non-domiciled individuals effective 06 April 2012 which are included in the Finance Bill 2012. In particular, however, it is the issue of residence or non-residence that is one that taxes the brains of all people involved in international payroll issues. This is particularly the case given the ruling in Gaines-Cooper v HMRC which brought into question the guidance on the IR20.
Any clarifications in this area of payroll are welcomed.
- HM Treasury – Statutory Definition of Tax Residence, a Consultation
- Payroll Help 12 December 2011 – Statutory Residence Test
HMRC’s Penalty Regime
There were two announcements regarding penalties in the Budget Report. The first was regarding ‘regulatory penalties’, which is the term that HMRC use to encompass penalties which are imposed to support the administration of the entire UK tax system (PAYE, VAT, Inheritance etc). For example, the penalties for late filing and the failure to keep records all encourage compliance and fall into the category of regulatory penalties. Following the consultation in June 2011, Finance Bill 2013 will contain legislation designed to simplify the regulatory penalty regime, whilst giving HMRC the power to uprate their value in line with inflation and repeal obsolete ones.
The second announcement was to do with PAYE penalties – for example, the failure to make a payment on time. The Budget Report announced that there will be a consultation in Summer 2012 on a new model penalty regime ‘ahead of the main roll-out of Real Time Information in October 2013’. This will also be contained in the Finance Bill 2013.
Note the reference to RTI and penalties for non-compliance. This will, undoubtedly, cover the late filing and the late payment of monies to HMRC. Remember that, with RTI submissions, HMRC will know on a monthly basis what payments are due to them, therefore, will be able to identify late or non-payment.
Disclosure of Tax Avoidance Schemes (DOTAS)
DOTAS is the existing regime for disclosing the existence and operation of tax avoidance schemes. In recent years, to clamp down and penalise any avoidance, the DOTAS applies to a range of taxes, including Income, Corporation, Capital Gains and Stamp Duty Land taxes and well as National Insurance Contributions.
In simple terms, the DOTAS requires disclosure of information about a tax avoidance scheme that meets certain definitions within five days of it being made available to clients. These definitions are referred to as ‘hallmarks’. The Budget 2012 Report confirms that Summer 2012 will see a consultation aimed at extending these hallmarks so that they capture tax avoidance schemes that are not currently captured.
In payroll, there is a number of tax and NICs avoidance regimes in place – salary sacrifice is the most obvious example. Will the hallmarks be extended and the regime tightened so as to make these DOTAS non-compliant in the future?
Review of Tax Advantaged Employee Share Schemes
As we reported, on 06 March 2012, the Office of Tax Simplification (OTS) presented its final recommendations to the Chancellor regarding tax advantaged share schemes (TASS). These are the Company Share Option Plans (CSOP), the Save As You Earn (SAYE), Share Incentive Plans (SIP) and Enterprise Management Initiatives (EMIs). Essentially, the report focused on the need to make sure that each of the schemes was administratively simple and relevant in the workplace.
The Budget Report stated that the Government will consider the report and consult on how to take the proposals forward with a view to making any legislative amendments in the Finance Bill 2013.
As I commented, the rules for each of the TASS are complicated and usually require expert advice within organisations. Any simplification, particularly so that they are attractive, relevant and understood by the workforce, is to be welcomed. We await the consultation with interest.
- HM Treasury – Review of Tax Advantaged Employee Share Schemes – Final Report
- Payroll Help 19 March 2012
Personal Service Companies and IR35
In another move to tackle avoidance, Budget 2012 announced that the Government is to bring forward a range of measure designed to address where this may be happening through the use of Intermediaries Legislation (IR35) by the use of a Personal Service Company.
This is a circumstance where, possibly, and despite the IR35 legislation’s intention, tax and NICs are being avoided where income is paid to a Personal Service Company instead of through the payroll. Three measures were highlighted in the Budget Report as ways forward:
- Strengthening compliance teams specialising in avoidance of employment income
- Simplification of the IR35 process so that it is easier to understand and administer
- Consult on proposals which will require office holders who are integral to the running of the organisation to have tax and NICs deducted from remuneration through the payroll
We recognise that any changes may have a huge impact on organisations and how they deal with employment status. Could this lead to an increase in the people that we have to regard as employed rather than self-employed?