tax journal

Tax transparency A digest of the key legislation and deadlines

Paul Crean & Jonathan Pitkin | BDO

Plus: in-depth review of the Common Reporting Standard

Hatice Ismail & Martin Shah | Simmons & Simmons

HMRC’s misunderstanding of accelerated payment noticesChris Davidson | Director | KPMG

Brexit and the public finances David Smith | Economics editor | The Sunday Times

This month’s VAT briefingLee Squires & Fiona Bantock | Hogan Lovells

Ask an expert: VAT on insurance claims handlingSean McGinness | Director | The VAT Consultancy

Insight and analysis for the business tax community

Fessal and human rights | The latest on the EC’s Anti-Tax Avoidance Directive

Tracker All the latest tax consultations

Cases Project Blue decision on s 75A

One minute with... Michael Steed, president of the ATT

Issue 1311 | 3 June 2016

For BDO internal use only

This is the property of LexisNexis, do not further reproduce, store or transmit in any form without the prior written consent of the publisher and editor

9–10 September 2016(Magdalen College, Oxford)

KEYNOTE SPEAKERS David Gauke MP (Financial Secretary to the Treasury)

Stephen Quest (DG Taxation and Customs Union, European Commission)

Edward Troup (Executive Chair and First Permanent Secretary at HM Revenue and Customs)

Every two years, IFS holds a residential conference, aiming to facilitate high‑level knowledge exchange between practitioners, policymakers and academics on key areas of policy and practice. This year we will consider how anti‑avoidance measures are designed, how governments’ and businesses’ perspectives on tax avoidance are changing, and what we can expect from international efforts going forward.

IFS Residential ConferenceCorporate tax avoidance: where next for policy and practice?

Accommodation will be provided on Thursday 8 and Friday 9 September and a drinks reception and conference dinner will take place on Friday evening.

OTHER PARTICIPANTS INCLUDE:Andrew Bonfield (100 Group)

Tracey Bowler (Research Director, IFS Tax Law Review Committee)

David Bradbury (Head of the Tax Policy and Statistics Division, OECD – TBC)

Ian Brimicombe (Vice President Corporate Finance, AstraZeneca and Audit Committee)

John Connors (Group Tax Director, Vodafone)

Bill Dodwell (President, CIOT and Partner, Tax Policy Group at Deloitte)

Julie Elsey (Counter-Avoidance Directorate, HMRC)

Kevin Fletcher (Chief Economist and Director KAI, HMRC)

Malcolm Gammie QC (One Essex Court and Chairman, IFS Tax Law Review Committee)

Jennie Granger (Director General, Enforcement and Compliance, HMRC)

Jim Harra (Director General, Business Tax, HMRC)

Surjinder Johal (Senior Fiscal Analyst, Office for Budget Responsibility)

Paul Johnson (Director, IFS)

Patrick Mears (Chair, GAAR Advisory Panel)

Helen Miller (Associate Director, IFS)

Paul Morton (Head of Group Tax, RELX Group)

Gareth Myles (Professor, Exeter University and Director, ESRC/HMRC Tax Administration Research Centre, TARC)

Paul Oosterhuis (Senior International Tax Partner, Skadden, Washington D.C.)

Toby Quantrill (Principal Economic Justice Adviser, Christian Aid)

Conor Quigley QC (Serle Court)

Heather Self (Partner, Non-Lawyer, for Pinsent Masons LLP)

Jon Sherman (Director, Corporation Tax, International and Stamps, HMRC)

Kate Thomson (Group Head of Tax, BP)

Stef van Weeghel (Global Tax Policy Leader, PwC)

John Whiting (Tax Director, Office of Tax Simplification)

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This is the property of LexisNexis, do not further reproduce, store or transmit in any form without the prior written consent of the publisher and editorThis is the property of LexisNexis, do not further reproduce, store or transmit in any form without the prior written consent of the publisher and editor

| 3 June 2016 1

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www.taxjournal.com Contents

News

2 Covering the key developments in tax

Cases

4 Reporting the tax cases that matter

In brief

6 Lessons from Fessal on tax and human rights6 Update on the EC’s Anti-Tax Avoidance Directive

Insight and analysis

Economics focus

7 The public finances and the Brexit voteClaims that leaving the EU would free up public money for other priorities have been disproved by experts, who say that Brexit would harm, not help, the public finances, as David Smith reports.

Comment

8 HMRC’s misunderstanding of accelerated payment noticesChris Davidson (KPMG) believes that HMRC has misinterpreted the 2004 DOTAS rules by issuing APNs on the basis that they are substantially the same as a previous transaction that was notifiable under DOTAS.

Analysis

9 Tax transparency round upPaul Crean and Jonathan Pitkin (BDO) provide an overview of recent developments which promote increased tax transparency.

Big read

12 20 questions on the Common Reporting StandardHatice Ismail and Martin Shah (Simmons & Simmons) answer questions on the complex due diligence and reporting obligations on affected financial institutions, individuals and entities since the implementation of the Common Reporting Standard on 1 January this year.

Briefing

23 VAT briefing for JuneLee Squires and Fiona Bantock (Hogan Lovells) provide your monthly review of the VAT developments that matter.

Consultation tracker

25 Your A to Z guide to the latest consultations.

Ask an expert

27 VAT on insurance claims handlingSean McGinness (The VAT Consultancy) answers a question on whether all services provided by an adviser to the insurance industry are VAT exempted.

Back page

28 One minute with Michael Steed, president of the ATT28 What’s ahead

A recent report by PwC reveals that nearly two thirds of FTSE 100 companies now disclose information about their approach to taxation. According to the report, 56 firms, compared with 37 in 2013, now explain their tax governance procedures, giving detail of responsibility for oversight of tax affairs and in some cases describing the controls in place to manage tax risks.

The upward trend comes as little surprise. In addition to increased scrutiny over tax affairs in the media, there are also numerous legislative initiatives designed to give tax authorities more information. To help keep track of these, this week’s edition carries a recap of the various requirements for greater transparency affecting both multinationals and HNWIs (page 9). And, on a related theme, we have a ‘big read’ on the common reporting standard affecting financial institutions (page 12).

The validity of accelerated payment notices issued by HMRC continues to be tested (see pages 2 and 5). For a practitioner view suggesting that HMRC has misunderstood the rules, see page 8.

In the last week, there have been several new tax consultations. See our tracker (at page 25) for details of these and other tax proposals open for comment.Paul [email protected]

Editorial BoardGraham Aaronson QC, Joseph Hage AaronsonPaul Aplin OBE, ICAEW Tax Faculty Technical CommitteePhilip Baker QC, Field Court Tax ChambersIan Brimicombe, AstraZeneca Michael Conlon QC, Temple Tax ChambersBill Dodwell, DeloitteStephen Edge, Slaughter and MayJudith Freedman CBE, University of Oxford Malcolm Gammie CBE QC, 1 Essex Court Melanie Hall QC, Monckton Chambers Dave Hartnett CB, Independent adviser

John Hayward, Pensions consultant Francesca Lagerberg, Grant Thornton Pete Miller, The Miller Partnership David Milne QC, Pump Court Tax Chambers Chris Morgan, KPMGPaul Morton, RELXLakshmi Narain, South Wales CIOT Jennie Rimmer, Aspen Adrian Shipwright, MLawJohn Whiting OBE, Office of Tax SimplificationJudge Christopher Vajda, CJEU

Editor: Paul Stainforth (tel:020 3364 4448; email: [email protected])Editorial teamSanthie Goundar, Julia Burns & Nick RaadCases: Cathya DjanoglyProduction manager: Angela WatermanDesign Manager: Elliott TompkinsDesign: Jack WitherdenMarketing manager: Rakhee PatelPublisher: Chris JonesTo contribute Please email a synopsis of the topic you would like to cover (what it is & why it matters) to the editor. Unsolicited articles are rarely published.To advertiseFor all recruitment and display advertising, contact Charlie Scott (tel: 020 8212 1980; email: [email protected]).To subscribeContact customer services (0845 370 1234; [email protected])Annual subscriptions cost £425 post-free (UK); £765 2 year (UK); £583 overseas 1 year.Missing copy?Contact customer services (tel: 0845 370 1234; email: [email protected]).

Follow us on Twitter @tax_journal

To access our websiteTax Journal subscribers are entitled to unrestricted access to www.taxjournal.com. If you are missing log in details, email [email protected] Tax JournalThis publication is intended to be a general guide and cannot be a substitute for professional advice. Neither the authors nor the publisher accept any responsibility for loss occasioned to any person acting or refraining from acting as a result of material contained in this publication.

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical or otherwise, without the prior written consent of the publisher and editor.

Printed by Headley Brothers Ltd, Ashford, Kent.Published by RELX (UK) Limited trading as LexisNexis, 1-3 Strand, London WC2N 5JR and 9-10 St Andrew Square, Edinburgh EH2 2AF. www.lexisnexis.co.ukCover image: iStock/MARIA TOUTOUDAKI© 2016 RELX (UK) Limited. All rights reservedISSN 0954 7274

From the editor


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News

News

Business taxesConsultation on SSE reformThe government is consulting until 18 August 2016 on options for the reform of the substantial shareholding exemption from corporation tax. This addresses concerns that the complexity of the exemption may be harming the UK’s competitiveness as a holding company location, given changes in both domestic and international taxation since its introduction in 2002. The options include:

zz a comprehensive exemption for share disposal gains, subject to tests for trading or otherwise at investee level;

zz changes to the existing framework with amended trading tests at investor and investee level; or

zz changing the definition of substantial shareholding to include shareholdings of less than 10% or a minimum invested capital requirement.

See www.bit.ly/1O1Q6dL.

Consultation on CT loss relief reformsHMRC is consulting until 18 August 2016 on the detail of two specific changes to corporation tax loss relief, announced at Budget 2016. From April 2017:

zz losses can be carried forward and set against the taxable profits of different activities within a company and the taxable profits of its group members; and

zz the amount of annual profit that can be relieved by carried-forward losses will be limited to 50%, subject to an allowance of £5m per group. Relief for carried-forward trading losses

arising before 1 April 2017 will be restricted to 50% of trading profit, whereas relief for

carried forward trading losses arising after 1 April 2017 will effectively be restricted to 50% of profit across the group. There will be no limit on losses carried back. The reforms will be confined to trading losses, non-trading loan relationship deficits, UK property losses, management expenses and non-trading losses on intangible fixed assets.

The distinct treatment of capital losses will remain. The consultation also covers interaction with the existing restriction on banks’ losses. See www.bit.ly/25AmZ8Z.

HMRC considers UK transfer pricing secondary adjustmentsHMRC is consulting until 18 August 2016 on whether to introduce a secondary adjustment rule into UK transfer pricing legislation, involving a range of possible methods for the design of the rule. The current UK rules make a primary adjustment involving the application of the arm’s length principle to the price used for tax purposes. The secondary adjustment would apply a tax charge to any excess cash accumulated from non-arm’s length pricing in an overseas company, such as where a payment is made to a tax haven. The OECD’s transfer pricing guidelines allow for secondary adjustments, which a number of other countries use already. See www.bit.ly/25yptVt.

If the government decides to introduce the rule, legislation will be included in Finance Bill 2017.

Consultation on intermediaries legislation for public sectorHMRC is consulting until 18 August 2016 on the detail of changes to the intermediaries legislation (IR35), which are

intended to apply to public sector bodies from April 2017. The new rules will shift the responsibility for determining whether or not a particular engagement comes within the scope of the intermediaries legislation, from the worker’s personal service company to the public sector body, agency or other third party paying that company. In the same document, HMRC has published a summary of responses to its July 2015 discussion document exploring ways to make the legislation more effective. The government announced at Budget 2016 its intention to consult on the application of the rules to public sector engagements. See www.bit.ly/1qLVu9o.

Lloyd’s underwritersThe Lloyd’s Underwriters (Roll-over Relief on Disposal of Assets of Ancillary Trust Fund) (Tax) Regulations, SI 2016/597, ensure that, with effect from 16 June 2016, individual members of Lloyd’s, and individual partners in Lloyd’s underwriting partnerships who convert to underwriting through successor companies, will continue to receive broadly the same amount of CGT rollover relief in relation to ancillary trust fund assets transferred to a successor company as would have been available had recent changes to Lloyd’s rules not been made. The Lloyd’s rule changes amended the method of measuring the level of assets required to support underwriting, on which the computation of CGT relief is based.

Bank levy: amended definitions of high quality liquid assetsHMRC is consulting until 30 June 2016 on the Bank Levy (Amendment of Schedule 19 to the Finance Act 2011) Regulations, SI 2016/Draft, which amend the definitions of ‘high quality liquid assets’ and ‘high quality securities’ for the purposes of the bank levy. The regulations are expected to take effect from 1 October 2016.

The amendment is required as a consequence of changes made to the Prudential Regulation Authority’s definition of liquid assets in October 2015, to introduce the new liquidity coverage ratios for banks under Capital Requirements Directive IV. There is no change to existing policy by updating this definition. HMRC consulted on an outline of the changes between December 2015 and March 2016.

Company cars: advisory fuel ratesHMRC has published revised advisory fuel rates for company cars to be used from 1 June 2016.

Personal taxesConsultation on ‘help to save’The government is consulting until 21 July 2016 on the detailed design of the ‘help

Our pick

HMRC withdraws APNs before judicial review

HMRC has decided to withdraw hundreds of accelerated payment notices (APNs) issued to taxpayers involved in employee benefit trust arrangements, rather than await the outcome of a judicial review application lodged by City law firm RPC. One of the grounds for challenging the notices was that these particular arrangements were not notifiable schemes under the DOTAS rules.

Adam Craggs, partner and head of tax disputes at RPC, described HMRC’s policy on accelerated payment notices as ‘shoot first and ask questions later’. Taxpayers who receive an accelerated payment notice, he added, ‘should not assume that HMRC has followed the correct internal processes and exercised its powers lawfully’.

Earlier this year, HMRC was forced to withdraw some 2,000 APNs issued in 2015 to taxpayers involved in an Isle of Man scheme marketed by Montpelier.

Commenting on the news, Chris Davidson, tax director at KPMG, said: ‘Since the introduction of APNs in 2014, HMRC has had a tricky time in applying the rules. Challenges were expected when the legislation was introduced, but there have now been two major avoidance investigations in which HMRC has been forced to accept that the statutory requirements for APNs were not met.’ He continued: ‘It would appear that HMRC has been taking an unsustainably broad view of the APN legislation, an approach which clearly needs reviewing in light of these latest rulings.’ (See also page 8.)


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to save’ scheme, which will be available to adults in receipt of universal credit or working tax credit from April 2018. The scheme will provide a 50% government bonus on up to £50 of monthly savings into a help to save account. The bonus will be paid after two years, with an option to save for a further two years. Areas for consultation include: whether to deliver accounts through multiple private sector providers, or a single provider such as National Savings and Investments; calculation of the bonus; second term and successor accounts; and making catch-up payments. The scheme will be introduced through the Lifetime Savings Bill. See www.bit.ly/1OZUsCk.

HMRC delays to client notification obligations regulationsWe understand HMRC has confirmed the delay of regulations and guidance, setting out the form in which financial institutions providing offshore advice or services will have to notify their clients about the requirement to share information with HMRC under the common reporting standard. These regulations will not, as previously anticipated, come into force on 30 June 2016. In view of this delay, HMRC has also confirmed that the compliance period will be extended, from the original date 30 April 2017, to a later date to allow for the obligation to be incorporated into client communications. See www.bit.ly/25AbHSg.

Indirect taxesEU adopts VAT action planThe Council of EU finance ministers has issued its conclusions on the Commission’s VAT action plan published in April. The action plan covered four broad areas: urgent measures to fight VAT fraud and tackle the VAT gap; short and medium-term actions on VAT and SMEs; a definitive VAT system (single EU VAT area); and increased flexibility on reduced and zero rates. Among its conclusions, the Council asked the Commission to present an in-depth analysis at the June ECOFIN meeting, setting out options for a temporary derogation allowing member states to apply the reverse charge as a means of tackling fraud. It also invited a legislative proposal by the end of 2016 for aligning VAT rates for e-publications within a digital single market, and a proposal for reduced or zero-rating for women’s sanitary products ‘at the earliest opportunity’.

EU holds minimum VAT rate The Council of the EU has adopted an amendment to the principal VAT directive, maintaining the minimum standard VAT rate at 15% until December 2017.

Landfill tax: taxable disposals and hazardous wasteHMRC is consulting until 18 August 2016 on: arriving at an unambiguous definition of ‘taxable disposal’ for landfill tax purposes; and identifying the types of hazardous waste that properly attract the lower rate of landfill tax. See www.bit.ly/1TJi8JT.

International taxesEU adopts amended directive for country by country reportingThe Council of the EU has adopted the amended Administrative Cooperation Directive to implement country by country reporting by multinationals and automatic exchange of the information in those reports between member states. This is the first element of the Commission’s January 2016 anti-tax avoidance package, implementing the OECD BEPS action 13 on country by country reporting in a legally binding EU instrument. It covers groups of companies with a total consolidated group revenue of at least €750m. The information to be reported includes revenues, profits, taxes paid, capital, earnings, tangible assets and the number of employees.

This information must be reported already for the 2016 fiscal year to the tax authorities of the member state where the group’s parent company is tax resident. Existing rules set deadlines of:

zz 12 months after the end of the fiscal year for companies to file the information; and

zz a further three months for tax administrations to automatically exchange the information.Member states will have 12 months

from the date the amended directive enters into force to transpose the new rules into national law.

(For an update on the progress of EC’s Anti-Tax Avoidance Directive, see page 6.)

EU takes forward non-cooperative jurisdictions blacklist The Council of the EU has published its conclusions on the Commission’s ‘external strategy for effective taxation’, which formed part of the corporate tax anti-avoidance package in January 2016. The Council calls for work to start on the EU list of third country non-cooperative jurisdictions by September 2016. It welcomes the recommended measures against tax treaty abuse, whilst acknowledging that bilateral tax treaties remain the competence of member states.

Extending the double taxation treaty passport schemeHMRC is consulting until 12 August 2016 on a review of the double taxation treaty passport scheme, including whether the scheme should be expanded beyond corporate-to-corporate lending and made available to sovereign investors, pension funds and partnerships. The scheme allows UK borrowers to pay interest to overseas corporate lenders without withholding tax or at a lower rate of withholding tax, as specified in the relevant tax treaty. See www.bit.ly/1r2AQlA.

Administration & appealsLords Constitution Committee warns on risks of fiscal devolutionIn its report published on 25 May, The Union and devolution, the Lords Constitution Committee expressed strong opposition to full fiscal autonomy for the constituent nations of the UK, saying it would ‘break the Union apart’. Taking the standpoint that ‘the nations of the UK are stronger together than apart’, the report notes that successive governments have neglected to consider the cumulative impact of devolution on the UK as a whole. See www.bit.ly/1TxAukc.

‘Full fiscal autonomy for any nation or region of the United Kingdom,’ the report states, ‘would end the pooling and sharing of risks and resources that is key to the social union and that brings security to all parts of the Union.’

The committee recommends ‘that the UK government reconsider its use of the inadequate Barnett formula and establish a mechanism that takes into account the relative needs of different nations and regions in allocating funds’.

CorrectionDespite a suggestion to the contrary in last week’s Tax Journal, American musician Jack White is not and has never been chair of the Office of Tax Simplification. Our caption accompanying the photograph on page 6 of last week’s edition should have instead read ‘Michael Jack’. Apologies.

People and firms

Tax experts Ray McCann and Helen McGhee leave New Quadrant Partners to join Joseph Hage Aaronson on 1 June. The Association of Accounting Technicians (AAT) appoints Mark McBride as its new president. His term will run until May 2017. Monckton Chambers announces Tim Ward QC and Philip Moser QC as joint heads of chambers. They were elected following a full membership vote. Allen & Overy expands its tax practice with the appointment of Daniela Trötscher as partner in the Frankfurt office, effective from 1 June.

To publicise tax promotions, appointments and firm news, email [email protected].


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www.taxjournal.comCasesCases

Cases

Business taxesThe taxation of financial dealers and Tower MCashback revisitedIn Investec Asset Finance and Investec Bank v HMRC [2016] UKFTT 356 (24 May), the FTT found that expenditure incurred by financial dealers in relation to tax positive partnerships was deductible and that HMRC could raise a point mentioned in the cover letter of a closure notice.

The two appellants, both financial dealers in the Investec group, had participated in transactions with the purpose of exiting from leasing partnerships without being taxed on any receipts of rental income or balancing charge. The appellants claimed that they should only be taxed on the net profits from their activities, deducting the costs of purchasing the partnership interests from the rentals or the sale proceeds of the rentals received whilst they were the relevant partners. HMRC contended either that the relevant costs were non-deductible, or that the appellants should be taxed both on the net profits in their respective sole financial trades and also on the entire partnership profits attributable to each appellant.

The first issue was whether the appellants had been conducting two trades or just one trade when becoming partners in the various partnerships. The FTT found that the appellants had been conducting their own sole financial trades, and that they had participated (in in a technical and minor manner) in a separate trade in partnership. There were therefore two trades and not just one trade with two computations.

The second issue was whether the costs incurred by the appellants were of a revenue or capital nature. The FTT found that the appellants’ expenditure in acquiring partnership interests and contributing further capital to the partnerships had been revenue expenditure, made in order to further their short-term venture. This conclusion was reinforced by the fact that the two appellants were financial trading companies, periodically dealing in receivables and that both companies had conducted seven very similar operations. Furthermore, the expenditure had been incurred wholly and exclusively for the purpose of each of the sole trades of the appellants.

As a procedural point, the appellants contended that the terms of the closure notices precluded HMRC from raising its fall-back argument, which was that the appellants should not be taxed only on their net profits. The FTT noted that the machinery for issuing closure notices when enquiries were completed contemplated that HMRC should reach only one conclusion and make one adjustment to

Our pick

Project Blue v HMRCSub-sale relief and alternative finance relief

In Project Blue v HMRC [2016] EWCA Civ 485 (26 May), the Court of Appeal found that FA 2003 s 71A did not apply to a land transaction, so that s 75A was not in point.

The issue was the SDLT payable on the purchase of the Chelsea Barracks from the Minister of Defence (MoD) by Project Blue (PBL), using an Ijara lease, which is a form of Sharia compliant financing (as opposed to an interest-bearing loan). The sale comprised the following steps:

zz MoD contracted to sell the land to PBL for £959m;

zz PBL contracted to sell the land to a Qatari bank (MAR). Under leaseback arrangements, PBL was to pay MAR rent (representing installments of the purchase price); and

zz PBL and MAR granted each other put and call options over the land.The UT had found that PBL was liable

to SDLT in the sum of £38m based on a consideration of £959m under s 75A. PBL contended that the party liable was MAR.

Under FA 2003 s 45 (before its 2008 amendments), PBL was not liable to SDLT, as the completion of the contract between the MoD and PBL was ‘disregarded’ under ‘sub-sale relief ’. Furthermore, under FA 2003 s 71A, no SDLT was payable on the transfer from the MoD to MAR under the second contract. This was because s 71A ensured that no SDLT was triggered by an Ijara lease transaction. Consequently, both the transfer to MAR and the leaseback by MAR were exempt alternative finance transactions. Finally, s 75A applied to a series of transactions between a vendor ‘V’ and a purchaser ‘P’, where the total SDLT payable was less than would have been payable on a direct sale by V to P.

The court observed that the purpose of s 71A was to limit SDLT to a single charge on the acquisition of the property from the third party vendor, whether by the financial institution or its customer. It would therefore be ‘strange’ for Parliament to have intended that both the acquisition of the property by the customer and its later acquisition by the financial institution should be SDLT free under sub-sale relief. The court therefore thought that the ‘much more obvious construction of s 71A’ was that cases falling within s 45(3) were intended to be treated as direct acquisitions by the financial institution from the third party vendor, which triggered SDLT so that MAR was liable.

As to s 75A, the court stressed that there was no reference in the provision to

the purpose of the transaction being tax avoidance. Under s 75A, MAR was ‘P’ and must be treated as such. However, this was only relevant if the court was wrong in relation to s 71A.Why it matters: The Court of Appeal reversed the UT’s decision, finding that s 75A did not apply because s 71A did not apply, so that the notional transaction and the actual transaction were identical for s 75A purposes. Interestingly, the s 71A argument was not run by PBL in the FTT and was given relatively short shrift by the UT.

Commenting on the impact of the decision, a client briefing issued by law firm Hogan Lovells observed that: ‘The mechanical operation of s 75A will risk multi-step transactions being overtaxed. In our view, this means that focus will now shift to s 75B. This reduces the s 75A charge by excluding consideration given on transactions connected with a land transaction, but incidental to it. Section 75B may not be well-suited to an important role. But there seems little other choice to make s 75A work sensibly.

‘In the Upper Tribunal, Morgan J gave s 75B a wide interpretation as a way to reach a common-sense answer that an SDLT charge fell on PBL on £959m. This analysis is not affected by the Court of Appeal’s decision (albeit, the court is critical of Morgan J’s ‘pre-conception’ of the right amount of tax).

‘There will also be focus on HMRC’s so called s 75A guidance. That has always been understood to give a clear commitment that HMRC will not apply s 75A except where there is understood to be SDLT avoidance (at least in effect, if not by motivation). Many transactions have relied on that, because of the power of s 75A otherwise to re-attribute consideration from non-chargeable to chargeable transactions (even in entirely commercial situations where the scheme of SDLT as a whole suggests there should be no charge). This raises public law and legitimate expectation issues.

‘As a matter of policy it is also a cause for concern that a financial institution entering into a sharia-compliant arrangement has been held liable for SDLT because of the court’s restrictive interpretation of the meaning of the word “vendor” in the context of a sub-sale. This is not what the parties contemplated, nor, we think, what Parliament intended or a sensible outcome.’


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the figures to reflect its conclusion. The covering letter sent by HMRC with all the closure notices had made it clear that the closure notices themselves addressed only the ‘capital’ and ‘non-deductible expense’ point, but that the other points had not been abandoned. The FTT concluded that HMRC should be allowed to raise its fall-back argument.

Having concluded that all the costs of purchasing the partnership interests and contributing funds to the partnerships were deductible, the FTT had to decide how the calculations should be made. It found that in calculating the profits of the appellants’ sole trades, it was appropriate to deduct from the gross income the amount already taxed under ICTA 1988 s 114. Why it matters: The FTT stated that this ‘was a very interesting and difficult case’; indeed, it ran to some 40 pages. In particular, the closure notice point was very different from the issue in Tower MCashback [2010] EWCA Civ 32, in that it was almost its ‘mirror image’. The FTT decided to accept that HMRC could raise a point in the cover letter if it was not possible to do so in the closure notice itself. Indeed, the FTT found it ‘sensible, if possible, to seek to reach a conclusion that does not lead to an incoherent result and suggest that the statutory provision is simply defective’.

Indirect taxesScope of the exemption in respect of payments and transfersIn HMRC v National Exhibition Centre (Case C-130/15) (26 May), the CJEU found that a service consisting in the sale of tickets and the processing of payments did not fall within the exemption of the Sixth Directive art 13B(d)(3) (transactions in respect of payments and transfers).

The NEC owned and operated the National Exhibition Centre and other venues in Birmingham, which were used to stage trade and public exhibitions, sporting events and concerts. It hired its venues to third party promoters and sold tickets for those events. The NEC refunded the event promoter the part of the amount paid by the customer corresponding to the ticket price and kept the amount corresponding to the booking fee. The issue was whether the service provided by the NEC fell within the art 13B(d((3) exemption, so that no VAT was due on the booking fee.

The court noted that the card processing service provided by the NEC resulted in a payment or transfer within the exemption. However, it added that the mere fact that a service was essential for completing an exempt transaction did not warrant the conclusion that that service was exempt. As the NEC did not debit or

credit the accounts concerned, it could not be regarded as executing the payment or transfer. The court concluded that the NEC merely collected information, communicated that information to the merchant acquirer bank and received information, which enabled it to make a sale and receive the corresponding funds.

In Bookit v HMRC (Case C-607/14)(26 May), the CJEU found that a card handling service provided in relation to the booking of cinema tickets did not fall within the exemption for ‘transactions concerning payment’ (Sixth VAT Directive art 135(1)(d)).

Bookit, a subsidiary of Odeon Cinemas, charged card handling fees to customers making advance bookings for cinema tickets. Until 2001, Odeon had provided these services itself. After consulting Deloitte & Touche, it had then restructured its ticket sales in order to ensure that the card handling fees were exempt from VAT. The issue was whether the card handling services were actually exempt.

Having stated the same principles as in the NEC case released on the same day (see above), the CJEU found that like the NEC, Bookit played no specific and essential part in effecting the transfers of funds, so that the services it provided did not fall within the exemption.Why these cases matter: The CJEU pointed out that it had previously held that in order to fall within the exemption, a transaction must have the effect of transferring funds (by whatever method), and this was to be distinguished from a mere technical or physical supply. On that basis, the services provided could not fall within the exemption as narrowly defined by the CJEU.

The reverse charge for material with a gold contentIn Envirotec Denmark ApS v Skatteministeren (Case C-550/14) (26 May), the CJEU found that a supply of material with a gold content fell within the scope of the reverse charge.

Envirotec, a Danish company had purchased ingots consisting of a variety of fused material with a gold content varying between 500 and 600 thousandths. Envirotec had paid VAT on the purchase of the ingots but its supplier had not paid the tax to the Danish tax authorities and it had gone into liquidation. The tax authorities had then decided that the VAT paid by Envirotec could not be deducted, on the ground that the ingots came under the reverse charge procedure.

Under the Principal VAT Directive art 198(2), where gold material (or semi-manufactured products) is supplied by a taxable person, member states may designate the customer as the person liable for payment of VAT. The issue was therefore

whether the ingots fell within the scope of art 198(2).

The court noted that the purpose of the provision was to fight tax evasion. As the gold content of an object which was not a finished product determined its value, the risk of tax evasion increased with the gold content, so that the degree of purity of the gold was crucial in determining whether it fell within the scope of the provision.Why it matters: The CJEU found that gold ingots made up of old jewellery, cutlery, watches and industrial residues could be treated as ‘gold material’ under art 198(2), as well as scrap of gold under art 199(1)(d).

Administration & appealsAPNs and DOTASIn The Queen (on the application of W Graham and others) v HMRC [2016] EWHC 1197 (26 May), the High Court found that transactions had been notifiable under DOTAS, so that both accelerated payment notices (APNs) and partner payment notices (PPNs) were valid.

The claimants were challenging the validity of APNs and PPNs. They had participated in schemes known as the ‘Liberty Partnerships’ and the issue was whether one of the conditions for the validity of APNs/PPNs was satisfied, which was that the schemes had been notifiable under DOTAS. The claimants contended that none of the Liberty Partnerships had been notifiable because the relevant first date for notifying had fallen before 1 August 2006 (DOTAS regulations, SI 2006/1543, regs 1(2)(a) and 1(2)(b)).

HMRC agreed that the relevant notifiable proposal for each of the partnerships had been the Information Memorandum of April 2006, which had been made available for implementation before 1 August 2006. However, HMRC contended that for the purposes of FA 2004 s 308(3), the relevant notifiable arrangements were the particular arrangements for each specific partnership.

The High Court agreed with HMRC, noting that each individual partnership had had its specific components, such as the identity of its partners, the amounts subscribed and the alleged tax advantage. The arrangements of s 308 must therefore be the specific arrangements of each particular partnership.Why it matters: The High Court found there was no justification for sweeping all the individual partnerships under a putative ‘single “umbrella” arrangement’, refusing to be swayed by references to a ‘so called’ reality.

Cases reported by Cathya Djanogly ([email protected])


6 3 June 2016 |

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www.taxjournal.comIn brief

In brief

Lessons from Fessal on tax and human rights

It is not in the public interest to tax the same profits twice.

In the recent case of I Fessal v HMRC [2016] UKFTT 0285 (TC) (reported

in Tax Journal, 13 May 2016), the First-tier Tribunal (FTT) held that a double charge to income tax on the same profits infringed the taxpayer’s human rights under article 1 of the first protocol to the European Convention on Human Rights (A1P1) (peaceful enjoyment of possessions), as applied by Human Rights Act (HRA) 1998 s 3.

The facts, so far as relevant, can be stated briefly. The taxpayer filed his income tax self-assessment returns for 2005/06 to 2008/09. He was in the ‘transitional regime’ applicable to barristers moving from the cash to the ‘true and fair’ basis of recognising profits for tax purposes, under FA 1998 s 42. His returns did not correctly reflect the allocation of profits between those years under the transitional regime. HMRC opened an enquiry into the taxpayer’s self-assessment for 2008/09 and revised returns were submitted for 2005/06 to 2008/09. The taxpayer had underpaid tax for 2005/06 and 2007/08, but had overpaid tax by a corresponding amount for 2006/07 and 2008/09.

HMRC informed the taxpayer in December 2011 that any claim for overpayment relief for 2006/07 was out of time; and in March 2012, it issued discovery assessments under TMA 1970 s 29 in respect of 2005/06 and 2007/08. The taxpayer appealed. He argued that the assessments for 2005/06 and 2007/08 should be reduced by reference to the tax which he had paid in respect of 2006/07, notwithstanding that his claim for repayment of that tax was excluded by the statutory time limit. The taxpayer claimed, amongst other things, that it was disproportionate for HMRC to collect tax on the profits of a period when it had already collected tax on those profits in a tax year that was ‘closed’, as this would lead to double taxation in contravention of his human rights under A1P1.

The FTT adopted a similar approach to the Supreme Court in R v Waya [2012] UKSC 51, and concluded that the power of the relevant HMRC officer to issue an assessment pursuant to s 29 should be read as being to make an assessment of the amount of tax which is the amount required in his opinion to make good the loss of tax, but only where assessing that amount does not breach the taxpayer’s rights under A1P1. A double charge to income tax on the same profits would infringe the taxpayer’s

human rights under A1P1. Accordingly, the overpaid tax for the closed year had to be taken into account, which would reduce the quantum of the assessment.

In considering whether the assessments were validly issued under s 29, it was necessary to construe s 29 in a manner that was compatible with A1P1. Accordingly, pursuant to HRA 1998 s 3, s 29 was to be construed as enabling HMRC to issue an assessment which makes good the loss of tax, but only after taking into account in the assessment a related overpayment which arises as a result of the circumstances giving rise to the underpayment.

There is an increased tendency on the part of HMRC to seek to impose a double tax charge (perhaps in an attempt to ‘punish’ those taxpayers who have participated in arrangements which it does not approve of). However, most people would agree with the FTT that subjecting the same profits to tax twice cannot reasonably be said to be pursuing a legitimate aim in the public interest or to be striking a fair balance between the demands of the general interest of the community and the protection of the individual’s rights.

The FTT has confirmed in this important decision that tax legislation, as with any other legislation, must be construed in a manner which is compatible with taxpayers’ human rights. HMRC can therefore expect to have to face similar arguments to those relied upon by the taxpayer in Fessal in other cases in which it seeks to subject the same profits to double tax. ■Adam Craggs, RPC ([email protected])

Update on the Anti-Tax Avoidance Directive

The EC’s Anti-Tax Avoidance Directive (ATAD) is likely to be implemented, in some form, within the next few months.

On 26 May, the EU’s Economic and Financial Affairs Council (ECOFIN)

met to discuss the European Commission’s Anti-Tax Avoidance Directive (ATAD). Agreement was not reached, but the issue will be brought back to the next ECOFIN meeting in June.

The European Commission’s proposed ATAD was announced in January, and is designed partly to ensure consistent implementation across the EU of the OECD BEPS package. Whilst a consistent pan-EU approach to BEPS is to be welcomed, ATAD goes further than BEPS in some respects and hence risks damaging the hard-won political consensus which has been reached

in relation to the overall BEPS package. If implemented, ATAD would require all

EU member states to introduce restrictions on interest deductibility, hybrid mismatch rules, CFC rules and an exit charge to prevent assets or company residence being shifted to low tax jurisdictions. There is also a ‘switchover rule’ which would enable member states to deny tax exemptions if income (such as dividends, capital gains or profits from permanent establishments) had been taxed at a low or zero rate in a non-EU country before being remitted to the EU.

The proposed restrictions on interest deductibility are similar to those in BEPS, with a suggested cap of 30% of EBITDA. A stricter limit of 20% was proposed by the Economic and Monetary Affairs Committee of the European Parliament, but this was not adopted by ECOFIN. On hybrid mismatches, the UK and Ireland expressed concern that the EU proposal does not go as far as the OECD recommendations, and recommended that it should be strengthened.

The CFC and ‘switchover rule’ proposals were the elements which proved controversial. The CFC proposal goes beyond current EU case law, since it is not expressed as applying only to wholly artificial entities, so some member states were concerned that it could impede the fundamental freedom of establishment. On the ‘switchover rule’, a number of member states expressed concerns and it seems possible that this element of ATAD may be dropped in the final proposals.

ATAD also included a proposal for a general anti-abuse rule (GAAR) and there was general agreement to this element.

ATAD is part of the Commission’s anti-tax avoidance package, which also includes a revision of the Administrative Cooperation Directive to provide country by country reporting between member states’ tax authorities on key tax-related information on multinationals operating in the EU. This part of the package was approved unanimously, and is in line with the BEPS recommendation. Separately, the Commission has proposed that certain country by country information should be made public, but this proposal has not yet been approved.

It is clear that the momentum generated by the OECD BEPS project is ensuring that tax remains high on the EU political agenda. It is likely that ATAD will be implemented, in some form, within the next few months. Particular points to watch are whether or not the ‘switchover rule’ is included, and for the UK, whether the final detail of the EU proposals matches the UK draft legislation on interest deductibility which has already been included in Finance Bill 2016. ■Heather Self, Pinsent Masons ([email protected])


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www.taxjournal.com


David Smith Economics editor David Smith has been economics editor of The

Sunday Times since 1989, where he writes a weekly column. He is also chief leader-writer, an assistant editor and policy adviser. He is the author of several books, including Something will turn up. Email: [email protected].

The moment is almost upon us. 23 June is a very important date for Britain’s future, and for those at the top of politics.

If the bookmakers are wrong and the vote is in favour of Brexit, we will soon have to get used to a new prime minister and chancellor. I can think of one obvious candidate for 10 Downing Street, though it is rather harder to come up with a clear successor to George Osborne.

The big names in the tax business have been treading carefully during the referendum campaign, keen not to be nabbed by the Electoral Commission for openly campaigning, and keen not to upset clients who favour Brexit. None of the ‘big four’ signed round-robin letters supporting continued EU membership. They have not ducked out of the referendum completely, however. When the CBI started the ball rolling with its analysis of the adverse economic consequences of leaving the EU, the work was done for it by PwC, which was happy to say so.

EY’s annual ‘attractiveness’ survey, which looks at inward investment, was carefully scrutinised by the firm’s lawyers to make sure it did not take sides. The underlying message, however, was pretty clear. Nearly four in five foreign investors (79%) said that being inside the single market was an important driver of Britain’s attractiveness as a location. Meanwhile, probably because of Brexit worries, only 23% of investors said they intended to invest in the UK over the next year, the lowest figure since 2010.

Anyway, let me shift this final pre-referendum piece on to the more familiar territory of the public finances. Tax Journal readers are better equipped than most to detect when a line is being spun, but even some of the most astute will have felt their heads spinning as a result of some of the numbers being batted across the Leave/Remain net. Let me try to help out.

One of Vote Leave’s central claims, emblazoned all over their campaign bus, is that Britain ‘sends’ £350m a week to Brussels, and that we could spend that money better ourselves if we choose to exit the EU, particularly on the National Health Service. The figure of £350m a week is, I hope people are aware, inaccurate. It has provoked the angriest response I can remember so far on any issue from Sir Andrew Dilnot, chair of the UK Statistics Authority, who

described its use as ‘misleading’, saying that it ‘undermines trust in official statistics’.

Before any money is ‘sent’ to Brussels, the rebate negotiated by Margaret Thatcher more than 30 years ago is deducted, knocking the payment down to around £275m a week. Around £115m a week of that comes back to the UK, mainly in farm support and regional structural assistance, reducing the net payment to £160m a week. A further sum in the region of £50m comes back to the UK private sector, reducing it to £110m.

The payment is therefore not £350m. However, the gross bill for EU membership, £14.3bn a year, sounds like a decent amount of money; and so does the net amount, after taking into account farm and regional support, of nearly £8.5bn annually. Could that money be used for other purposes? The answer, according to the Institute for Fiscal Studies (and, it should be said, pretty much every other assessment), is a fairly definite no.

The reason for this is straightforward. There is more than one moving part at work in this analysis. Yes, there would be a saving on Britain’s EU budget contribution, but Brexit would damage the public finances by reducing economic growth. The Treasury, in its short term assessment, said that public borrowing in 2017/18 would be between £25bn and £39bn higher under a Brexit scenario, not least because unemployment would be between 500,000 and 820,000 higher.

Enter the IFS…The Institute for Fiscal Studies (IFS) took a middle line on the economic damage from Brexit, taking an average of all the predictions. It concluded that, even without the EU budget contribution, the budget deficit at the end of the decade would be between £20bn and £40bn higher than under a Remain scenario. There is no pot of gold to spend on the National Health Service or anything else. In fact, the pressure would be to cut spending further and raise taxes.

The response of the official Vote Leave campaign to all of this says much about how they have approached the debate. They claim that the IFS is a propaganda arm of the European Commission, which is about as mad as it gets. They would have been better off saying that an overshoot of between £20bn and £40bn is nothing compared with the overshoots regularly chalked up by George Osborne since 2010. Or, that it is roughly on a par with the amount of extra borrowing Ed Miliband and Ed Balls aimed for when presenting their plans for balancing the current budget, but not achieving an overall surplus, at the May 2015 general election. Anyway, we will soon know whether all this analysis was for a purpose, or merely a tool to warn voters against a leap in the dark.

We will also soon know whether the public finances are doing as well as they should be. On 24 May, the Office for National Statistics released the first numbers for public borrowing for the new fiscal year. They showed a disappointingly small fall in borrowing in April compared with a year earlier, £7.2bn against £7.5bn. They also showed that borrowing in 2015/16 was £76bn, a £3.8bn overshoot compared with the Office for Budget Responsibility (OBR) March forecast.

The OBR, in response, pointed to the tendency for these figures to be revised lower over time. The slightly disappointing figures for April may fit in with other evidence that referendum uncertainty has hit revenues because of its wider impact on the economy. As I say, we will soon know. Either the world will be very different on 24 June or it will be more or less business as usual. ■

Economics focus

The public finances and the Brexit vote

Speed readThe public finances have been at the forefront of the referendum campaign. An intervention by the IFS, pointing out that Brexit would not free up resources for other spending priorities but increase the pressure for additional cuts and tax increases, will prove to be an important one.

For related reading visit www.taxjournal.com XX Brexit: UK tax policy considerations (Hilary Barclay, 9.11.16)



mailto:[email protected]

http://www.taxjournal.com

8 3 June 2016 |

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www.taxjournal.comInsight and analysis


Chris Davidson KPMGChris Davidson is a director in KPMG’s tax management consulting group. Drawing on

his 40 years’ experience, he advises corporate and private clients on all aspects of managing relationships with HMRC, both proactively and reactively, including disputes, tax risk and governance, low-risk ratings and escalation routes. Email: [email protected]; tel: 020 7694 5752.

There has been a lot of comment on accelerated payment notices (APNs) since they were introduced in 2014. Their

introduction has been a bumpy road, with legal challenges that still rumble on and the odd misstep by HMRC. The highest profile of these was the withdrawal of several hundred APNs last week after 2,000 APNs were withdrawn late last year, when HMRC accepted that the legislative requirements were not met: although the arrangements were notified to HMRC purportedly under DOTAS, they were not notifiable.

HMRC’s mistake in relation to the 2,000 withdrawn APNs seems to be quite straightforward. Promoter A made a disclosure, apparently under DOTAS. It turned out there was no obligation to disclose; and the APN is therefore unfounded. However, there is a more subtle mistake that HMRC is now making. Promoter B made a disclosure under DOTAS; B subsequently implemented the same transaction with another client. HMRC seems to take the view that if the original disclosure was correctly made, the subsequent transaction must be notifiable and hence the APN is soundly based.

Is that right? This requires a close analysis of the APN and DOTAS rules. The APN rules contain various conditions, including condition C, that ‘the chosen arrangements are DOTAS arrangements’ (FA 2014 s 219(4)(b)).

DOTAS arrangements are defined with three alternatives, all referring back to the DOTAS legislation:

zz The first two are variations of notifiable arrangements. The original distinction between a notifiable arrangement in FA 2004 s 306(1) and a notifiable proposal in s 306(2) reflected the different contractual possibilities, including a promoter making a proposal but not knowing whether it had been implemented. In either case, only one taxpayer is necessarily involved. In these circumstances, the promoter sends HMRC a disclosure under s 308, HMRC allocates a reference number under s 311 and the promoter passes it to the client under s 312.

zz The third alternative deals with the very common scenario where more than one client is involved. The first one had a notifiable arrangement or proposal and HMRC issued a

DOTAS number; the same promoter then gives similar advice to a subsequent client. The promoter does not need to send in an identical disclosure because s 308(5) removes that requirement as long as the arrangements are (or the proposal is) substantially the same, but the original reference number must be passed to the second client under s 312(2)(b). It is in this last scenario that the problem occurs. What

order do we need to answer the questions in? Should we say: the original arrangements were notifiable; these subsequent arrangements are substantially the same; the client must be given the reference number? Or: these subsequent arrangements are notifiable; the original arrangements were substantially the same; the client must be given the original reference number?

This matters because we may be looking at different rules. Are we asking whether these subsequent arrangements are notifiable by reference to the original DOTAS rules; or by reference to the rules that were current when they were proposed/implemented? For example, take a disclosure that was made in 2004 when DOTAS was introduced and a transaction that is substantially the same in 2016. The 2004 transaction must have enabled the taxpayer to obtain a tax advantage, which must have been one of the main benefits. Nothing has changed here (although it may be possible, on the facts, to show that a tax advantage or a main benefit for one client in 2004 was not the same as a tax advantage or a main benefit for another client at a later date). It must also have fallen within ‘any description prescribed … by regulations’.

Those regulations have changed over the years since 2004. Originally, we had financial products and employment products, and the key issues were confidentiality and premium fee. Subsequently, there have been various iterations as ‘hallmarks’ have come and gone. Is the 2016 transaction to be judged by reference to the 2004 hallmarks or the 2016 edition? From the analysis above, it seems clear that it must be 2016. The first question is: is this a notifiable arrangement or proposal within s 306? Only if the answer is ‘yes’ do you go on to ask which reference number the promoter must pass on.

HMRC has recently been responding to APN representations with a rather different analysis, however. In HMRC’s view, if a scheme was notifiable in 2004, it remains notifiable ‘even if it ceased to meet the definition of notifiable arrangements at some later date’. Therefore, the arrangements have some sort of independent existence, have been badged as notifiable and this branding stays with the arrangements come what may. The design is what counts in HMRC’s analysis, so you don’t need to test the actual arrangements each time they are implemented.

It seems to me that this is not a sustainable interpretation of the DOTAS rules and is inconsistent with the recent Graham case ([2016] EWHC 1197 (Admin)) and hence that HMRC is applying the APN rules incorrectly. As Lin Homer told the Public Accounts Committee, HMRC has to apply the law as it is, not as some people would like it to be. I understand HMRC is reviewing its analysis. Those who have received APNs in these circumstances will be hoping that Counter-Avoidance reconsiders their cases. ■

For related reading visit www.taxjournal.comXX HMRC withdraws APNs issued in error (Adam Craggs, 20.1.16)XX APNs: time for Parliament to reconsider? (Peter Vaines, 1.3.16)XX Rowe and accelerated payments (Michael Conlon QC &

Julian Hickey, 3.9.15)XX Challenging follower and accelerated payment notices

(Patrick Cannon, 3.10.14)XX Q&A on accelerated payment notices (James Bullock, 24.7.14)

Comment

HMRC’s misunderstanding of accelerated payment notices

Speed readHMRC is issuing APNs on the basis that a transaction is substantially the same as a previous transaction that was notifiable under DOTAS; and hence it is a DOTAS arrangement for APN purposes. This misinterprets the 2004 DOTAS rules under which the later transaction must itself meet the DOTAS standard. And it means that changes in the hallmarks are being ignored.



| 3 June 2016 9

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www.taxjournal.com Insight and analysis


Paul Crean BDOPaul Crean is a tax director within BDO’s financial services tax group, specialising in the

provision of tax services to the banking and insurance sectors. Paul is also BDO’s UK FATCA and Common Reporting Standard lead. Email: [email protected]; tel: 020 7893 2274.

Jonathan PitkinBDOJonathan Pitkin is a tax senior manager in BDO’s tax dispute resolution team and

has significant experience in advising taxpayers on tax investigations and voluntary disclosures to HMRC. Email: [email protected]; tel: 020 7893 2833.

Over the next two years, taxpayers will find themselves facing a wide range of measures designed both to give

tax authorities more information on a global basis and also to reassure the public that multinational companies and high net worth individuals are paying the right amount of tax. Taxpayers can be forgiven for struggling to keep track of the multiple requirements. This article provides a digest of key legislation and deadlines.

Tax information exchange (TIE) agreementsUK financial institutions (FIs) were required to report to HMRC under both FATCA and the International Tax Compliance (Crown Dependencies and Gibraltar) Regulations, SI 2014/520, by 31 May 2016; and thereafter annually on the same date under FATCA and the Common Reporting Standard (CRS) and/or the EU Directive on Administrative Cooperation in Tax Matters (DAC). Broadly, other than where a UK FI has no overseas account holders, all FIs can expect to be subject to reporting requirements from 2017, if not earlier.

FIs should consider the differences between FATCA and the CRS/DAC provisions; in particular, the interpretation of ‘controlling persons’. Under FATCA, controlling persons of corporate entities are typically interpreted as shareholders owning more than 25% of the shares. However, the OECD Commentary states that where no shareholders own over 25% of the shares, the controlling person of the entity will be the natural person(s) who hold(s) the position of senior

managing official. The OECD Commentary on the CRS should also be considered when implementing the DAC. (See the OECD Standard for automatic exchange of financial account information in tax matters, commentary on section VIII para 132.)

Consequently, individuals holding senior positions at companies may have to be reported, even where they have no shareholding in the entity which they manage. This may come as an unwelcome surprise. Under the CRS/DAC, the expectation is therefore that there will always be one or more controlling person(s) of a company; and the number of people brought into the reporting net will expand significantly.

Client notification regulations In addition to information flowing out of the UK, HMRC has also produced draft client notification, whereby FIs and specified relevant persons (those who give financial or legal advice as part of their business) will have to write letters to clients (and former clients) in a form partly prescribed to explain that HMRC will be receiving information from overseas tax authorities about their offshore assets. The letters will have to enclose a document under HMRC branding. In essence, HMRC expects FIs and tax advisers to put pressure on taxpayers.

The draft regulations are intended to implement the client notification obligations contained in FA 2013 s 222(2)(ca), inserted by F(No. 2)A 2015 s 50. The provisions of s 222(2)(ca) impose obligations on certain financial institutions and on ‘specified relevant persons’ to give ‘specified information’ to ‘clients or specified clients’.

HMRC therefore intends to use FIs and advisers to reinforce the message that TIEs are, in the main, reciprocal; and it clearly expects that a letter from an adviser or FI will effect a behavioural change on taxpayers. The obvious question is: what capacity do tax authorities have to interrogate the data they will receive?

Use of taxpayer data received by authoritiesHMRC has a clear strategy for data from TIEs. It will process data using Connect software, supported by a team of specialist data analysts and HMRC inspectors. The software operates in two environments: the ‘telescope’; and the ‘microscope’. The ‘telescope’ interrogates data from multiple sources and identifies patterns or anomalies. Inspectors take these results under the ‘microscope’ to build pictures of taxpayers’ affairs, identify risks and open enquiries.

Outside the UK, however, residents in certain jurisdictions may have greater concerns than mere tax enquiries. For example, some individuals hold assets overseas for privacy and security purposes, owing to the risks of kidnapping or extortion in their home country. It is important that these people understand what information will be reported and to whom, and how it may be used in their home jurisdiction. There is already an indication that individuals are changing tax residency as a result of such concerns.

HMRC’s strategy for tackling offshore non-complianceWith the advances in TIEs and the ability to handle large volumes of data, HMRC’s approach to individuals with offshore compliance issues has hardened. Beneficial disclosure facilities, such as the Liechtenstein disclosure facility, have closed; and although a new offshore disclosure facility is in the pipeline, it is not expected to include beneficial terms. HMRC has instead promised a tougher environment to encourage future compliance.

Analysis

Tax transparency round up

Speed read Over the next two years, many taxpayers will find that they are spending more time and resources providing information to HMRC, some of which will be shared with overseas authorities under tax information exchange agreements; and, under country by country and tax strategy requirements, making available information about how they structure their tax affairs. Taxpayers will also face the risk of increased penalties for failing to comply with new measures designed to tackle tax evasion, such as the corporate offence of failing to prevent tax evasion. They will have to consider seriously how this will affect their communications with customers and investors.




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The introduction of the offshore asset ‘move penalty’ (contained FA 2015 s 121 and Sch 21) from 27 March 2015 means that individuals can already be subject to penalties of up to 300% of the tax loss in relation to their offshore assets. Finance Bill 2016 includes measures that go even further, including:

zz a criminal offence for offshore tax evasion: HMRC will no longer need to prove intent to commit the offshore evasion (TMA 1970 ss 106B–106H);

zz an asset based penalty: 10% of the value of the asset, in addition to existing penalties (FB 2016 s 153, Sch 22); and

zz publishing details of deliberate tax defaulters: FA 2009 s 94 is amended, and existing safeguards will only apply to unprompted disclosures. These measures will only apply where the loss of tax

exceeds £25,000 in a tax year, but those who deal with high net worth individuals will know how complex their clients’ tax affairs can be. The £25,000 threshold could easily be broken in one transaction, and the seriousness of the sanctions means they must be considered for any advice or services.

Finance Bill 2016 also introduces tougher measures not limited by the £25,000 threshold. The minimum level for some offshore penalties will increase by 10%. Taxpayers will also be required to give a full account of the evasion to achieve full penalty reductions, e.g. details of anyone who facilitated the evasion. We await the draft statutory instrument to give effect to the FB 2016 measures, but taxpayers should review their offshore arrangements and correct offshore compliance issues without delay.

Notwithstanding the enhanced penalty regime on taxpayers, HMRC is also seeking to tackle all aspects of what it sees as the chain of evasion by introducing new civil and criminal offences.

Civil penalties for enablers of offshore tax evasion Finance Bill 2016 introduces penalties for persons who knowingly enable taxpayers to carry out ‘offshore tax evasion or non-compliance’.

An enabler is defined as a person who ‘encouraged, assisted or otherwise facilitated’ the taxpayer. The enabler can suffer a penalty of up to 100% of the tax loss, where the taxpayer is convicted of an offence or charged a penalty in relation to an offshore matter. The penalty can be for a careless or deliberate taxpayer error, which could give rise to significant disparities between the taxpayer and enabler penalties.

Where the loss of tax exceeds £25,000 in a tax year, or an enabler suffers five or more penalties in five years, HMRC will be able to publish details of the enabler, its business and the penalty. This would be likely to cause significant reputational damage.

Enablers will be able to mitigate the impact by disclosing details of the evasion, but this will likely present challenges with regard to client confidentiality and conflicts of interest where both the enabler and taxpayer make disclosures.

Corporate offence of failure to prevent the criminal facilitation of tax evasionThe second consultation on this offence will close 10 July 2016, with the offence expected to come into force at some point in 2017. As drafted, the offence would apply to a ‘relevant body’, including corporates and partnerships, if a person associated with the relevant body commits a UK or foreign tax evasion facilitation offence. Associated persons include those providing services on behalf of the relevant body (employees, agents and subsidiaries). There is also a requirement to look past the contractual arrangements and to consider all the facts and circumstances when identifying associated persons.

A UK tax evasion facilitation offence occurs when an associated person facilitates the evasion of UK tax. The relevant body can be in the UK or abroad. A foreign tax evasion facilitation offence occurs when an associated person facilitates the evasion of tax in a foreign country.

The defence against the offence will be to have reasonable procedures in place to prevent associated persons from criminally facilitating tax evasion. HMRC’s draft guidance for developing procedures is based around six key principles, including that of proportionality as to what reasonable procedures are.

HMRC has been quick to point out that the guidance is neither prescriptive nor a ‘one size fits all’. The onus is on the relevant body to prove that its procedures are reasonable. Ultimately, it will be up to the courts to decide, based on the facts and circumstances.

Other data sharing measures: making information publicIn addition to the above measures, corporate taxpayers are also being required to make other data available either directly to HMRC or to which HMRC will have access.

Timeline of transparency measures

2016 2017

1 Jan 2016Country by

country reporting implemented

10 Jul 2016‘Condoc’ closes

on corporate offence of failure

to prevent tax evasion

April 2017 Latest expected date for FB 2016

civil and criminal sanctions to come

into force

31 Dec 20171.CbC report filed2.Tax strategy published (Dec year ends)

31 May 2016FATCA CDOT reporting

30 Sep 2016CDOT data

transmitted to HMRC

30 Apr 2017Client notification

deadline for relevant offshore

advisers

30 Sep 2017CRS/DAC data transmitted to

HMRC

31 May 2017FATCA, CRS/DAC reporting (and

annually)


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Again, the rationale is to enforce greater transparency and, in some cases, to make such details public.

Country by country reportingLegislation was introduced in FA 2015 s 122 to enable the making of regulations to implement country by country (CbC) reporting. The Regulations obligate multinational enterprises with parent entities resident in the UK, and with consolidated group revenue of £586m or more in a 12 month accounting period, to make an annual CbC report to HMRC for the following period. The obligation to file applies to accounting periods starting on or after 1 January 2016 and reports must be filed no later than 12 months after the related period.

Pressure from EC to make CbC reporting publicAlthough the original expectation was that reports would not be made public, the European Commission issued a press release on 12 April 2016 proposing that large multinational companies should disclose publicly the income tax they pay within the EU, on a country by country basis. In addition, groups would be asked to disclose how much tax they pay on the business they conduct outside the EU.

Publication of UK tax strategyFinance Bill 2016 will require large businesses to publish a UK tax strategy document on an annual basis. In March, HMRC published draft guidance (see www.bit.ly/1NWrpJX) and expanded on what it might expect to see within a tax strategy to meet the four requirements detailed in the legislation, namely:

zz the approach of the UK group to risk management and governance in relation to UK tax;

zz the attitude of the group to tax planning, insofar as it affects UK tax;

zz the level of risk appetite for UK tax that the entity is prepared to accept; and

zz the approach of the group towards its dealings with HMRC.

This draft guidance also considers multinational enterprises (MNEs). An MNE group is defined as a group which is subject to CbC reporting (or that would be if the head of the group were based in the UK). HMRC has indicated that UK subsidiaries of MNE groups will therefore be caught by the requirements of the tax strategy legislation, irrespective of the size of the UK group. The strategy must be published by the end of the accounting period starting on or after the date of royal assent of Finance Bill 2016.

Where does this leave us?With new initiatives being driven by governments and the OECD, tax transparency is a rapidly developing area. Businesses must have the correct operational framework in place to deal with reporting, but these new measures mean they also need to review internal procedures and relationships with third parties. Individuals should be reviewing their offshore arrangements and correcting any compliance issues before tougher sanctions bite. ■

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For related reading visit www.taxjournal.com XX Examining the US final FATCA regulations (Reed Carey, 14.3.13)XX 20 questions on the CRS (Hatice Ismail & Martin Shah, 3.6.16)XX The proposed corporate offence of failing to prevent tax evasion

(Helen Buchanan, 4.5.16)XX Strict liability offences: a worrying trend? (James Quarmby, 13.5.16)XX FB 2016: Update on tax strategy publishing requirements (Angela

Clegg & Lucy Sauvage, 4.5.16)


https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/510346/Draft_Guidance_for_Strategy_Publication-1.pdf

http://www.bit.ly/1NWrpJX

http://www.bit.ly/1NWrpJX


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Hatice Ismail Simmons & Simmons Hatice Ismail is a corporate tax partner at Simmons & Simmons LLP. She advises

on all aspects of corporate tax, including corporate, restructuring, structured finance, cross-border and real estate transactions, predominantly for clients in the asset management & investment funds and financial institutions sectors. She also advises on stamp taxes, VAT and international exchange of tax information regimes. Email: [email protected]; tel: 020 7825 3977.

Martin Shah Simmons & Simmons Martin Shah is a corporate tax partner at Simmons & Simmons LLP and leads the

financial services tax practice. Martin advises on domestic and international financial markets, corporate, real estate (including structured real estate) and commercial work, covering direct and indirect taxes, with an emphasis on clients in the asset management & investment funds and financial institutions sectors. Email: [email protected]; tel: 020 7825 4638.

1. What is the Common Reporting Standard?

The Common Reporting Standard (CRS) is a cross border automatic exchange of information regime

developed by the Organisation for Economic Cooperation and Development (OECD) at the behest of the G20, against the backdrop of public pressure to tackle tax evasion by wealthy individuals and corporations in the wake of the financial crisis.

It was inspired by the US Foreign Account Tax Compliance Act (FATCA) regime, which imposes reporting obligations on non-US financial institutions to assist the US Internal Revenue Service to identify US taxpayers evading US tax on their offshore financial accounts.

The OECD was tasked with developing a single global standard for governments to annually exchange financial

account information which had been reported to them by their local financial institutions. The resulting CRS regime, which was first released and endorsed by the G20 in February 2014, has been aptly dubbed the ‘global FATCA’; it imposes similar obligations on financial institutions as they face under FATCA, but on a much more global scale.

CRS essentially requires reporting financial institutions in participating jurisdictions to conduct due diligence to identify financial accounts held directly or indirectly by residents of other jurisdictions that are reportable jurisdictions. They must annually report certain information about such account holders and accounts to the tax or other competent authorities in the financial institution’s own jurisdiction, for exchange with each of the other reportable jurisdictions.

A consolidated version of the CRS (www.bit.ly/1rwOhee) was released by the OECD on 21 July 2014. It includes an overview, commentary and guidance for implementation by governments and financial institutions, and detailed bilateral and multilateral model Competent Authority Agreements (which are based on the FATCA Model 1 intergovernmental agreement to ease implementation and minimise the associated costs for financial institutions). It also includes standards for harmonised technical and information technology solutions (including a standard XML schema format) and requirements for the secure transmission of data.

In addition, the OECD has published a CRS Implementation Handbook (Aug 2015) (www.bit.ly/1VMgieI) and CRS-related FAQs (Nov 2015) (www.bit.ly/1UDZ2XE); and created an automatic exchange portal on the OECD website that includes CRS materials and tracks how CRS is being implemented globally (www.bit.ly/228neBf).

A summary of key aspects of the CRS rules and a discussion of some of the related practical issues is set out below. Due to the global nature of the regime and the variation of implementing rules between jurisdictions, the discussion below is based on the OECD CRS and is only jurisdiction specific where expressly stated.

2. Which jurisdictions are participating in the CRS?To date, 101 jurisdictions have committed to adopting the CRS (www.bit.ly/1ixyRkV), with a view to commencing the exchange of information with partner jurisdictions from either 2017 (these are the so-called ‘early adopter’ jurisdictions) or 2018. Most notably, this list does not include the United States.

As at 12 May 2016, 82 jurisdictions (www.bit.ly/1plT68V), including each EU jurisdiction, had signed a multilateral Competent Authority Agreement.

At EU level, a Directive was adopted in December 2014 to extend the scope of mandatory automatic exchange of information between EU tax authorities under the existing EU Directive on Administrative Cooperation (2011/16/EU) (the DAC). Those amendments require the consistent implementation of the CRS by each EU member state under local law with effect from 1 January 2016, although Austria is allowed a further year to implement the CRS.

The UK and most other ‘early adopter’ jurisdictions have already implemented the CRS under local law with effect from 1 January 2016, with other jurisdictions committed to first exchanges of information in 2018 planning to implement the CRS with effect from 1 January 2017.

The CRS/DAC and FATCA are implemented in the UK by The International Tax Compliance Regulations,

Big read

20 questions on the Common Reporting Standard

Speed readThe Common Reporting Standard regime, which many jurisdictions around the world (including the UK) have already implemented under local law with effect from 1 January 2016, imposes complex due diligence and reporting obligations on affected financial institutions. It also has implications for individuals and entities that are not financial institutions, as they may be requested to provide self-certifications about their tax residence and status under the regime to affected financial institutions in which they hold accounts. Financial institutions in jurisdictions that have implemented the regime should already have compliance programmes in place, whilst others in jurisdictions that have committed to implementing the regime in future should be preparing now.


http://bit.ly/1rwOhee

http://bit.ly/1rwOhee

https://www.oecd.org/ctp/exchange-of-tax-information/implementation-handbook-standard-for-automatic-exchange-of-financial-information-in-tax-matters.pdf

https://www.oecd.org/ctp/exchange-of-tax-information/implementation-handbook-standard-for-automatic-exchange-of-financial-information-in-tax-matters.pdf

http://bit.ly/1VMgieI

http://bit.ly/1VMgieI

https://www.oecd.org/tax/automatic-exchange/common-reporting-standard/CRS-related-FAQs.pdf

http://bit.ly/1UDZ2XE

http://bit.ly/1UDZ2XE

https://www.oecd.org/tax/automatic-exchange/

http://www.oecd.org/tax/automatic-exchange/commitment-and-monitoring-process/AEOI-commitments.pdf

http://www.oecd.org/tax/exchange-of-tax-information/MCAA-Signatories.pdf

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SI 2015/878 (the ‘UK regulations’). UK CRS guidance has been issued by HMRC. The UK equivalent regime to FATCA (known as ‘UK FATCA’ or ‘CDOT’), which applies to financial institutions resident in the UK and in the British Crown Dependencies and Overseas Territories and took effect at the same time as FATCA (i.e. from 1 July 2014), has effectively been superseded by CRS, but subject to transitional provisions (see Q18 below).

Early adopter jurisdictions committed to first information exchanges by 2017 (55)

Anguilla, Argentina, Barbados, Belgium, Bermuda, British Virgin Islands, Bulgaria, Cayman Islands, Colombia, Croatia, Curaçao, Cyprus, Czech Republic, Denmark, Dominica, Estonia, Faroe Islands, Finland, France, Germany, Gibraltar, Greece, Greenland, Guernsey, Hungary, Iceland, India, Ireland, Isle of Man, Italy, Jersey, Korea, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Mexico, Montserrat, Netherlands, Niue, Norway, Poland, Portugal, Romania, San Marino, Seychelles, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Trinidad and Tobago, Turks and Caicos Islands, United Kingdom

Jurisdictions committed to first information exchanges by 2018 (46)

Albania, Andorra, Antigua and Barbuda, Aruba, Australia, Austria, The Bahamas, Bahrain, Belize, Brazil, Brunei Darussalam, Canada, Chile, China, Cook Islands, Costa Rica, Ghana, Grenada, Hong Kong (China), Indonesia, Israel, Japan, Kuwait, Lebanon, Marshall Islands, Macao (China), Malaysia, Mauritius, Monaco, Nauru, New Zealand, Panama, Qatar, Russia, Saint Kitts and Nevis, Samoa, Saint Lucia, Saint Vincent and the Grenadines, Saudi Arabia, Singapore, Sint Maarten, Switzerland, Turkey, United Arab Emirates, Uruguay, Vanuatu.

Note: The jurisdictions yet to sign a CRS Competent Authority Agreement are italicised.

A jurisdiction implementing CRS treats as participating jurisdictions each other jurisdiction with which it has an agreement to exchange CRS information and which it publishes on a list of participating jurisdictions. In view of the time it may take for such agreements to be put in place and/or to implement CRS under local law, a participating jurisdiction is permitted to treat other jurisdictions committed to implementing CRS by 2018, or that have signed such agreement but not yet implemented it, as a participating jurisdiction for a transitional period on the assumption that they will deliver on their commitments. The UK has, for example, adopted this approach under the UK regulations. This treatment is helpful for reporting financial institutions, which are required to ‘look through’ certain financial institution account holders to their ‘controlling persons’ where such account holders are in a non-participating jurisdiction (see Q6 below).

3. What are financial institutions under CRS?The CRS due diligence and reporting obligations apply to reporting financial institutions in CRS participating jurisdictions from the applicable implementation date.

There are four main types of financial institution under CRS, as there are under the FATCA intergovernmental agreements. Financial institution includes:

zz an investment entity;zz a depositary institution; zz a custodial institution; andzz a specified insurance company.

A financial institution is in a CRS participating jurisdiction if it is tax resident in a participating jurisdiction. A financial institution with no tax residence (such as partnerships and other transparent entities) should generally be a participating jurisdiction financial institution if it is incorporated, effectively managed or subject to fiscal supervision in a participating jurisdiction; or, in the case of a trust, if the trustees are resident there. Where a financial institution has a branch located in another participating jurisdiction, that branch is treated as a financial institution governed by the CRS rules of the other jurisdiction.

Certain holding companies of financial groups and treasury centres can be financial institutions under US FATCA regulations, but under CRS they will only be financial institutions if they fall within any of the definitions of the above four categories of financial institution.

‘Investment entity’ includes two types of entities: entities that primarily conduct as a business investment activities or operations on behalf of other persons; and entities that invest in financial assets and are managed by other financial institutions. Most discretionary investment managers and funds/collective investment vehicles, capital markets issuer SPVs, as well as some trusts and other entities investing or trading in financial instruments will fall to be treated as an investment entity financial institution.

The first type of ‘investment entity’ is any entity that primarily conducts as a business one or more of the following activities or operations for or on behalf of a customer:

zz trading in money market instruments (cheques, bills, certificates of deposit, derivatives, etc.); foreign exchange; exchange, interest rate and index instruments; transferable securities; or commodity futures trading;

zz individual and collective portfolio management; orzz otherwise investing, administering, or managing

financial assets or money on behalf of other persons.Broadly, the above will be a primary activity of the

entity if the majority of its gross income is attributable to such activities over the relevant period. The provision of investment advice is not caught by such activities/operations.

The second type of ‘investment entity’ includes any entity the gross income of which is primarily attributable to investing, reinvesting or trading in financial assets, if the entity is managed by another entity that is a depository institution, a custodial institution, a specified insurance company, or the first type of investment entity. An entity is ‘managed by’ another entity if the managing entity performs, either directly or through another service provider, any of the activities or operations described above on behalf of the managed entity. However, an entity does not manage another entity if it does not have discretionary authority to manage the entity’s assets (in whole or part). However, under UK rules, the test of being managed by another financial institution is met in relation to a trust (making it a financial institution) where the trust or its activities are being managed by a financial institution. ‘Financial assets’ includes a broad range of interests in securities, partnerships, derivative contracts, insurance and annuity contracts, etc., but does not include


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non-debt interests in real estate.A ‘custodial institution’ is any entity that holds, as

a substantial portion of its business, financial assets for the account of others. Such activity constitutes a ‘substantial portion’ of the entity’s business if (broadly) its gross income attributable to the holding of financial assets and related financial services equals or exceeds 20% of the entity’s gross income over the relevant period. Generally, custodian banks, brokers and central securities depositories should fall within this category, although central securities depositories may not have due diligence and reporting obligations under local implementing rules. It can also include fund nominees, intermediaries and platforms that hold interests in funds and other assets for their clients.

A ‘depositary institution’ is an entity that accepts deposits in the ordinary course of a banking or similar business. This should include most savings banks, commercial banks, savings and loan associations and credit unions.

A ‘specified insurance company’ is an entity that is an insurance company (or holding company of an insurance company) that issues, or is obligated to make payments with respect to, a product that is classified as a cash value contract or an annuity contract. This will generally include most life companies.

4. Are any financial institutions in a CRS participating jurisdiction exempt from the CRS obligations?Financial institutions in a CRS participating jurisdiction that fall within a category of non-reporting financial institution are exempt from the CRS due diligence and reporting obligations. These include the following, where the relevant detailed conditions are met:

zz government entities; zz international organisations;zz central banks;zz pension funds of each of the above;zz certain retirement funds (broad and narrow

participation retirement funds);zz qualified credit card issuers; zz exempt (regulated) collective investment vehicles;zz trustee documented trusts (where the trustee does the

CRS reporting for the trusts); and zz other financial institutions designated as at low risk of

being used to evade tax under the local law of a participating jurisdiction.The EU Commission has published in the Official

Journal of the European Union a list of the non-reporting financial institutions in the low risk category received from each member state, which it will update as necessary. The UK has not notified any specific types of UK financial institutions that it considers should fall within this category.

5. Which ‘financial accounts’ fall within the scope of the CRS obligations for reporting financial institutions?A reporting financial institution is required to review the ‘financial accounts’ it maintains and to identify whether any such accounts are held by reportable persons (i.e. are reportable accounts); and to annually report certain information on such reportable accounts and reportable persons to its local tax or other competent authorities. There are five categories of financial accounts:

zz depositary accounts (such as checking and savings

accounts);zz custodial accounts (accounts in which financial assets

are held for the benefit of others);zz equity and debt interests (and their equivalents, such as

for partnerships and trusts) in certain investment entity financial institutions;

zz cash value insurance contracts (broadly contracts insuring against mortality, morbidity, accident, liability or property risk that has a cash value); and

zz annuity contracts (contracts where payments are made for a period of time determined in whole or part on life expectancy).Equity and debt interests held in investment managers

who are solely financial institutions because of their investment management activities are specifically carved out of the definition of ‘financial accounts’.

The list of financial accounts is subject to certain exemptions. These include (if the relevant conditions are met) certain:

zz retirement and pension accounts;zz non-retirement tax favoured products; zz term life insurance contracts;zz accounts held solely by estates;zz escrow accounts;zz depositary accounts that exist due to unreturned

overpayments; andzz other low risk accounts designated as such under the

local law of a participating jurisdiction.The EU Commission has published in the Official

Journal of the European Union a list of excluded accounts in the low risk category received from each member state, which it will update as necessary. The UK nominated and set out in the UK regulations a broad range of financial accounts as low risk ‘excluded accounts’, including tax favoured products such as ISAs and Junior ISAs, premium bonds, immediate needs annuities, HMRC approved company share option plans, fixed interest and index linked savings certificates issued by UK National Savings and Investments, HMRC registered pension schemes and low value dormant accounts.

Unlike under FATCA, equity and debt interests ‘regularly traded on an established securities market’ are not exempt accounts (see Q19 below).

6. Which financial accounts are reportable accounts?The due diligence processes that a reporting financial institution is required to carry out (detailed further below) are aimed at identifying the following types of ‘reportable accounts’ they maintain:

zz financial accounts held by individuals resident in reportable jurisdictions;

zz financial accounts held by non-financial entities (NFEs) (i.e. entities that are not financial institutions) resident in reportable jurisdictions, whether such entities are ‘passive NFEs’ or ‘active NFEs’, unless such persons are excluded from being reportable persons (see below);

zz financial accounts held by ‘passive NFEs’ with one or more natural ‘controlling persons’ who are resident in a reportable jurisdiction, even if the passive NFE is not itself resident in a reportable jurisdiction; and

zz undocumented accounts.‘Resident in a reportable jurisdiction’ means resident

under the tax laws of a jurisdiction with which an agreement is in place to report CRS information and is identified on a list of reportable jurisdictions published by the reporting financial institution’s jurisdiction. A legal arrangement such as a partnership with no tax residence is


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treated as resident in the place of its effective management. Jurisdiction specific guidance on when a person is considered resident under domestic law is available on the OECD Automatic Exchange Portal.

The definition of a ‘reportable jurisdiction’ is similar to that of a ‘participating jurisdiction’, except that it effectively excludes a participating jurisdiction that has entered into a non-reciprocal agreement under which it agrees to send but not receive CRS information.

A reportable jurisdiction in relation to a reporting financial institution should generally not include its own jurisdiction.

Financial accounts held by financial institutions are not generally reportable, wherever the financial institution is resident (or located if a branch). An exception to this is where the financial account is held by an investment entity financial institution resident (or located if a branch) in a non-participating jurisdiction that is managed by another financial institution (e.g. a US fund), in which case it is treated as a ‘passive NFE’ that is required to be looked through to its natural ‘controlling persons’ to identify if one or more of them is resident in a CRS reportable jurisdiction.

Financial accounts held by certain categories of entities who are resident in a reportable jurisdiction, which overlaps with some categories of active NFE (see below), are also excluded from being reportable accounts. These are:

zz corporations whose stock is regularly traded on one or more established securities markets, and related entities of such companies (entities are related if one controls the other or both are under common control, with control including direct or indirect ownership of over 50% of vote and value in an entity);

zz government entities;zz international organisations; and zz central banks.

A ‘passive NFE’ is essentially an NFE that is not an ‘active NFE’, or is deemed to be a passive NFE by virtue of being an investment entity financial institution resident in a non-participating jurisdiction that is managed by another financial institution.

‘Active NFEs’ include (amongst other things) any NFEs that meet the relevant conditions to be:

zz active NFEs by reason of income and assets;zz publicly traded NFEs;zz governmental entities, international organisations,

central banks or their wholly owned entities;zz holding NFEs that are members of a non-financial

group;zz start-up NFEs;zz NFEs that are liquidating or emerging from bankruptcy;zz treasury centres that are members of a non-financial

group; orzz non-profit NFEs.

An ‘undocumented account’ arises when a reporting financial institution is unable to obtain information from an account holder in respect of a pre-existing account. This could either be the result of inadequate procedures being implemented by a reporting financial institution to obtain the necessary information or where the account holder is recalcitrant.

7. What are the key deadlines for reporting financial institutions in early adopter jurisdictions?The deadlines for the key CRS due diligence and reporting obligations in the early adopter jurisdictions are

summarised in the table below.

Obligation Deadline

Implement CRS compliant on-boarding procedures for new accounts opened on or after 1 January 2016

1 January 2016

Complete due diligence on high value (>US$1m) pre-existing individual accounts open as at 31 December 2015

31 December 2016

Complete due diligence on all other pre-existing accounts open as at 31 December 2015 (i.e. pre-existing entity accounts with an account balance or value that exceeds US$250,000 (in aggregate) as at 31 December 2015 and low value individual accounts)

31 December 2017

File first annual report (for the 2016 calendar year) with local tax or other competent authority, and complete any related tax authority notification/portal registration

By 2017 deadline applicable in local jurisdiction (examples of reporting deadlines include 31 May in the UK and Cayman Islands, 30 June in each of the British Crown Dependencies, Luxembourg and Ireland)

The CRS information received by the local tax or other competent authority is required to be exchanged for the first time with each other reportable jurisdiction with which a suitable instrument is in place

30 September 2017

Some participating jurisdictions require reporting financial institutions to notify their status. For example, the Cayman Islands (which is an early adopter jurisdiction) requires that the Cayman Tax Information Authority is provided with a one-off notification from reporting Cayman financial institutions by 30 April of the first year of them being required to report – i.e. by 30 April 2017 for reporting Cayman financial institutions in existence during 2016.

Reporting financial institutions may be required to notify individual account holders before any report is made about them to any tax or other competent authorities. This is a specific requirement of the DAC and therefore is mandatory for EU financial institutions under their local law implementing the DAC. Other jurisdictions such as Guernsey also have such a requirement.

Under the UK regulations, the account holder notification deadline is 31 January following the calendar year in which the account is first identified as reportable. In practice, the HMRC CRS guidance suggests that a direct communication to account holders that will be reported on is not needed and instead this requirement could be met through a one-off general paper or electronic communication, such as by way of an update to terms and conditions, and could be included in the self-certification or account opening documents.

Separately to this process, HMRC will require financial


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intermediaries (which includes financial institutions) and tax advisers to write to customers to tell them about automatic exchange of information, disclosure opportunities and penalties for failing to declare liabilities relating to offshore financial accounts.

8. Are there any optional variations to the due diligence requirements that could impact on timing?The CRS provides for various options, any number of which a participating jurisdiction may permit reporting financial institutions in its jurisdiction to apply. This could have an effect on the type and timing of due diligence processes applied and timing of reporting relevant accounts. Some of these potential options include allowing reporting financial institutions to elect to:

zz apply the more stringent due diligence procedures for new accounts to all or a clearly identified group of pre-existing accounts (although the rules otherwise applicable to pre-existing accounts still apply);

zz apply the more stringent due diligence procedures for pre-existing high value individual accounts to all or a clearly identified group of pre-existing low value individual accounts, so as to avoid the requirement to monitor whether the account balance or value of low value individual accounts subsequently exceeds the $1m threshold at the end of each calendar year;

zz apply a de minimis threshold to all or a clearly identified group of pre-existing entity accounts, such that accounts with an aggregate account balance or value of $250,000 or less (or local currency equivalent) as at 31 December 2015 (or relevant later date in ‘later adopter’ jurisdictions) are not subject to review, unless and until the $250,000 threshold is exceeded at the end of a later calendar year; and/or

zz treat new accounts opened by holders of pre-existing accounts as pre-existing accounts, with the benefit of a potentially longer period in which to complete the due diligence process and the ability to rely on information already collected in relation to such account holders for AML/KYC and other regulatory purposes, provided certain conditions are met (see question 10 below).Each EU member state is permitted under the DAC

to provide any of the above options under its local CRS implementing legislation.

A jurisdiction offering such options may require formal elections to be made for a reporting financial institution to benefit.

9. What is the wider approach and what impact does it have on the account holder data that can be collected?The wider approach is intended to enable reporting financial institutions to collect and maintain information on the tax residence of account holders, even where the account holder is not resident in a reportable jurisdiction during the reporting period. This is especially helpful given that further jurisdictions are expected to become reportable jurisdictions in future. Where the wider approach is adopted, it gives reporting financial institutions comfort from a data protection law compliance perspective because they are obliged to collect and retain information on where account holders are resident. Many jurisdictions, including the UK, are taking such a wider approach, as indicated on the OECD Automatic Exchange Portal, although for some (such as Ireland) it only applies for a transition period. The due diligence obligations described below, which relate to identifying reportable accounts,

should be read in light of the wider approach of generally identifying the tax residence of account holders.

Reporting is still limited to information on accounts held by residents of reportable jurisdictions, although jurisdictions may allow wider reporting at local level for even greater efficiency.

10. What are the due diligence procedures for new accounts?Reporting financial institutions are required to carry out different due diligence procedures on financial accounts, depending upon whether the financial accounts are new or pre-existing accounts, individual or entity accounts.

For new accounts, there is generally an obligation to obtain self-certifications to determine the tax residence of the account holder (and, where applicable, the controlling persons) from the outset, whereas for pre-existing accounts reporting financial institutions can generally rely on information they already hold on file.

For reporting financial institutions in ‘early adopter’ jurisdictions, new account opening procedures should be applied to all financial accounts opened on or after 1 January 2016, unless a new account is treated as a pre-existing account.

If the reporting financial institution is in a participating jurisdiction that applies a wider definition of ‘pre-existing account’ to allow new accounts opened by an account holder that holds a pre-existing account with the reporting financial institution to be treated as pre-existing accounts, it may exercise such an option, provided that the relevant conditions applicable under local law are met.

Where the account is held by joint or multiple individual account holders, the procedures should be applied to each account holder.

New individual accountsThe procedures that should be applied to new individual accounts:

zz Obtain upon account opening a valid self-certification, which may be part of the account opening documentation. The self-certification may be any form but must be signed or positively affirmed by the account holder, be dated, and must include the account holder’s name, address, jurisdiction(s) of tax residence, tax identification number(s) (TIN(s)) and date of birth.

zz Carry out a completeness check on the self-certification. Reject an incomplete self-certification and make a further request for a valid self-certification.

zz Check and confirm the reasonableness of such self-certification based on consistency with the information that was obtained in connection with the account opening, including documentation collected pursuant to AML/KYC procedures. The reasonableness can only be confirmed if the reporting financial institution does not know or have reason to know that the self-certification is incorrect or unreliable. If there is reason to believe that the self-certification is incorrect or unreliable, then a valid self-certification or reasonable explanation and documentation supporting the reasonableness of the self-certification should be obtained.

zz If the self-certification establishes that the account holder is tax resident in any reportable jurisdiction(s), then the account should be treated as reportable.

zz Monitor the account for any changes of circumstances that might affect the tax residence of the account and obtain a valid self-certification if there is a change that causes the reporting financial institution to know, or


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have reason to know, that the original self-certification is incorrect or unreliable.

New entity accountsThe due diligence procedures to be applied to new entity accounts have two parts:1. Establish if the account is held by one or more entities

tax resident in a reportable jurisdiction.2. If the new entity account is held by a passive NFE,

establish whether the entity is controlled directly or indirectly by one or more natural persons who are resident in a reportable jurisdiction.New accounts opened by holders of pre-existing

accounts may potentially be treated as pre-existing accounts instead of new accounts in certain circumstances (see above).

zz The starting point for the due diligence process for a new entity account could be to obtain a self-certification from the new entity account holder(s). The self-certification must be signed or positively affirmed by the account holder, be dated, and must include the account holder’s name, address, jurisdiction(s) of tax residence, and TIN(s).

zz Alternatively, the OECD CRS Implementation Handbook suggests that the starting point could be to establish whether, based on publicly available information and/or information in its possession, it could be reasonably determined that the account holder is not a reportable person and therefore the account is not reportable in relation to the account holder (e.g. see question 5 above for a discussion of which financial accounts are reportable or non-reportable).

zz If, using such alternative approach, it cannot be reasonably determined that the new entity account holder is not a passive NFE or is not otherwise reportable, then a valid self-certification would need to be obtained from the entity. If such reasonable determination is made, then no self-certification is required unless there is a change of circumstances.

zz Although self-certifications should always be provided by account holders who are or may be passive NFEs, self-certifications relating to the natural controlling persons of a passive NFE account holder can be obtained either from the account holder or the natural controlling persons themselves. Such self-certifications should include the same details relating to the natural controlling persons as described above in relation to new individual account holders.

zz The completeness and reasonableness checks described above need to be completed in relation to any self-certification form(s) obtained.

zz If the account holder is determined to be resident in a reportable jurisdiction, then the account should be treated as a reportable account. If the account holder is a passive NFE with one or more natural controlling persons resident in a reportable jurisdiction, then the account must be treated as reportable (even if the passive NFE is not itself resident in a reportable jurisdiction).

zz The account should be monitored for any change of circumstances. If there is a change that causes the reporting financial institution to know or have reason to know that the self-certifications(s) or other account documentation is incorrect or unreliable, then a fresh self-certification should be obtained within 90 days of becoming aware of the change (or, if later, the end of the reporting period).

Timing of obtaining self-certificationsThe OECD CRS suggests that the self-certification must be obtained on ‘day one’, as a condition precedent to opening the new account. However, the OECD FAQs allows for the possibility of a participating jurisdiction relaxing this position by allowing for a 90-day grace period in certain circumstances. The OECD FAQs (FAQ 20) provide that where a self-certification is obtained at account opening, but validation of the self-certification cannot be completed because it is a ‘day two’ process undertaken by a back-office function, the self-certification should be validated within a period of 90 days. The FAQ acknowledges that there are a limited number of instances where, due to the specificities of a business sector, it is not possible to obtain a self-certification on ‘day one’ of the account opening process; for example, where an insurance contract has been assigned from one person to another or in the case where an investor acquires shares in an investment trust on the secondary market. In such circumstances, the self-certification should be both obtained and validated as quickly as feasible, and in any case within a period of 90 days.

OECD FAQ 20 also expresses the OECD’s expectation that jurisdictions have strong measures in place to ensure that valid self-certifications are always obtained for new accounts, given that obtaining a self-certification for new accounts is a critical aspect of ensuring that the CRS is effective. In all cases, reporting financial institutions shall ensure that they have obtained and validated the self-certification in time to be able to meet their due diligence and reporting obligations with respect to the reporting period during which the account was opened.

However, UK HMRC CRS guidance provides that such a ‘grace period’ can be applied, but suggests that if a UK reporting financial institution has used proper endeavours but failed to obtain a self-certification within 90 days of opening the account then the account does not need to be closed but should be reported if there are any indicia of residence in a reportable jurisdiction.

11. What are the due diligence procedures for pre-existing accounts?The due diligence procedures applicable to pre-existing accounts are complex and vary depending upon whether the account is a high or low value individual account or an entity account. High value individual accounts are subject to enhanced review procedures compared to those applicable to low value individual accounts.

A reminder of the due diligence deadlines applicable in relevant early adopter jurisdictions are below.

Type of pre-existing

account holder

Category of account as at 31 December 2015 Deadline

Individual High value (>$1m in aggregate)

31 December 2016

Individual Low value (≤$1m in aggregate)

31 December 2017

Entity All accounts, subject to a $250,000 de minimis, where

applicable

31 December 2017

New accounts may in certain circumstances be treated as pre-existing accounts (see Q10 above).


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Is the account exempt from being reportable (by virtue of being a cash value insurance contract/annuity contract prevented by law from being sold to residents of any reportable jurisdictions)?

Pre-existing individual account

Do the electronically searchable databases of the reporting financial institution include all the information required to complete an indicia check?

Does the reporting financial institution hold documentary evidence (e.g. government issued certificate of residence/ID) and wish to apply the simplified residence test (where permitted by its jurisdiction)?

Is the current address in a reportable jurisdiction?

Account is reportable account

Not reportable account

Not reportable account, until change of circumstances

Not reportable account, until change of circumstances

Obtain a self-certification and conduct a paper record search. If residence is not established, then report account as undocumented and re-apply applicable process annually until account documented. Report account if established individual is resident in a reportable jurisdiction.

Account is reportable account

Conduct a paper record search for missing indicia

Was only a ‘hold mail’ or ‘ in care of’ address and no other address or other indicia found in the indicia search; and, having conducted a relationship manager inquiry, does the relationship manager have no actual knowledge of the account being reportable?

No – apply enhanced due diligence procedures

No

No

NoNo

No

No

No

No

Yes

YesYes

Yes

Yes

Yes

Yes

Yes

Yes

Was indicia of a reportable jurisdiction found during the electronic search? Was indicia of a reportable jurisdiction

found during the indicia search or does the relationship manager have actual knowledge of the account being reportable?

Can the indicia be cured through a self-certification or other documentary evidence?

Was the only indicia found during the indicia search a ‘hold mail’ or ‘ in care of’ address?

Is the account a low value account (with an account balance/value of $1m or less in aggregate as at 31 December 2015 or at the end of a subsequent calendar year)?

Yes

No

Procedure for pre-existing individual accounts

The relevant indicia are:1. Identification of the account holder as resident in a

reportable jurisdiction.2. Current mailing or residence address in a reportable

jurisdiction.3. One or more telephone numbers in a reportable

jurisdiction and none in the jurisdiction of the reporting financial institution.

4. Current standing instructions (other than for

depositary accounts) to repeatedly transfer funds to a reportable jurisdiction(s).

5. Current effective power of attorney or signatory authority granted to a person with an address in a reportable jurisdiction.

6. A current ‘hold mail’ instruction or ‘ in-care-of’ address where there is no other address of the account holder on file.


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The due diligence procedures should be applied to each holder of a joint account, although the account balance or value should not be split between them for the purposes of applying any threshold tests.

Pre-existing individual accountsWhere pre-existing individual accounts are low value (i.e. have an aggregate balance or value of $1m or less as at 31 December 2015 (or a relevant later date in ‘later adopter’ jurisdictions)), the account balance or value as at 31 December of each subsequent year must be reviewed; and, where the $1m threshold is exceeded, the procedures for high value accounts must be carried out within the next calendar year.

The diagram opposite summarises the procedure in relation to pre-existing individual accounts.

Pre-existing entity accountsThe procedures that should be applied to pre-existing entity accounts are as follows:

zz If the reporting financial institution can benefit from applying the $250,000 de minimis, then pre-existing accounts with an account balance or value of $250,000 or less do not need to be reviewed. Such a reporting financial institution that elects to apply such a de minimis threshold must review the account balance at 31 December each year to determine if the balance has exceeded the $250,000 threshold and review any account where the threshold is exceeded, completing the due diligence procedures for pre-existing entity accounts within the next calendar year.

zz The information maintained for regulatory or customer relationship purposes (including information collected pursuant to AML/KYC procedures) should be reviewed to determine whether the information indicates that the account holder is resident in a reportable jurisdiction (e.g. through place of incorporation or address). If the information indicates that the account holder is resident in a reportable jurisdiction, the reporting financial institution must treat the account as reportable in relation to the account holder unless: it obtains a self-certification from the account holder; or it reasonably determines, based on information in its possession or that is publicly available, that the account holder is not a reportable person.

zz If it cannot be reasonably determined on the basis of such information that the entity account holder is not a passive NFE, then a valid self-certification would need to be obtained from the entity in relation to its own status and tax residence.

zz Where the entity account holder is, or is deemed to be, a passive NFE, the reporting financial institution may, for the purposes of establishing whether the passive NFE has one or more natural controlling persons resident in a reportable jurisdiction, rely on:

zz information collected and maintained pursuant to AML/KYC procedures in the case of a pre-existing entity account held by one or more NFEs with an aggregate account balance or value that does not exceed $1m, and perform an indicia search on that information to determine if any controlling persons are resident in a reportable jurisdiction(s); or

zz a self-certification from the account holder or such controlling person(s) of the jurisdiction(s) in which the controlling person(s) is resident for tax purposes.

zz If any natural controlling persons of a passive NFE are identified as resident in a reportable jurisdiction(s),

they and the passive NFE itself are reportable.zz Where any self-certifications are obtained, those

self-certifications should contain certain information, and completeness and reasonableness checks must be carried out, as described above in relation to new entity accounts and (in the case of controlling persons) new individual accounts. Changes of circumstances must also be monitored and self-certifications obtained if necessary, as described above.

12. Who are the natural controlling persons of a passive NFE?If an entity account holder is a passive NFE, then the financial institution must ‘look through’ that entity to identify its controlling persons. If the controlling persons are resident in any reportable jurisdiction(s), then information in relation to the financial account must be reported, including details of the account holder and each reportable controlling person.

The term ‘controlling persons’ is interpreted in a manner consistent with the Financial Action Task Force (FATF) recommendations, under which ‘controlling person’ corresponds to the term ‘beneficial owner’. For an entity that is a legal person, the term ‘controlling persons’ means the natural person(s) who exercises control over the entity, generally the natural person(s) with a controlling ownership interest (in terms of vote or value) in the entity. Determining a controlling ownership interest will depend on the ownership structure of the entity; and control over the entity may be exercised by direct or indirect ownership (or shareholding) of one or more intermediate entities. For example, controlling persons could include any natural person that holds directly or indirectly more than 25% of the shares or voting rights of an entity as a beneficial owner. If no such person exists, then any natural person that otherwise exercises control over the management of the entity (e.g. the senior managing official of the company) is deemed to be the controlling person.

In the case of a partnership and similar arrangements, ‘controlling person’ means, consistent with ‘beneficial owner’ as described in the FATF recommendations, any natural person who exercises control through direct or indirect ownership of the capital or profits of the partnership, who has voting rights in the partnership, or who otherwise exercises control over the management of the partnership or similar arrangement. The natural persons controlling a partnership may be difficult to establish, especially for example where a US limited partnership fund is treated as a passive NFE by virtue of being managed by a financial institution and in a non-CRS participating jurisdiction. It may be difficult for such a US fund to establish whether it has natural controlling persons, especially where limited partnership interests are held by different types of entities.

In the case of a trust, the term ‘controlling persons’ means the settlor(s), the trustee(s), the protector(s) (if any), the beneficiary(ies) or class(es) of beneficiaries, and any other natural person(s) exercising ultimate effective control over the trust. If the settlor, trustee, protector or beneficiary is an entity, the reporting financial institution must identify the controlling persons of such entity. The CRS due diligence and reporting obligations relating to trusts are complex.

The above principles under the FATF recommendations do not entirely sit comfortably with CRS principles,


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particularly that of ‘no duplicative reporting’, if the requirement to ‘look through’ a chain of legal entities described above might include looking through other reporting financial institutions in the chain. The OECD is considering this point.

13. Can reporting financial institutions delegate their CRS obligations?Yes. Reporting financial institutions can delegate their CRS due diligence and reporting obligations to service providers. However, the financial institution remains ultimately responsible for fulfilling the obligations. Therefore, any local law financial penalties or other sanctions for breaches of the applicable CRS rules will be imposed on the financial institution, not the service provider. Reporting financial institutions should

document their arrangements with their service providers and include suitable contractual protections against liabilities suffered by the financial institutions as a result of breaches by the service provider.

Unlike with the FATCA and UK FATCA regimes, there is no formal ‘sponsoring entity’ regime.

14. What form(s) of self-certifications should be used?There is no prescribed form of self-certification and therefore no industry wide approach to self-certifications. To be valid, self-certifications must be signed (or otherwise positively affirmed) by the account holder, dated at the latest at the date of receipt and collect the bare minimum information required (as discussed above in relation to the due diligence procedures at Q10 and Q11).

Versions of self-certification forms have been released by the Business and Industry Advisory Committee to the OECD. There are also various versions issued by industry bodies and also versions drafted for Cayman Islands financial institutions approved by the Cayman authorities. Many service providers and large financial institutions use their own template forms. The approach taken in these forms vary – some use a three form approach for individual account holders, entity account holders and controlling persons; others use a two form approach dealing with the collection of controlling person information on an individual or entity form. Some forms, such as the Cayman Islands approved forms, seek to collect FATCA, UK FATCA and CRS information but can be adapted easily for use in relation to any combination of those regimes.

The self-certification forms do not expire, unlike certain US tax forms used for FATCA purposes. They should be replaced following a change of circumstances that makes relevant information included on the forms incorrect.

15. What information is reportable for a calendar year or other reporting period?A summary of the information to be reported is set out in the adjacent table. For participating jurisdictions that are early adopters, this applies to the calendar years from 2016 onwards.

In relation to accounts identified as held by passive NFEs with one or more natural controlling persons resident in a reportable jurisdiction(s), the passive NFE and each controlling person resident in a reportable jurisdiction is reported, even if the passive NFE is not itself resident in a reportable jurisdiction.

The TIN and date of birth are not required to be reported in respect of pre-existing accounts if they are not in the reporting financial institution’s records and not required by domestic law to be collected (subject to reasonable efforts to obtain it). Place of birth is not required to be reported in respect of new and pre-existing accounts unless it is required to be obtained and reported under local law and contained in the reporting financial institution’s electronically searchable data.

Information reported should be in the currency in which the account is denominated, with any currency conversions, to or from US Dollars, such as in relation to thresholds, being calculated based on the spot rate on the last day of the year.

Some jurisdictions (not including the UK) may opt to phase in gross proceed reporting.

What information is reportable?

Account type Information reportable

Allzz accounts identified

as held by individuals or entities resident in a reportable jurisdiction(s)

zz accounts held by passive NFEs with one or more natural controlling persons resident in a reportable jurisdiction(s)

zz name; zz address; zz jurisdiction of residence; zz Tax Identification Number

(TIN);zz date of birth (individuals);zz place of birth (individuals);zz account number or functional

equivalent;zz name and identifying number

(if any) of reporting financial institution; and

zz account balance or value (including the cash value/surrender value of cash value insurance contracts and annuity contracts) at the end of the calendar year or other reporting period (with negative balances reported as nil), or the fact of the closure of the account (if closed during the year).

Custodial accounts zz total gross amount of interest; zz total gross amount of

dividends; zz total gross amount of other

income paid or credited to the account; and

zz the total gross proceeds from the sale or redemption of property paid or credited to the account.

Depositary accounts The total amount of gross interest paid or credited to the account in the calendar year or other reporting period.

Other accounts The total gross amount paid or credited to the account, including the aggregate amount of redemption payments made to the account holder during the calendar year or other appropriate reporting period.


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Comparison of FATCA and CRS

Issue FATCA CRSRegistration Non-US financial institutions are required to

register with the US Internal Revenue Service and obtain a GIIN, unless an exemption applies. An FFI agreement with the US is required, unless located in a Model 1 jurisdiction.

There is no such registration requirement or equivalent to a GIIN. Registration on electronic portals for CRS reporting may be required.There is no contractual nexus between financial institutions (FIs) and any government.

Responsible officer requirement

Yes, to effect registration and act as a point of contact for the US IRS queries in relation to registration only. An authorised person is required instead if in a Model 1 jurisdiction.

No

Sanctions for non-compliance

Potential FATCA withholdings at 30% from payments to non-compliant non-US FIs. Financial penalties and other potential sanctions (civil and/or criminal) under local law implementing an intergovernmental agreement.

No withholding tax; only financial penalties and other potential sanctions (civil and/or criminal) under local law implementing CRS.

The entities are treated as reporting FIs and therefore within the scope of the obligations

FATCA applies to non-US investment entities, depositary institutions, custodial institutions and specified insurance company FIs, subject to exemptions for certain deemed compliant/non-reporting categories.

The four main types of entities treated as FIs are essentially the same. However, FATCA includes some additional exemptions, such as in relation to ‘local client base’ FIs not contained in the CRS. Therefore, there are potentially entities not subject to FATCA which are or will be within the scope of CRS obligations. Another example is where charities fall within the definition of FI: they may potentially benefit from deemed compliant/non-reporting FI status as ‘non-profit organisations’ under FATCA, but they would be ‘reporting FIs’ under CRS.

Who are reportable persons?

Certain US citizens/green card holders/residents are reportable.

US financial institutions are reportable, unless exempt.

Residents of reportable jurisdictions (participating jurisdictions receiving CRS information from, as well as providing CRS information to, other jurisdictions). Citizenship is not relevant. This difference is also reflected in the indicia for pre-existing account due diligence purposes.FIs in reportable jurisdictions are not reportable. An investment entity FI in a non-CRS participating jurisdiction that is managed by another FI (e.g. a US fund) is treated as a passive NFE and ‘looked through’ to its natural controlling persons. The account is reportable if such controlling persons are resident in any reportable jurisdictions.

Account balance/value thresholds below which financial accounts do not need to be reviewed

$50,000 de minimis for depositary accounts. Pre-existing accounts de minimis thresholds of $50,000 for individual and $250,000 for entity accounts.

Only a $250,000 de minimis for pre-existing entity accounts applies. Under FATCA such an account does not need to be reviewed until the $1m threshold is exceeded at the end of a subsequent calendar year. Under CRS, once the $250,000 threshold is exceeded at the end of a subsequent calendar year, the account needs to be reviewed. This could result in FATCA reporting being brought forward if the account is identified before the $1m threshold is exceeded.

Financial accounts

Financial accounts subject to due diligence and reporting include equity and debt interests in investment entity financial institutions, custodial accounts, depositary accounts, cash value contracts and annuity contracts, subject to certain exemptions.Equity and debt interests ‘regularly traded on an established securities market’ are not financial accounts.

The categories of financial account are essentially the same but some of the exemptions are different to those under FATCA. Most notably, there is no exemption for equity and debt interests ‘regularly traded on an established securities market’. Although most listed equity and debt interests should be held by non-reportable FIs, this approach potentially gives rise to additional due diligence burdens and practical challenges for reporting FI issuers of such interests (e.g. listed funds), given the lack of any real nexus with the investors in such interests and the potential for interests to quickly change hands on the secondary market. The practical ‘solution’ in the UK, under draft HMRC CRS guidance, is that uncertificated interests held in CREST do not need to be reviewed or reported on by a UK financial institution issuer of the interests, as that responsibility should fall on CREST members or sponsors. However, such UK issuers would need to conduct pre-existing account and periodic new account due diligence on the certificated equity/debt interests traded on the secondary market, as well as due diligence on primary market issuances of equity/debt interests. Other jurisdictions may take a different approach. For example, Jersey treats such regularly traded interests as exempt ‘low risk’ accounts.

Reporting in first year of regime

Only account balance and value reported in addition to account holder information for 2014.

Account balance and value, income paid on the account and gross proceeds paid to the account reported in addition to account holder information for 2016.

Sponsoring entity regime

Yes No, but (as under FATCA) delegation of obligations to service providers is permitted.

Status and obligations of investment managers

Most investment managers are certified deemed compliant/non-reporting FIs with no due diligence or reporting obligations, by virtue of their investment activities being their sole activity that makes them a financial institution.

Investment managers who are treated as certified deemed compliant/non-reporting FIs and technically reporting FIs but are not treated as having financial accounts. The effect is there is nothing to report, but any tax authority notification or nil reporting obligations applicable in the investment manager’s jurisdiction will need to be complied with.


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Some jurisdictions, such as the UK, will not require reporting financial institutions with no reportable accounts to file nil reports. Where accounts are reportable accounts for a particular year but the account balances/values and amounts of gross proceeds are nil, nil reports are required to be filed.

16. When does an account holder become reportable?CRS reports should contain information on financial accounts identified through the due diligence procedures as reportable accounts during the previous calendar year; and any reportable accounts identified in previous years unless a change of circumstances means that such account ceased to be reportable.

Therefore, the first CRS report for reporting financial institutions in relevant early adopter jurisdictions should cover (at least) new accounts opened in 2016 and high value (>US$1m) pre-existing individual accounts identified as reportable (given the 31 December 2016 deadline). Pre-existing entity and individual low value accounts will either be reported in 2017 or 2018, depending upon when the reporting financial institution identifies the reportable accounts.

The due diligence process could be completed in respect of financial accounts on a date that falls in an earlier calendar year than required and therefore could be reportable earlier than perhaps envisaged. This could occur, for example, where the due diligence process used for FATCA and/or (where relevant) UK FATCA compliance purposes generally identifies the tax residence of the reporting financial institution’s account holders, given that the pre-existing entity and low value individual account due diligence processes will have to be completed under those regimes by 30 June 2016 but not until 31 December 2017 under CRS. Many reporting financial institutions will have been collecting self-certification forms that request information on the jurisdiction of residence of the account holder and controlling persons of passive NFEs, not just whether such persons are specified/reportable persons under FATCA/UK FATCA.

17. What is the required format of the CRS reports to be filed?The CRS includes an XML schema format for CRS reporting. However, participating jurisdictions may require reporting in a jurisdiction specific prescribed format on an electronic portal, which may be based on the OECD CRS XML schema. The OECD Automatic Exchange Portal includes information on which jurisdictions are using the OECD CRS schema and which are adopting their own domestic electronic reporting formats.

Advance registration by a reporting financial institution on the local electronic portal may be required, although this process may already have been completed if it registered for FATCA reporting purposes. Jurisdictions where nil reporting is optional, such as the UK, generally do not require portal registration where no reports are going to be filed.

18. What is the interaction between CRS and other automatic exchange of information regimes?For the moment at least, the US is sticking with FATCA, so the FATCA and CRS regimes sit side by side with non-

US financial institutions having to navigate the various differences between the two regimes. (See Q19 for a high level summary of some of the key differences.)

Both the UK FATCA (a regime applicable to financial institutions in the UK, British Crown Dependencies and Overseas Territories) and the ‘EU Savings Directive’ (applicable to financial institutions in the EU and certain third countries) have effectively been superseded by the CRS, subject to transitional measures. On 10 November 2015, the EU Savings Directive measures were repealed, with effect from 1 January 2016 for each EU jurisdiction, except for Austria, which retains the EU Savings Directive and delays CRS implementation until 1 January 2017 because of the broader scope of the CRS regime.

UK FATCA will be phased out and should be fully repealed by affected jurisdictions by 2017. It is expected that financial institutions in affected jurisdictions will have both CRS and UK FATCA reporting obligations in 2017 for the 2016 calendar year. HMRC intends to ensure the reporting of certain financial account information, which is reportable under UK FATCA in 2017 but is not required to be reported under CRS, such as in relation to pre-existing entity and low value individual accounts required to be due diligenced by 30 June 2016 under UK FATCA but not until 31 December 2017 under CRS. Duplicate reporting should not however be required in the transitional year of 2017. It remains to be seen how this will work from a practical perspective for Bermudan financial institutions required to report to HMRC on financial accounts held by UK residents under UK FATCA and required to report to the Bermudan authorities on financial accounts held by residents of reportable jurisdictions (including, in theory, the UK).

UK resident non-domiciled individual holders of accounts in financial institutions in British Crown Dependencies and Overseas Territories already benefit on an elective basis from the special alternative reporting regime (ARR), which is based on UK tax year rather than calendar year reporting. They will effectively lose the ARR benefits after the 2014 and 2015 reporting periods, as there is no similar regime under CRS.

19. What are some of the key differences between the FATCA and CRS regimes? Although CRS is modelled on FATCA, particularly the Model 1 intergovernmental approach to FATCA compliance, there are some significant differences between the two regimes. (For high level differences between the two regimes, see the table on the previous page.)

20. Final thoughts?Reporting financial institutions should already have CRS compliance programmes in place but, as identified above, there remain a great many practical issues, as well as differences between FATCA and CRS and jurisdictional variations in CRS rules to grapple with.

Reporting financial institutions should ensure that, if they have not already done so, their account holder terms and conditions and offering documents are updated to contain CRS related protections, such as the ability to request, process and disclose required account holder information without liability and to be able to close accounts and impose economic sanctions on recalcitrant account holders who may cause the financial institution to suffer financial penalties under local law. ■


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Lee Squires Hogan LovellsLee Squires is the head of indirect tax (UK) at Hogan Lovells. He specialises in VAT and

indirect taxation, representing a wide range of clients on transactional, disputes and advisory matters. Email: [email protected]; tel: 020 7296 2789.

Fiona Bantock Hogan Lovells Fiona Bantock is a senior associate in the Hogan Lovells tax group. She has a broad

practice, advising on all aspects of UK tax law, including international tax structuring, group reconstructions, outsourcing, funds, M&A and VAT. Email: [email protected]; tel: 020 7296 5369.

Airtours: VAT recovery under tripartite arrangements

In Airtours Holidays Transport Ltd v HMRC [2016] UKSC 21 (reported in Tax Journal, 20 May 2016), the Supreme

Court (SC) dismissed Airtours’ appeal and found by a 3 to 2 majority that Airtours was not entitled to deduct VAT on fees it paid for services supplied to a third party.

Airtours had commissioned PwC to produce a report to around 80 financial institutions on Airtours’ restructuring proposals. The letter appointing PwC, which was addressed to the institutions, stated that PwC was retained by the institutions and that the report was for their sole use. PwC owed Airtours no duty of care, and Airtours was only entitled to copies of the report, which could be redacted. Airtours paid PwC a retainer of £200,000 plus VAT to produce the report, and indemnified PwC against certain claims. All these parties signed the letter.

HMRC challenged Airtours’ deduction of the VAT paid to PwC. While HMRC accepted that there was a commercial benefit to Airtours, it argued that PwC’s services were not supplied to Airtours. The First-tier Tribunal (FTT) applied HMRC v Redrow Group Plc [1999] 1 WLR 408 in finding that Airtours only had to show it had ‘obtained anything at all … for the purposes of his business’. However, the Upper Tribunal and Court of Appeal found in favour of HMRC in deciding that Airtours did not receive any services from PwC under the contract.

The SC first considered whether, under the terms of the contract, PwC contracted to supply services to Airtours. Lord Neuberger, giving the leading judgment, said: ‘The

issue is whether PwC agreed … with Airtours that they would supply those services [to the institutions]. Thus, it is enough for Airtours’ purposes if it can establish that PwC were under a contractual obligation to Airtours to supply services, such as providing the report, to the institutions. Airtours does not have to show that PwC were under a contractual obligation to supply any services directly to Airtours.’

Businesses entering into tripartite arrangements will need to carefully consider who receives services and be explicit in their contracts

Following a close analysis of the terms of the contract, the SC concluded that PwC was under no contractual obligation to Airtours to supply services to the institutions, and such a term could not be implied into the contract. This meant that Airtours did not receive any supply of services from PwC, which only provided services to the institutions.

The SC then considered whether Airtours was nonetheless entitled to recover the VAT based on the statement from Redrow relied on by the FTT. The SC concluded that Redrow had to be read in light of subsequent case law, and found that if a person does not have a right to receive services under a contract, then unless the contract does not reflect the economic reality, the person has no right to reclaim VAT. In this case, the contract did reflect the economic reality, and Airtours had simply paid third party consideration for a supply to the institutions rather than receiving any supply itself.

Why it mattersBusinesses entering into tripartite arrangements will need to carefully consider who receives services and be explicit in their contracts. The fact that there were two dissenting judgments highlights the difficulties and uncertainty in this area.

However, it seems clear that it would have been sufficient for input VAT recovery if PwC had been under a contractual obligation to Airtours to deliver the report to the institutions, and that Airtours did not have to receive any tangible services directly. Changes to the drafting of the engagement letter could, therefore, have led to a different result in this case.

Bookit and NEC: card handling servicesThe CJEU found in two separate, but similar, cases (Bookit Ltd v HMRC (Case C-607/14) and National Exhibition Centre Ltd v HMRC (Case C-130/15), reported on page 5) that the VAT exemption for transactions involving payments and transfers does not apply to ‘card handling services’.

Bookit and NEC provided payment processing services for ticket purchases. When customers paid for a ticket, the company transferred the card details to a ‘merchant acquirer’ bank, which sent the information on to the customer’s bank (the card issuer). The card issuer verified the customer had enough money in their account and sent an authorisation code to the merchant acquirer to send on to the companies. Once the companies received the authorisation code, it informed the customer that payment was authorised and allocated the customer a ticket. The

VAT focus

VAT briefing for June

Speed readThere have been several important VAT decisions in recent weeks. In Airtours, the Supreme Court held that Airtours was not entitled to deduct VAT on fees it paid for services supplied to a third party. In Bookit and National Exhibition Centre, the CJEU held that the VAT exemption for transactions involving payments and transfers does not apply to ‘card handling services’. In University of Huddersfield, the Court of Appeal held that the EU principle of abuse of rights invalidated a lease and leaseback scheme intended to create an absolute VAT saving.


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companies then retransmitted the authorisation codes and their customers’ card information back to the merchant acquirer at the end of each day to confirm that the sales had taken place. This information was then retransmitted by the merchant acquirer to the card issuer, which led to funds being transferred.

The companies claimed that their card handling services should be exempt from VAT under article 135(1)(d) of the Principal VAT Directive, which exempts ‘transactions … concerning … payments [and] transfers … but excluding debt collection’. Under the previous judgment in SDC (Case C-2/95), this meant the services had to have ‘the effect of transferring funds and entail[s] changes in the legal and financial situation’.

The CJEU found that article 135(1)(d) should be interpreted strictly, and that the mere fact that a service is essential for completing an exempt transaction does not mean that the service is exempted. The exemption only applies to services that, viewed broadly, form a distinct whole, fulfilling in effect the specific, essential functions of a transfer of funds. The CJEU held that Bookit and NEC’s services did not play a specific and essential part in achieving the changes in the legal and financial situation that gave rise to a transfer of funds. Instead, the companies only applied technical and administrative means to collect information and communicate it to and from the merchant acquirer.

This was because, among other reasons:zz The purpose of the retransmission of the authorisation

codes at the end of the day was merely to inform the payment system that a previously authorised sale had been made. This could not be regarded as executing the transfer or as fulfilling in effect the specific and essential functions.

zz The companies did no more than request, receive and retransmit the authorisation codes over which they had no control, which was not a specific and essential function to the transfer of funds.

zz The companies did not assume any liability as regards the achievement of the changes in the legal and financial situation, which is normally characteristic of the existence of an exempted transaction.

zz It would otherwise mean that any trader taking steps necessary for the receipt of a card payment would be undertaking a financial transaction, which is contrary to the purposes of the exemption and the requirement that it must be interpreted strictly.In NEC, the Upper Tribunal also asked a question on

the scope of the exclusion in article 135(1)(d) for debt collection (and whether a debt collection service could be supplied to the debtor), but the CJEU considered it unnecessary to answer this.

Why it mattersThere has been substantial uncertainty over the VAT treatment of card handling services in the UK, and it is good that the CJEU has provided some clarity over the scope of the exemption for payments and transfers. However, the CJEU’s interpretation arguably seems to represent a narrowing of the exemption as previously understood, and this could have implications for other payment businesses, including new and emerging payment technologies.

University of Huddersfield: abuse of rightsThe Court of Appeal in University of Huddersfield Higher Education Corporation v HMRC [2016] EWCA Civ 440 (reported in Tax Journal, 20 May 2016), held that the EU

principle of abuse of rights invalidated a 1996 VAT savings scheme entered into by the university.

The university had entered into a lease and leaseback scheme involving the grant of taxable leases of two properties to a discretionary trust, which was a shell entirely funded and controlled by the university. The trust then granted taxable underleases of the properties back to the university, which contracted with a wholly owned but non-VAT grouped subsidiary to carry out refurbishment works (which it subcontracted to third party building contractors). The intended benefit of the scheme was to enable the university (which as an education provider was partially exempt) to recover input tax on construction works to improve the properties whilst only paying a small amount of output tax on rental payments.

The court held (following Halifax (Case C-255/02)) that the principle of abuse of rights rests on two tests, both of which need to be satisfied:

zz the transactions concerned, although formally valid under the VAT legislation, result in the accrual of a tax advantage which is contrary to the purpose of its provisions; and

zz the essential aim of the transactions is to obtain that tax advantage.On the facts, there was no dispute about the second test,

as the sole purpose of the leasehold structure was to obtain a tax advantage and it ‘had no commercial effect other than to secure that advantage’. Whether the first test was satisfied required a comparison of the tax advantage that the scheme gave the university with the purpose and objectives of the VAT code, with a view to determining whether the tax advantage resulted from a choice that the legislation intended to give the university. The court held that it was always the university’s intention to make an absolute VAT saving (rather than merely to defer VAT) and this was contrary to the purpose of the legislation. The scheme was, therefore, abusive from the outset.

Why it mattersThe judgment highlights that, when redefining the transactions, a court’s role should be limited to removing the abusive elements of the scheme, not to replacing them with a different and wholly fictional scheme. It was, therefore, correct simply to disregard the artificial steps (i.e. the creation of the trust and the creation of the leasehold structure), ignoring any argument that the university could have achieved the same tax advantage by entering into a similar leasehold arrangement as part of an arm’s length financing package.

What to look out forzz On 30 June, the CJEU will hear the reference in DNB

Banka (Case C-326/15) on the cost sharing exemption.zz The Supreme Court heard the appeal in Investment Trust

Companies (on restitutionary claims for overpaid VAT) on 17 to 19 May, and so judgment may be expected in the next few months. ■

For related reading visit www.taxjournal.comXX Cases: Airtours Holidays Transport v HMRC (17.5.16)XX Supreme Court in Airtours: Redrow redacted (Nick Skerrett & Gary

Barnett, 17.5.20)XX Cases: HMRC v National Exhibition Centre (1.6.16)XX Cases: The University of Huddersfield Higher Education Corporation

v HMRC (17.5.16)XX What’s new in VAT abuse? (Michael Conlon QC & Rebecca Murray,

24.5.15)



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Your A to Z guide of the tax measures open to comment.

Bank levyHMRC is consulting on the Bank Levy (Amendment of Sch 19 to the Finance Act 2011) Regulations, SI 2016/Draft, which amend the definitions of ‘high quality liquid assets’ and ‘high quality securities’ for the purposes of the bank levy. The regulations are expected to take effect from 1 October 2016.

The amendment is required as a consequence of changes made to the Prudential Regulation Authority’s definition of liquid assets in October 2015, to introduce the new liquidity coverage ratios for banks under Capital Requirements Directive IV. There is no change to existing policy by updating this definition. HMRC consulted on an outline of the changes between December 2015 and March 2016. See: www.bit.ly/280cv1C. Comments to: [email protected]. Closes: 30 June 2016.

BEPS related measuresThe OECD are consulting on, or are due to consult on, three BEPS related matters:

zz Multilateral instrument to implement the tax treaty-related BEPS measures. This consultation was issued on 31 May, with the consultation period running until 30 June.

zz Interest deductions: elements of the design and operation of the group ratio rule. This consultation will be issued on 6 July, with the consultation period running until 3 August.

zz Hybrid mismatch arrangements: branch mismatch arrangements. This consultation will be issued on 15 July, with the consultation period running until 26 August.

zz Interest deductions: approaches to address BEPS involving interest in the banking and insurance sectors. This consultation will be issued on 18 July, with the consultation period running until 29 August.See: www.bit.ly/24Yhf5t.

Business ratesConsultation on challenges in delivering more frequent revaluations under the current valuation system and possible alternatives that could enable a move to more frequent revaluations. See: www.bit.ly/1pKOd9L. Comments to: [email protected]. Closes: 8 July 2016.

Corporate interest expense, deductibility ofConsultation on design of new rules addressing OECD BEPS recommendations which will be included in FB 2017 and introduced from 1 April 2017. The new

rules will limit the tax relief that large multinational enterprises can claim for their interest expenses. The government will cap the amount of relief for interest to 30% of taxable earnings before EBITDA in the UK, or based on the net interest to EBITDA ratio for the worldwide group. To ensure the rules are targeted where the greatest risk lies, the rules will include a de minimis threshold of £2m net UK interest expense per annum and provisions for public benefit infrastructure. The government will develop appropriate rules for groups in the banking and insurance sectors. See: www.bit.ly/1kvUMKR. Comments to: [email protected]. Closes: 4 August 2016, 11:45pm.

Corporation tax computationAlthough not a formal consultation, the Office of Tax Simplification has invited comments for its review of the corporation tax computation. The aim is to develop recommendations for the chancellor and the financial secretary on how to simplify the computation and reduce the administrative burdens. The OTS’s work will look at the adjustments to get from accounting profit to taxable profit in the context of the current business environment, building on its earlier work; in particular, the OTS’s competitiveness report. The OTS will provide a report before Budget 2017, and an update before Autumn Statement 2016. See: ‘Streamlining corporation tax’ (John Whiting), Tax Journal, 27 May 2016 and terms of reference at www.bit.ly/1r2HI2v. Comments to: [email protected].

Corporation tax loss reliefHMRC is consulting on the detail of two specific changes to corporation tax loss relief, announced at Budget 2016. From April 2017: (1) losses can be carried forward and set against the profits of different activities within a company and the profits of its group members; and (2) the amount of annual profit that can be relieved by carried-forward losses will be limited to 50%, subject to an allowance of £5 million per group. The distinct treatment of capital losses will remain. The consultation also covers interaction with the existing restriction on banks’ losses. See: www.bit.ly/1WWyH8U. Comments to: [email protected]. Closes: 18 August 2016.

Double taxation treaty passport (DTTP) schemeHMRC is consulting on a review of the double taxation treaty passport scheme, including whether the scheme should be expanded beyond corporate-to-corporate lending and made available to sovereign investors, pension funds and partnerships.

The scheme allows UK borrowers to pay interest to overseas corporate lenders without withholding tax or at a lower rate of withholding tax, as specified in the relevant tax treaty. See: www.bit.ly/1r2AQlA. Comments to: [email protected]. Closes: 12 August 2016.

DOTAS indirect taxes and IHTHMRC consultation on proposals to strengthen the DOTAS regimes which takes forward both elements of an earlier 2014 consultation, including draft revisions to the hallmark regulations covering IHT. It asks for views on the proposals to make sure the disclosure regimes provide reasonable and timely information to HMRC about avoidance of these taxes and duties. See: www.bit.ly/1Vj1zYc. Comments to: [email protected]. Closes: 13 July 2016.

Evasion facilitationThis consultation considers draft legislation and guidance for the new corporate criminal offence of failure to prevent the criminal facilitation of tax evasion, seeking stakeholder views to ensure that the offence is both effective at meeting the stated objectives, and not unduly burdensome. See: www.bit.ly/23IfWua. Comments to:[email protected]. Closes: 10 July 2016.

Gift aid small donations schemeConsultation on reforms to gift aid small donations scheme following Autumn Statement 2015 announcement. The consultation sets out specific proposals for simplifying the scheme rules to help ensure as many eligible charities as possible can benefit. See: www.bit.ly/1qDElz6. Comments to: [email protected]. Closes: 1 July 2016.

‘Help to save’ scheme The government is consulting on the detailed design of the ‘help to save’ scheme, which will be available to adults in receipt of universal credit or working tax credit. Areas for consultation include: delivery of accounts through multiple private sector providers, or a single provider such as National Savings and Investments; calculation of the bonus; second-term and successor accounts; and making catch-up payments. The scheme will be introduced through the Lifetime Savings Bill from April 2018.See: www.bit.ly/1OZUsCk. Comments to: [email protected]. Closes: 21 July 2016.

ICAEW/ICAS guidance on realised profits and dividends under FRS 102Joint IC7AEW and ICAS exposure draft which updates the ICAEW’s 2010 guidance on the determination of realised profits and


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losses in the context of distributions under the Companies Act 2006 reflecting changes to International Financial Reporting Standards since 2010 and new UK GAAP, principally in the form of FRS 102. See: www.bit.ly/1V6WXUT. Comments to: [email protected]. Closes: 9 June 2016.

Indirect taxes, fulfilment house due diligence schemeHMRC consultation on a new due diligence scheme from 2018 for UK fulfilment houses handling goods imported from outside the EU. See: www.bit.ly/1RWke8m. Comments to: [email protected]. Closes: 30 June 2016.

Landfill taxHMRC is consulting on:

zz arriving at an unambiguous definition of ‘taxable disposal’ for landfill tax purposes; and

zz identifying the types of hazardous waste that properly attract the lower rate of landfill tax.Despite changes to legislation since

Waste Recycling Group Ltd [2009] STC 200, there are still a considerable number of disputes over what constitutes a taxable disposal. The government announced at Budget 2016 its intention to consult with the aim of clarifying the areas of uncertainty that have led to litigation. See: www.bit.ly/1TJi8JT Comments to: [email protected]. Closes: 18 August 2016.

Life insurance policies, part-surrenders and part-assignments ofHMRC is consulting on three options for changing the tax rules in relation to part-surrenders and part-assignments of life insurance policies, capital redemption policies and life annuity contracts. Current rules allow policyholders to surrender or assign up to an annual cumulative 5% allowance of the premium paid without incurring a tax charge. If the value received exceeds the allowance, a gain is brought into charge at the next policy anniversary date. In certain circumstances, this can result in gains arising which are disproportionate to the policy’s underlying economic gain. See: www.bit.ly/23L6Z3g. Comments to: [email protected]. Closes: 13 July 2016.

NICs elections for unapproved share schemesHMRC is consulting on whether there is still a need for formal NICs elections to transfer from employer to employee the secondary class 1 liability arising on gains from unapproved employment-related securities options. NICs agreements, which do not require HMRC approval,

would continue. HMRC is keen to know whether the perceived benefits of NICs elections for employers outweigh the costs of administering its paper-based approval process. See: www.bit.ly/1WRKV1r. Comments to: [email protected]. Closes: 13 July 2016.

OTS strategic reviewThe Office for Tax Simplification has published its high-level strategy consultation as it prepares to become a statutory body with a new and broader remit. The consultation aims to ensure tax becomes simpler, with the UK remaining attractive to business, and reflects the OTS’s new broader remit as a statutory body. The document is also intended to prepare the ground for the OTS stakeholder conference, which is planned for 18 July 2016. See: OTS website, www.bit.ly/1DMFchC. Comments to: [email protected]. Closes: ideally by 30 June, but OTS will accept submissions until 31 July. There is also a consultation laying out the proposed detail of the tax framework for the secondary market for annuities and asking for views on a number of detailed issues. See: www.bit.ly/1riYWtf. Comments to: [email protected]. Closes: 15 June 2016.

Public sector off-payroll work, intermediaries legislation forHMRC is consulting on the detail of changes to the intermediaries legislation (IR35), which will apply to public sector bodies from April 2017. This will shift the responsibility for determining whether the intermediaries rules apply from the personal service company to the public sector body, agency or other third party paying the worker’s company. The document also includes a summary of responses to the discussion paper published in July 2015. See: www.bit.ly/1qLVu9o. Comments to: [email protected]. Closes: 18 August 2016.

Scottish devolved air passenger dutyScottish government consultation on how a replacement for APD from 2018 in Scotland should be structured and operated. See: www.bit.ly/21s65C7. Comments to: See website link. Closes: 3 June 2016.

Shadow ACTTechnical consultation on draft regulations which makes consequential amendments to the shadow ACT rules, to reflect abolition of the dividend tax credit and repeal of the term ‘franked investment income’ with effect from 6 April 2016. See: www.bit.ly/1SNnBi7. Comments to: [email protected]. Closes: 30 June 2016.

Sports, grassrootsTreasury consultation to identify additional ways in which the government can support contributions to grassroots sports from companies through the corporation tax system. See: www.bit.ly/1RpJqoS. Comments to: [email protected]. Closes: 15 June 2016.

Substantial shareholdings exemptionThe government is consulting on options for reform of the substantial shareholding exemption. This addresses concerns that the complexity of the exemption may be harming the UK’s attractiveness as a holding company location, given changes in both domestic and international taxation since its introduction in 2002. The options include: a comprehensive exemption for share disposal gains, subject to tests for trading or otherwise at investee level; changes to the existing framework with amended trading tests at investor and investee level; or changing the definition of substantial shareholding. See: www.bit.ly/1O1Q6dL. Comments to: [email protected]. Closes: 18 August 2016.

Tips etcConsultation on revisions to HMRC’s guidance on the tax and NICs treatment of tips, gratuities, service charges and troncs (leaflet E24), as part of a wider consultation on the transparency of employers’ practices in relation to these payments to employees in the hospitality, leisure and service sectors. Among the broad aims of the consultation is an aim to ensure that workers receive a fair share from discretionary service payments. One option for achieving this is to ‘incentivise and increase the prevalence of well managed tronc systems’. The consultation also asks whether tronc requirements should be placed on a statutory footing. See: www.bit.ly/1rQfqJC. Comments to: [email protected]. Closes: 27 June 2016.

UK transfer pricing secondary adjustmentsHMRC is consulting on whether to introduce a secondary adjustment rule into UK transfer pricing legislation, involving a range of possible methods. The current UK rules make a primary adjustment involving application of the arm’s-length principle to the price used for tax purposes. The secondary adjustment would apply a tax charge to any excess cash accumulated from non-arm’s-length pricing in an overseas company. The OECD’s transfer pricing guidelines allow for secondary adjustments, which a number of other countries use already. See: www.bit.ly/25yptVt. Comments to: [email protected]. Closes: 18 August 2016. ■



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I am involved in providing services to the insurance industry, both in finding new customers and also in dealing with claims. I can provide both services to an underwriter or managing general agent, or sometimes just one of the services. I’ve always treated my services as exempt from VAT. Is this correct?

This has long been an area with a question mark over whether or not

the services provided are exempt.UK VAT law (VATA 1994 Sch 9

Group 2 item 4) provides for an exemption for insurance intermediary services when a broker or agent provides the services of insurance intermediation between a party wishing to purchase insurance and an insurer. In the law and HMRC’s guidance, it is specifically stated that claims handling and the collection of premiums are covered by this exemption. Therefore, on the face of it, you are correct to have treated your services as exempt from VAT.

However, there are a few issues that you should consider before putting the issue into the ‘dealt with’ pile.

Where you provide claims handling services onlyHMRC has maintained the exemption for claims handling services for ten years, even though the CJEU decided in 2006 (Arthur Andersen (Case C-472/03)) that a key component of the insurance intermediary exemption at EU level was that the party providing the services had to be acting as a broker or agent (Directive 2006/112/EC art 135(1)(a)). UK law also contains this provision, but includes in the notes that claims handling is a service carried out by a broker or agent. The CJEU stated that it was not sufficient to simply be acting as part of the insurance supply chain; and that the supplier had to be clearly involved in bringing the parties together to benefit from the exemption.

This point of view was recently reaffirmed at the CJEU in the case of Minister Finansów v Aspiro SA (Case C-40/15).

Both of these cases indicate that the notes to VATA 1994 Sch 9 Group 2 are too widely drawn. HMRC

recognises this in its internal manuals (VATINS5210), but indicates that it will not change its guidance in this area until the EU financial services VAT review is concluded/implemented. This is why the UK VAT exemption has stayed in force in its current form for ten years after a CJEU decision to the contrary.

It should be noted that the FS review has been cancelled by the EU recently, due to the inability to reach a consensus and/or a lack of political will to keep it on the agenda. Further, it is expected that HMRC will publish its view on Aspiro in July this year.

There is a risk – both because the FS review has been removed from the EU agenda and due to the 2016 decision on Aspiro – that HMRC could now be looking to implement changes to the law which would narrow the scope of the exemption for those in the insurance supply chain. In terms of your claims handling services, and certainly where they are provided as a standalone service, there is a risk that in the short to medium term they could become subject to VAT. It is recommended that the services you provide and your contractual arrangements (in terms of how your price is set) are reviewed. It is almost certain that a UK insurer will not wish to bear any VAT cost, which therefore may cut your margin on these services.

Providing a bundle of servicesYou indicate in your question that, in addition to claims handling services, you also provide services which involve the bringing together of the insurer and the insured (or wishing to be insured) party. Your question does not say how you do this, but it is assumed that it is by gathering customer information either online or by telephone. For the purposes of this response, it is assumed

that these services meet the criteria for the insurance intermediary exemption, although I would recommend that this is something that you also review.

Assuming that you are bringing together the parties and these services go far enough to fall within the exemption, then the Aspiro decision offers some hope to the provision of an all-in managed service. The CJEU in Aspiro indicated that where a party in the supply chain is providing a service that encompasses claims handling and acting as broker or agent in bringing together the parties, then the insurance intermediary exemption could apply to all of the services being provided.

It is presumed that the CJEU principles Card Protection Plan (Case C-349/96) relating to single or multiple supplies will have to be considered to establish if a service falls with the exemption as broker/agent services; or whether the whole service is characterised as claims handling and is therefore potentially taxable.

So where does this leave us?In summary, under current UK law and interpretation, your services are likely to be exempt from VAT. However, recent case law, the ending of the EU FS review and the impending EU in/out referendum mean that there could be some changes in the near to medium term in respect of the VAT liability of your services which may impact on the profitability of the insurance supply chain. ■

Sean McGinnessThe VAT Consultancy Sean McGinness is a director at The VAT Consultancy. Prior to joining The VAT Consultancy, Sean was with EY. He advises on a broad range of VAT issues but has a particular focus on retail, property and VAT processes and controls. Email: [email protected]; tel: 01962 735 350.

VAT on insurance claims handlingAsk an expert

1. Case report: T and C Bainbridge v P Bainbridge (4.5.16)

2. Tax deductibility of corporate interest: the new consultation (Daniel Head & John Monds, 19.5.16)

3. The proposed corporate offence of failing to prevent tax evasion (Helen Buchanan, 4.5.16)

4. Strict liability offences: a worrying trend? (James Quarmby, 13.5.16)

5. FB 2016: The new investors’ relief (Dipan Shah & Nick Baker, 11.5.16)

Most read on taxjournal.com:


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What’s in your in-tray?I work for Kaplan Leadership and Professional Development (LPD), so it’s full of material for tax courses for our national and international clients. I also help out in a family tax and accounting practice, so I’m hands on too; lots of practical tax problem solving.

In your inaugural speech as president of the ATT, you said you wished to defend the ‘responsible centre ground of tax planning’. Can you give an assessment of your success in this during your term?The tax planning profession is under pressure as never before, from the government and the media. Tax has much more of a moral element now than when I trained with Coopers & Lybrand 26 years ago. But I have never had any difficulty with the concept of responsible tax planning and the line over which planning becomes unacceptable. It’s called professional judgement and tax advisers, including ATT members, exercise that every day. I think that message is a steadying message to my ATT members and at our conferences they understand it perfectly.

Looking back on your career to date, what key lesson have you learned?Always to be open minded. Tax is a multi-faceted prism and there is rarely one simple answer – just lots of bits that need putting together in a structured way.

What caught your eye in the Finance Bill? Sometimes it’s the detail that catches my eye: in this Bill, it’s the clause 68 proposal to repeal the replacement rule for small tools which appeared to put small tools into the capital allowance regime. I was a bit alarmed by the practical implications of that and asked one of our technical officers to seek clarification from HMRC on the measure. That prompted an interesting discussion from which it emerged that HMRC consider that the deduction of expenditure on low cost items with an expected useful life of less than two years has not been dependent on the statutory replacement provisions! It follows rather from generally accepted

accounting principles. So, the repeal of the statutory provisions should not mean that traders have to claim capital allowances on low-cost low-durability items. The repeal of the replacement provisions is going to require quite a major overhaul of HMRC guidance and I think that it will be important for tax advisers to consider the significance of any changes.

If you could make one change to a tax law or practice, what would it be? One practical change would be getting the government to reinstate the monthly reporting for RTI for all small businesses. I’d like to get the chancellor to run a 14 hour shift in our local pub and then go upstairs and do the FPS submissions at 1am, when he’s paid everyone (at least those who turned up).

If you had one piece of advice for the chancellor, what would it be?Slow down on the rush on ‘making tax digital’ (MTD). Too many advisers are counselling caution. It seems inappropriate to insist on quarterly reporting of all transactions in a digital format, when many small businesses struggle with digital records, some don’t even have a computer and the internet signal is so sporadic across the UK. I assume that this in response to ministerial pressure in respect of the tax gap, which HM Treasury’s analysis suggests is in a large part down to small businesses.

HMRC’s record on telephone response has been pretty lamentable (although there has been improvement recently). Written responses are also poor. I’ve now waited a year for a reply on a written response to an HMRC query and nothing yet – so please get the basics right before you move on.

Finally, you might not know this about me but… When I’m not dreaming up tax solutions, I’m growing crops and raising animals in Kent at our small family farm. It’s a microcosm of the old garden of England, so we produce cherries, top fruit, hops, cobnuts, rare breed pigs and sheep. We also have a small vineyard and we grow shiitake mushrooms on oak logs. ■

Michael SteedATT

Michael Steed is the current president at the Association of Taxation Technicians (ATT). He is a senior tax consultant at Kaplan Leadership and Professional Development and has worked in professional practice for over 25 years, advising clients on a wide range of accounting and tax issues, both in the UK and overseas. Email: [email protected]; tel: 07751 883 975.

One minute with ...What’s aheadJune

Consultation: Comments due on the structure of the devolved air passenger duty in Scotland from April 2018 (see www.bit.ly/21s65C7).Parliament: House of Commons and House of Lords returns.Consultation: Comments due on ICAEW exposure draft which updates its 2010 Guidance on the determination of realised profits and losses in the context of distributions under the Companies Act 2006 reflecting changes to International Financial Reporting Standards since 2010 and new UK GAAP, principally in the form of FRS 102 (see www.bit.ly/1V6WXUT).Parliament: House of Commons and House of Lords rises.Consultation: Comments due on corporate contributions to grassroots sports (see www.bit.ly/1RpJqoS). Consultation: Comments due on the proposed detail of the tax framework for the secondary market for annuities (see www.bit.ly/1riYWtf).Regulations: The Lloyd’s Underwriters (Roll-over Relief on Disposal of Assets of Ancillary Trust Fund) (Tax) Regulations, SI 2016/597 come into force.Consultation: Comments due on proposals to ensure the treatment of tips, gratuities, cover and service charges is fair and transparent (see www.bit.ly/1rQfqJC).Parliament: House of Commons and House of Lords returns.Draft legislation: Comments due on The Corporation Tax (Treatment of Unrelieved Surplus Advance Corporation Tax) (Amendment) Regulations, SI 2016/Draft (see www.bit.ly/1SNnBi7). Consultation: Comments due on Fulfilment house due diligence scheme, planned for introduction in 2018 for UK fulfilment houses handling goods imported from outside the EU (see www.bit.ly/1RWke8m). Consultation: Comments due on the Bank Levy (Amendment of Schedule 19 to the Finance Act 2011) Regulations, SI 2016/Draft (see www.bit.ly/280cv1C). Compliance: Companies with a 31 December 2015 year end to notify HMRC of their potentially being within the scope of diverted profits tax.

Coming soon in Tax Journal:zz A review of Project Blue.zz Examining the proposed reforms to the

substantial shareholding exemption.

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Share Schemes ManagerManchester/Leeds – To £48,000 + benefitsThis Big 4 accountancy firm is looking for a share schemes specialist to join their growing team in either the Leeds or Manchester office. You must have a good understanding of the UK tax and legal issues that may arise in relation to long term and equity based incentive arrangements, and also have experience of drafting legal documentation and giving technical advice. You may therefore be a ACA/ICAS/CTA qualified tax advisor or a qualified solicitor looking for a change of working environment. Call Alison Ref: 2267

Corporate Tax SeniorLeeds – To £32,000This well established independent firm in Leeds is looking for a corporate tax senior to manage a corporate tax portfolio. You will review and finalise the corporation tax returns and computations, which are generally prepared by the audit team. You will also assist the tax partner and senior manager with advisory work, which would typically include issues such as transactions, share schemes, EIS, share valuations, incorporation and share buy-backs. You must have solid all round OMB experience. Call Alison Ref: 2305

Tax Partner DesignateTaunton, Somerset – £excellentThis role would suit an enthusiastic individual who genuinely enjoys tax work, and who is looking for a long term career in a local, successful practice which ‘punches above its weight’ – someone who will continue the tradition of innovation in the tax practice. You will need to have a relevant professional qualification (ACA, CTA, ICAS). You may be a experienced senior manager looking for a chance at partnership, or an existing partner looking for the right role and location. Mixed tax experience is an advantage. Call Georgiana Ref: 2308

Personal Tax Assistant ManagerLeeds – To £38,000 + benefits This is a growing team offering scope for rapid career progression and a really varied portfolio of work. Reporting to the senior manager, you will manage the compliance work for the firm’s clients and will assist with the advisory work on a regular basis, which includes dealing with income tax, CGT, IHT and trust issues. You will also be responsible for managing and training a junior in the team. You should be ACA/CTA/STEP qualified, with experience of managing a portfolio of clients. Call Alison Ref: 2300

Personal Tax SeniorLeeds – To £32,000You will manage a portfolio of clients, including HNW individuals, company directors and local entrepreneurs. You will be responsible for the tax compliance work on this portfolio, including the preparation and submission of the self-assessment tax returns and liaising with the client and HMRC. There will also be the opportunity to regularly assist the senior manager and tax partner on tax advisory projects. Our client will also consider candidates looking to work a 4 day week. Call Alison Ref: 2304

Trust Senior Leeds – £market rateOur client is a longstanding and well regarded professional firm. This practice seeks a trust specialist to join a busy team. Ideally, you will have at least 2 years’ of trust accounts, trust tax and trust admin experience. There is an opportunity to get involved in broader advisory work and personal tax. This firm has an excellent client base and a real specialism in trust work. STEP an advantage, but study support is also available. Full time or 4 day week considered. Call Georgiana Ref: 2039


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