Tax points for UK companies in 2021

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France resumes its digital tax collection

HMRC has announced that it has opened a series of fraud investigations, focusing on whether or not the HMRC investigations into TP, residency and profit sharing arrangements have been misrepresented. This serves as a warning for the tax chiefs to research their facts before filing with HMRC. If it is later found that the facts differ from those presented, HMRC would like to know whether this was purely accidental, negligent, or knowledgeable. Even if the company can demonstrate that the misrepresentation was not intentional, carelessness will prompt HMRC to impose sanctions.

Reporting of uncertain tax positions

Many large companies were relieved that HMRC had postponed proposals that large companies would have to inform HMRC of uncertain tax positions by April 2022. From public domain comments from a senior HMRC official, it emerges that the HMRC (rightly) has one of the most controversial aspects of the proposal’s controversy, namely the fact that companies would have to decide whether the position they have occupied is one with which HMRC may not agree to. We can find out in the household what is proposed instead.

State aid

In April 2019, the European Commission concluded that the full and partial exemption from non-trade finance profits in UK CFC rules is incompatible with EU state aid rules, provided that the profits come from UK activities and the UK is obliged to recover the profits of unlawful state aid with interest from groups who benefited from it.

The UK has challenged the decision in the EU courts, but is still required to recover the state aid despite the dispute. Since the alleged aid is an exempt amount under UK tax law, the reimbursement is outside the normal tax assessment system. In order to avoid having to rely on costly and lengthy civil proceedings to reclaim the aid, HMRC has been given new powers to recover the alleged aid using a fee attestation process, income tax and prepayment notices. We can assume that many of these announcements will be released in 2021.

Tax rights and “carving the cake”

The pandemic has accelerated the exploitation of the digital economy and made the tax laws of the federal states for dealing with digitization and consumer-oriented brands even more urgent. The OECD had set itself the goal of agreeing a new set of rules by the end of 2020. However, this was not possible: in part because of US intransigence, which regards the measures as unfair against US tech companies; and partly as a result of the pandemic. Meanwhile, countries that are key markets for the tech giants are continuing to be more aggressive under current “digital PE” and withholding tax regulations – or, like France and the UK, are driving temporary unilateral taxes on digital services.

If international agreement cannot be reached on new tax laws in early 2021, we are likely to see even more unilateral taxes on digital services, including the mothballed EU-wide proposal. The need to raise taxes to pay off coronavirus-related loans will likely only add to the pressure.

Employment tax

The pandemic-delayed changes to the so-called IR35 working rules outside of payroll will come into force on April 6, 2021. The rules essentially shift responsibility for “complying” with the engager (if it is a medium or large company) first happened to public sector engagers. Although many companies have already changed their practices and moved some roles straight into payroll, we still expect some companies to struggle with regulatory compliance if the roles continue to be assigned through interim work.

VAT

The domestic chargeback to the construction sector to combat organized VAT fraud is another measure that has apparently been discussed for some time and that is repeatedly being postponed. The rollout was initially postponed from October 1, 2019 to October 1, 2020 due to concerns that many companies were not prepared for the changes. Then Coronavirus delayed it until March 1, 2021. It is still doubtful that companies are prepared for the change and it remains to be seen whether it needs to be delayed any further.

In the midst of the pandemic, HMRC published a surprising change in practice regarding VAT and contract terminations in its Revenue & Customs Brief 12 (2020) that it claimed would have a retrospective effect and potentially affect all compensation payments related to contracts. This particularly created confusion about how the contract was applied to real estate, including dilapidated payments on leases. We understand that HMRC is reversing the change with retroactive effect and intends to issue another brief this month to clarify its new position.

After the Brexit transition period has expired and the UK has left the EU entirely, 2021 could be the year in which the UK deviates from EU VAT law in some areas – or at least signals where it intends to do so in the future.

The call for evidence launched in the fall of the VAT group rules suggests this could be an area where the government wants to make changes. One of the points to consider is that only UK businesses and UK entities operated by businesses outside the UK are eligible for VAT. Make grouping mandatory and not selectable; Allowing Limited Partnerships and Scottish Limited Partnerships to join VAT groups – an area that needs clarification. While expecting regime changes in 2021 may be ambitious, we should at least learn more about the likely direction of travel.

Another call for evidence published in December suggests that the government is exploring possible changes to digital platforms in the “sharing economy”. The platforms typically claim that they only provide information technology and agency services legally and for VAT purposes, and that the underlying service (e.g. a rental) is a delivery from the service provider to the customer, which is often below the VAT registration threshold . The call for evidence suggests that the government may accept failure in legal analysis, but is changing the rules to make the platform the supplier for VAT purposes. The call for evidence ends on March 3, 2021, which means we’ll have to wait and see if this is likely to result in a major change in tax policy.

Tax litigation

The government has set up a group of experts to look into reforming the judicial review process. Separately, the government is also trying to make it more difficult to get permission to appeal to the Court of Appeals from the Supreme Court. Changes in either area could have a profound impact on disputes with HMRC, and we should learn more about what the government is proposing in 2021.

With regard to VAT and other parts of the tax system that are “retained EU law”, the tax courts and tribunals need to start applying new rules to interpret this law. The UK courts are not bound by decisions of the Court of Justice of the European Union (ECJ) made after December 31, 2020 and the Supreme Court may depart from ECJ decisions made before that date in the same way as they are able to deviate from their own decisions. The government has expanded this power to depart from ECJ rulings on the appellate court and its equivalents. However, these new regulations are unlikely to have any significant impact in 2021. They are more likely to lead to disputes when UK VAT deviates from the EU system.

Tax investigations

HMRC will likely continue to devote significant resources to reviewing and investigating non-compliance with the vacation and other state coronavirus support programs. Those who have claimed the assistance need to remain vigilant to make sure they are following the rules and to make sure they know what happened on the ground. There will certainly be many cases in which employees who are not known to the management have been working during their vacation, either because of an instruction from their manager or because they believe they are helping their employer. If these cases become known, it is important that employers provide full disclosure to HMRC and repay any overcharged amounts as soon as possible.

HMRC’s raids on easing no-fault liability for tax evasion, also known as the Corporate Criminal Offense (CCO), began in late 2018. It is possible that some of these cases will be indicted in 2021. HMRC Raid activity has of course been hindered by the lockdown restrictions, so we expect raid activity to increase once these restrictions are lifted.

This is based on an article by Jason Collins and Catherine Robins, tax experts at Pinsent Masons, the law firm behind Out-Law, published in the Tax Journal on January 8, 2021.