Tax briefing: new penalties for involvement in failed tax avoidance schemes are among the significant measures in the spring Budget of which solicitors should be aware

Chancellor Philip Hammond’s proposal to increase the rate of class 4 national insurance contributions (NICs) for the self-employed from 9% to 10% in 2018, and then up to 11% in 2019, was swiftly condemned from the backbenches of his own party, ultimately leading to the policy being scrapped a mere week after its announcement. With discussions around what will be the last ever spring Budget being dominated by Hammond’s U-turn, it is important to be aware of some of the other relevant provisions which will come into force with the Finance Act 2017.

Tax avoidance sanctions

The Act will bring into force tough new sanctions aimed at penalising the so-called “enablers” of tax avoidance in situations where HMRC subsequently defeats any such tax avoidance scheme. An “enabler” is broadly defined as being an individual or entity who was involved in any aspect of the scheme, such as its design, management or marketing, and even includes those deemed to be “enabling participants”. It is clear from the drafting that there is potential for legal advisers to fall within the scope, provided that they “could reasonably be expected to know” of the abusive nature of any such scheme (even if they have no actual knowledge of the avoidance).

Whilst the bulk of this legislation was announced in the 2016 autumn Budget and set out in the draft Finance Bill, the spring Budget introduced further provisions to address a number of issues which arose during consultations. The legislation has been revised to provide greater clarity for affected parties, including further guidance on when cases will be pursued.

In implementing this aggressive legislation, the Government is sending out a clear message that any form of exploitation of tax rules will no longer be tolerated, and HMRC defeating any such scheme at a later date will have consequences for all of those involved. The intention is clearly to deter tax avoidance at source.

The penalties will not have retrospective application, but will apply to all enabling activity which occurs after the Finance Bill receives Royal Assent. Lawyers who advise on transactions with a taxable element should familiarise themselves with the provisions to ensure they do not fall foul (inadvertently or otherwise) of the sanctions.

Corporation tax deductions

Another measure previously announced but subjected to further amendments is the new restrictions on tax deductions which companies can claim for interest expenses. The legislation applies from 1 April 2017 and will cap the net deductions of interest which can be made by a company group to 30% of the EBITDA (earnings before interest, tax, depreciation and amortisation) taxable in the UK, and to a maximum of £2 million of net interest expense per annum. Groups which fall below this threshold need not apply the rules, ensuring that funding for the majority of smaller businesses will be unaffected.

Off-payroll working: public sector

The Finance Bill includes a number of changes to the previous draft proposals which seek to reform the rules governing payments made “off-payroll” where a public sector body engages a worker through a personal service company. From 6 April 2017, the responsibility for operating the off-payroll working rules and for deducting the relevant tax and NICs shall be shouldered by the body or agency which is making the payments to any personal service company.

At present, the new requirements only apply to the public sector: private sector engagements can still make payments to personal service companies in the usual manner. There has been no indication from the Government as to whether a similar reform is planned for payments made in the private sector; however, the issue may be considered again in the future if the public sector experiences difficulties recruiting skilled workers for major projects as a consequence of the disparity.

Venture capital schemes

The Government has made a number of helpful amendments to the tax-advantaged venture capital schemes: the Enterprise Investment Scheme (EIS), the Seed Enterprise Investment Scheme (SEIS), and venture capital trusts (VCTs). The amendments:

  • clarify the rules for share conversion rights which apply to EIS and SEIS;
  • provide investors in VCTs with additional flexibility to make follow-on investments in companies with certain group structures; and
  • introduce a power to enable VCT regulations to be made in relation to certain “share-for-share” exchanges to provide greater certainty to VCTs.
The Author
Christine Yuill, partner, Pinsent Masons LLP
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