UK Tax News | 11.01.2018

Lawmakers in the UK reject proposed amendment to Brexit legislation

A proposed amendment to Brexit legislation has been voted against by the lawmakers in the UK. This legislation would have replaced a clause seen as ‘ambiguous’ for a clear message that UK courts should temporarily follow rulings from the European Court of Justice after Brexit.

Mrs Theresa May the UK’s Prime Minister has made it clear that one of the Government’s main priorities when leaving the EU is for the interpretation of law to no longer be provided by judges in Luxembourg, but instead by courts in the UK.

The EU (Withdrawal) Bill contains the requirement to end the ‘direct’ jurisdiction of the European Court of Justice. This requirement is subject to a parliamentary debate at the end of 2017.
Guidance has already been released by the UK Government on the content of the Bill and in specifically its requirements on the future role of the European Court of Justice’s rulings in the UK in a report titled ‘The European Union (Withdrawal) Bill: Supremacy and the Court of Justice’, released on 7th November, 2017.

This Bill highlights concerns from legal professionals and from the President of the UK’s Supreme Court about the wording of Claus 6(2) specifically, on how UK courts should treat rulings delivered by the ECJ after Brexit.

According to this UK Government report, Claus 6(1)(a) provides that domestic courts are not bound to follow judgements of the ECJ handed down after exit day. Nonetheless, it does not prevent domestic courts from treating them as ‘persuasive authority’, as they may currently treat judgements given by courts in other jurisdictions. Clause 6(2) specifically permits a domestic court to talk about to a post-exit ECJ judgment “if it considers it appropriate to do so”, devoid of defining a test for suitability.

Within the report there are abundant concerns which have been highlighted about this provision, declared Sir Stephen Laws, Former First Parliamentary Council, he described Claus 6(2) as “unhelpfully vague”, as it gives no indication of what might be considered “appropriate”. Sir Law adds “that silence would be better than the creation, as in Claus 6(2), of a new, but imprecise, statutory test of appropriateness”.

“The Bar Council has argued that 6(2) would not be effective, as it reflects neither the ‘UK courts approach to rulings on foreign law by courts of competent jurisdiction’ nor their approach to judgments of the ECJ. The Bar Council suggested that the subsection should be deleted and replaced with a provision which instructs domestic courts ‘may take account of but is not bound by’ the ECJ’s post-exit case law,” the report highlighted.

Meanwhile, the Institute for Government has argued that ambiguity on this point “would risk leaving judges stranded on the front line of a fierce political battle”.

The President of the Supreme Court, Lord Nueberger, similarly has warned that such wide-ranging discretion will leave judges in the UK open to political attack.

With other noteworthy provisions in Claus 6 including:

• Clause 6(3), which delivers that ECJ judgments given before exit day will be mandatory on most domestic courts when understanding retained EU law;
• Clause 6(3)(b), which instructs the courts to have regard to the limits of EU capabilities when understanding retained EU law; and
• Clause 6(4), which excuses the Supreme Court from the duty to follow current EU case law, and in certain cases the High Court of Justice in Edinburgh. They have been instructed to treat previous EU case law as though it were their own case law.

The UK will carry on following prior EU case law after Brexit, since it provides jurisprudence through which UK law is understood. Nonetheless, the document notes Parliament could ratify legislation to specifically annul retained EU case law.

On 14th November, 2017, during a parliamentary debate on this matter, Mr Stuart McDonald of the Scottish National Party (SNP) disputed in favour of following future ECJ case law for a period after Brexit, asserting that: “In the first months and years after exit, few cases in the ECJ will concern new EU rules that have nothing to do with the UK. Most will continue to relate to rules that existed before exit and that will in fact have been incorporated into the UK statute book by this Bill. In essence, such decisions by the ECJ are about how the law always was and should have been applied, including immediately prior to exit”.

Then on the 15th November, 2017, UK lawmakers only barely decided to vote down a anticipated modification to Clause 6(2), which was put forward by the SNP in Amendment 137, that specified that: “when interpreting retained EU law after exit day a court or tribunal shall pay due regard to any relevant decision of the European court”.

Legislation for post-Brexit cross-border taxes published by the UK

At the end of November, 2017 the UK Government published the ‘Taxation (cross-border trade) Bill’, previously known as the ‘Customs Bill’. This provides the introduction of an independent customs regime for the UK when the country leaves the EU.

According to the UK Government, the Bill will allow the UK to fix and collect its own goods coming into the country and will permit the Government to implement different outcomes of the EU negotiations, including an implementation period.

Mr Phillip Hammond the Chancellor of the Exchequer said “Britain is a great trading nation and innovative UK businesses are central to the success of our economy. This Bill represents the first step in setting up an independent UK customs regime and reaffirms our commitment to deliver a smooth transition for businesses as we leave the EU”.

The Government specified that the Bill will permit the Government to:

• charge and vary customs duty on goods;
• stipulate which goods, are subject to what duty;
• set special or extra duties in certain conditions – for example:
  • to secure the benefits of global free trade, while shielding domestic industries, such as, by providing necessary and comparable safeguards against unfair trade; and
  • to support developing countries by proposing special treatment; and
• to ensure that value-added tax (VAT) and excise legislation function efficiently upon EU exit.

Further post-Brexit provisions were included in the Trade Bill, which was introduced to the UK Parliament on the 7th November, 2017.

Dr Liam Fox the International Trade Secretary said: “As we leave the European Union, the Trade and Taxation Bills will help us seize this unprecedented opportunity to boost British businesses and support a global trade system that works for the UK”.

The Queen first announced this Bill at her yearly speech, which follows the publication of the White Paper Legislating for the UK’s future customs VAT and excise regimes in October 2017, which set out the key intentions of the legislation.

In reply to the publication of the Bill, the British Chamber of Commerce (BCC) said clearer regulation is required from the UK Government on the future of the UK’s VAT regime.

Head of Trade Policy at the BCC, Anastassia Beliakova said: “Businesses will expect this Bill to provide continuity and alignment with the Union Customs Code, and help establish future customs cooperation with the EU. But it is also imperative that the Government consults with business on how to improve our customs procedures as we leave the European Union. Firms tell us that they want clarity on the future of the UK’s VAT regime, and what our exit from the EU will mean for cross-border liabilities. HMRC must be given more resources, and adopt a clear focus on customer service, to enable them to support exporters and importers as they navigate the UK’s exit from the EU”.

2018/19 and 2019/2020 UK VAT registration threshold frozen

Mr Phillip Hammond the UK Chancellor at the end of November 2017, announced in his Autumn Budget that the UK VAT registration will be frozen at £85,000.00 for the tax years 2018/19 and 2019/20. This freeze will raise approximately £26 million each year.

The UK has the highest VAT registration threshold in the EU

Currently the UK’s VAT registration threshold of £85,000.00 (€95,500.00.00) per annum is the highest in the EU. The closest other countries are France £82,000.00 (€73,000.00) and Ireland £75,000.00 (€67,000.00) on goods. The official basis for the high UK threshold is to give small companies a tax subsidy to help them grow. Nonetheless, the more realistic reason is the negative cost/benefit in trying to enforce compliance on small, hard to track businesses.

The UK’s Office for Tax Simplification (ONS) in November, 2017 reported that such a high level was altering the growth of small enterprises. Many micro businesses were noted to curb growth to stay below the threshold and side-step having to raise their prices by charging VAT. There was also an indication of tax evasion in the system as businesses illegitimately ‘split’ sales between companies to remain below the registration threshold.

The ONS suggested considerably decreasing the threshold. Cutting it from £85,000 to £43,000 would bring up to 600,000 businesses into the VAT net. This would force new VAT registration and return administrative drains on micro-businesses – including keeping digital records under the Government’s 2019 Making Tax Digital proposals.

UK 2017 Autumn Budget: Marketplace VAT fraud and split payments

Mr Phillip Hammond the UK Chancellor on 22nd November, 2017 announced in his Autumn Budget a range of measures to combat an estimated £1.5 billion in online VAT fraud.

These measures starting in Spring 2018 include:

• Making sure e-Commerce marketplaces are equally and severally liable for unpaid VAT by UK and foreign merchants on their platforms. This extends the current liability from non-EU merchants to catch those creating ‘shell’ companies in the UK;
• Making sure e-Commerce marketplaces equally and severally liable to unpaid VAT if a platform knew, or should have known, a merchant should be VAT registered and were not.
• e-Commerce marketplaces must check the validity of a merchants VAT number presented on their platforms;
• The Government is to consider the introduction of ‘split payments’, whereby the VAT element of any e-Commerce purchase is paid directly to the Government;
• The Government will consult on plans to bring in new legislation surrounding how VAT is accounted for when payments are made using vouchers. This is to bring the UK in line with similar changes being made across the EU so that when a customer pays with a voucher, the business accounts for the same amount of VAT as when any other forms of payment are used; and
• The Government will publish a call for evidence to explore what more digital platforms can do to prevent non-compliance from the users of their platforms;

Digital Platforms – How to tackle online VAT Fraud?

The UK Government will publish a call for substantiation to explore what more digital platforms can do to prevent non-compliance from the users of their platforms.

Making Tax Digital (MTD)

It was also declared that, as legislated in the Finance Act (No 2) 2017, no business will be mandated to use MTD until April 2019. It will only be businesses with turnover above the VAT registration threshold who will have an obligatory requirement to use MTD at that point, and will only be required to do so to meet its VAT obligations. It will only be once the system has been shown to work will they look to widen the scope of MTD. Further details on how the VAT return information will be submitted is expected in the next few months.

Import VAT

It was recognised that following Brexit, UK businesses may face increased import VAT bills which could have negative cash flow repercussions. Some businesses currently enjoy deferral of these payments, but research will be undertaken to see if further steps to assist businesses can be instigated. It is likely that such steps might include the option to report and declare import VAT on VAT returns, which is something already allowed by a number of EU Member States.

Reverse charge for labour supplies with the construction market

From the 1st October, 2019 a ‘reverse charge’ (which transfers the duty to account for VAT onto the recipient of a supply) will be introduced or supplies of labour in the construction market. A long lead time has been given to this change in order that a consultation can be undertaken and businesses given sufficient lead time to make changes.

The UK will continue to push for effective MNE tax rules

At the end of November, 2017 the UK Government published for stakeholder’s comments a position paper setting out its views on the challenges posed by the digital economy for the corporate tax systems and its ideal solutions.

This paper, which was published together with the 2017 Autumn Budget, states that “the Government believes in the principle that a multinational group’s profits should be taxed in countries in which it generates value”.

It summarises that the Government has taken significant steps – both at domestic and international levels – to ensure taxation under this principle, including by being a party that initiated the ‘Base Erosion and Profit Shifting’ (BEPS) project. It says the Government “led the implementation of that project’s outputs, and took bold unilateral action where needed, including the introduction of the diverted profits tax in 2015, which is forecast to raise £1.35 billion ($1.79 billion) by 2019. However, there is still more to be done”.

Also according to the paper, the Government will drive for improvements to the international tax framework, to make sure that the value fashioned by the participation of users in certain digital businesses is acknowledged in determining where those businesses’ profits are subject to tax.

Awaiting reform of the international framework, the Government will explore interim options to raise revenue from digital businesses that generate value from UK users, such as a tax on revenues that these businesses derive from the UK market. The UK will work with other countries to consider how such a tax could be targeted, designed, and co-ordinated to minimise business burdens and distortion. Nonetheless, the Government stands ready to take unilateral action in the absence of sufficient progress on multilateral solutions, the paper notes.

To conclude, it says the Government will take more direct action against multi-national groups, primarily in the digital sector, who achieve low-tax outcomes by holding their valuable intangible asset in low-tax countries where they have limited economic substance. This action, which is taken in accordance with the UK’s international treaty obligations, will help to prevent groups achieving unfair competitive advantages in the UK market in which they operate. It will also help to ensure that the discussion on how value is created by the users of certain digital businesses “starts from a more sustainable position,” the paper states.

Remarks are being received until the 31st January, 2018.

Brexit import VAT postponement as UK reviews

Before Brexit, the UK Government will review providing an import VAT deferment scheme to help relieve cash flow risks for importers. This would assist an estimated 180,000 regular importing businesses.<

Currently, as part of the EU VAT regime, EU importers into the UK do not have to pay UK VAT when entering the country. However, this will end on Brexit, with importers having to pay 20% UK VAT (and customs) to bring goods into the country. Goods imported into the UK from non-EU countries are liable to import VAT.

In its Autumn Budget, the UK announced a plan to postpone cash payment of the import VAT, and have the importer declare the transaction through their UK VAT return.

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