Finance Bill 2019-20 sets out £1.1bn tax grab from payroll working extension
The government has published Finance Bill 2019-20 with 17 key tax changes, including off-payroll working rules for the private sector which are expected to raise £1.1bn in the first year, extension of HMRC powers in GAAR investigations and the 2% digital services tax
11 Jul 2019
The draft legislation will go out for consultation until early September with plans to pass the Finance Bill after Budget 2019 this autumn, following the current Brexit deadline of 31 October.
The measures are set to come into effect from April 2020, including a controversial extension of off-payroll working regulations to the private sector, a 2% digital services tax on multinationals which is set out in 37 pages of new legislation, extended powers for HMRC to chase up individuals who evade tax through complex abusive schemes, corporate capital loss restrictions for corporation tax, capital gains tax relief on loans to traders and preferred creditor status for HMRC in insolvencies.
The off-payroll working rules will be a major revenue generator for the Treasury, with government estimates that the off-payroll rules will raise over £3bn in the first four years of operation, with year one expected to net £1.16bn, especially since HMRC views the use of personal service companies as potentially abusive tax planning.
The Treasury said the contractor clampdown was designed ‘to ensure that two people working side by side in a similar role for the same employer pay the same employment taxes… these changes are being introduced to improve fairness in the tax system by ensuring that individuals are not able to sidestep income tax or NICs liabilities by working through an intermediary’.
The off-payroll working rules already apply to the public sector, and will be extended to all medium and large businesses from 6 April 2020, bringing thousands of people working through personal service companies and under IR35 into the PAYE system where they will be treated as employees, not contractors. Recruitment agencies and other intermediaries supplying staff through PSCs will also be caught by the rules.
Michael Steed, co-chair of the Association of Taxation Technician’s (ATT) Technical Steering Group, said: ‘We are pleased to see HMRC indicate that these proposals are not intended to transfer liabilities in cases of genuine business failure, where deliberate tax avoidance has not occurred, but the final legislation and accompanying guidance will be key in ensuring that this is indeed the case in practice.’
Earlier this year, there was a three-month consultation on the framework and compliances issues, and HMRC issued guidance in June, before the government had published responses to the initial consultation. The 11-page draft legislation is available for review and comment.
Extension of HMRC powers
The Bill also drafts rules to tighten up the General Anti-Abuse Rule (GAAR) giving HMRC more powers to investigate.
The current process for pursuing abusive tax arrangements under the GAAR, gives HMRC a fixed 12-month window to gather information and consider whether to continue a GAAR challenge.
HMRC will now be able to chase recalcitrant taxpayers and advisers, who ‘have deliberately refused to co-operate with HMRC during that window and have withheld information, to prevent HMRC from making a decision as to whether enquiries should be pursued under the GAAR or not’, the HRMC policy paper stated.
A new GAAR notification (protective GAAR notice) will allow HMRC to carry on its investigations beyond 12 months.
Taxpayers will have the right to appeal a GAAR adjustment 12 months after the protective GAAR notice is issued (reflecting the existing 12-month window during which appeals cannot be progressed while HMRC carries out its enquiries).
Digital services tax
Rather than waiting for the OECD to finalise its global digital tax framework, which is unlikely to be agreed before late 2020 at the earliest, the UK is taking unilateral action on a digital services tax, although it has said this is temporary and it will withdraw the UK tax once an international system is agreed.
On the back of the earlier diverted profits tax, the government is ramping up its efforts to raise the tax take from the largest crossborder tech multinationals with the introduction of a digital services tax from 1 April 2020, which is projected to raise £370m in the first year of operation, rising to £440m by 2022/23. This is a tax charge for the largest digital businesses - search engines, social media platforms and online marketplaces - with global revenues over £500m and UK revenues over £25m to reflect the revenue derived from their UK users. This rate will be a 2% tax charge on the revenues.
Companies like Facebook, for example, which reported global revenues of US$55.8bn (£44.4bn) in 2018, will be affected by this tax. It will not apply to small businesses or businesses making UK losses, helping to protect start-ups.
The impact on affected multinationals will include one-off costs of familiarisation with the new rules and ongoing costs for revenue recognition for sales attributable to UK users. HMRC will set up a new service in the future to allow companies to make an annual digital services tax return. Guidance has been promised before the rules come into effect in April 2020, according to the HMRC policy paper issued 11 July.
HMRC will incur costs of up to £8m to set up new IT systems and processes as well as additional staff to monitor and administer the new tax.
Insolvency and the taxman
Following consultation earlier this year, plans to make HMRC a secondary preferential creditor for certain tax debts will go ahead and this is expected to raise revenues of £530m in the first three years of operation.
From 6 April 2020, when a business enters insolvency, more of the taxes paid by employees and customers, and temporarily held by the business, will go to the Exchequer, rather than being distributed to other creditors, including financial institutions.
HMRC will remain an unsecured creditor for taxes directly on businesses, such as corporation tax and employer National Insurance contributions (NICs).
There is also clarification on the spreading requirements for lease accounting under the new IFRS 16 Leases rules, confirming that these apply to any period of account beginning on or after 1 January 2019.
The consultations on the draft legislation will close on 5 September 2019, with measures included in the next Finance Bill, which will be enacted by December 2019 following the autumn Budget.
Report by Sara White