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New OTS report recommends changes to UK’s capital gains tax regime

The Office of Tax Simplification (OTS) has published its first report following its review of certain aspects of the UK’s capital gains tax regime requested by the Chancellor in July this year with the specific purpose of identifying opportunities relating to technical and administrative issues as well as areas where the present rules can distort behaviour or do not meet their policy intent. This report is the first of two. The second will focus on key technical and administrative issues and is expected to follow early in 2021. The report contains a number of recommendations for the government to consider.

The report makes a number of recommendations to the government, including:

  • Aligning the capital gains tax and income tax rates more closely, since the OTS considers that the current disparity can distort decision-making, delay business sales for tax-motivated reasons and create an incentive for taxpayers to arrange their affairs in ways to try to recharacterise income as capital gains. In connection with this, the OTS recommends that the government considers reintroducing reliefs for inflationary gains and allowing more flexibility in the use of capital losses, as well as looking at how such changes will interact with taxation of capital gains for companies.
  • Alternatively, if the capital gains tax and income tax rates are not more closely aligned:
    • looking to reduce the number of “boundary issues” between capital gains and income. Specifically, the report examines rewards from personal labour as the driver behind capital growth in the value of an asset (or a business) and whether such amounts are taxed consistently. The report places particular focus on the question of whether more employee share-based rewards should be taxed at income tax rates; and
    • considering reducing the number of capital gains tax rates from four to two (the four existing because of the higher rates applied to certain gains). The report does not expressly set out which rates might be abolished, but the context suggests that the two basic rates might be removed.
  • Reducing the annual exempt amount to ensure that it operates effectively as an “administrative de minimis” rather than as a form of relief.
  • Removing the capital gains uplift on death and instead providing that the recipient is treated as acquiring the relevant assets at the historic base cost of the deceased. This particular recommendation relates to the interaction between capital gains tax and inheritance tax and how it can mean that business owners are encouraged to hold onto their businesses until death rather than selling them (something also raised in the OTS inheritance tax report from July 2019).
  • Considering how effective certain reliefs are, including Business Asset Disposal Relief (previously known as Entrepreneurs’ Relief) and Investors’ Relief and whether such reliefs should be amended and/or abolished.

While the report can be considered a part of the government’s and OTS’s long running process of reviewing the UK’s tax system, the particular discrepancy between capital gains tax and income tax rates for individuals and the government’s likely focus on ways to fill the hole in public finances caused by the ongoing Covid-19 pandemic mean that certain recommendations that could lead to increasing the tax take (rather than, say, just simplifying and focusing the capital gains tax regime) might be attractive and lead to change. Having said this, the publication of this initial report gives little insight into the reality of any future changes to the capital gains tax regime in the UK as the government must now review the OTS’s input, wait for its further recommendations and consider which, if any, of its recommendations it will look to implement. Any proposal to make changes to the rules would then be likely to be subject to a detailed consultation process.

The sensitivity of making wholesale changes to the capital gains tax regime is highlighted by the immediate response of Lord Leigh of Hurley, senior treasurer of the Conservative Party (and a senior partner at Cavendish Corporate Finance), who is reported to have said that “Proposals to simplify tax by equating income and capital don’t reflect the differences between the two. Capital gains are rewards for a risk taken by investing in an asset which might become worthless. Income involves no risk at all. If you want people to move from a comfortable salary to invest in a new business, take a risk, employ people, as I did, they have to feel that tax on any success reflects that risk”. Other commentators have warned against increasing tax rates with the effect of discouraging business development, employment and so, ultimately, the overall tax take to the Exchequer.

COVID-19: UK Chancellor announces significant extension of support packages

The UK Chancellor has today announced that the Coronavirus Job Retention Scheme (the furlough scheme) and the Self-Employment Income Support Scheme (SEISS) will be extended against “a worsening economic backdrop”.

Earlier this week we reported on the UK Prime Minister’s reintroduction of the furlough scheme until 2 December 2020 (the scheduled end date of the national lockdown) and an extended SEISS grant for the self-employed to 80% of average trading profits for November (https://www.proskauertaxtalks.com/2020/11/covid-19-extension-of-economic-support-ahead-of-national-lockdown/).

Today’s announcement goes further: the furlough scheme will now be extended until the end of March 2021 (with a review in January 2021) and the SEISS grant for the self-employed will now be 80% of average trading profits for November to January 2021 (up to £7,500).

COVID-19: Extension of economic support ahead of national lockdown

Ahead of England’s return to national lockdown this Thursday, the UK Prime Minister has announced the extension of support packages for both employed workers and for the self-employed.

As reported by us previously (https://www.proskauertaxtalks.com/2020/09/uk-chancellor-announces-winter-economy-plan/) the Coronavirus Job Retention Scheme (the furlough scheme) was due to end and its replacement, the Job Support Scheme, was to commence on 1 November. In conjunction with the Prime Minister’s announcement of this month’s national lockdown, the furlough scheme is being extended until 2 December 2020 and the Job Support Scheme is being postponed until that date.

The extended furlough scheme will broadly mirror its previous incarnation:

  • The government will pay 80% of an employee’s usual salary for hours not worked, up to a maximum of £2,500. This marks a return to the original scope of the scheme (as the level of government contribution was reduced in September and October) and a recognition of the difficulties of a second lockdown.
  • Employers are required to cover employer National Insurance Contributions and pension contributions for the hours the employee does not work (and wages for the hours worked).
  • To be eligible to claim the grant for its furloughed employees an employer has to report and claim for a minimum period of seven consecutive calendar days.
  • Employers can bring furloughed employees back to work on a part time basis.
  • The extended scheme is available regardless of whether an employer or employee has previously used it.
  • The Treasury has confirmed that businesses will be paid in arrears for the period required for the legal terms of the scheme and the system to be updated. Further guidance is expected to be announced.

In addition to the reintroduction of the furlough scheme, the Prime Minister announced further support for self-employed individuals with the Self-Employment Income Support Scheme (SEISS) being extended:

  • In November the government will pay 80% of the average trading profits of self-employed individuals. As we previously reported (https://www.proskauer.com/blog/covid-19-further-extension-to-the-uks-job-support-scheme), the UK Chancellor announced last month that the taxable grants to the self-employed were to cover 40% of average monthly trading profits over a three month period. Yesterday’s announcement means that, as the SEISS grants are calculated over three months, the total level of the grant works out as 55% of trading profits for November to January (with 80% in November and 40% in December and January).
  • The period for claiming the grant opens on 30 November (two weeks earlier than previously announced).
  • For self-employed individuals to be eligible for the grant extension, they must have been eligible for the two previous grants under the scheme (but did not have to actually claim the previous grants) which means that individuals who have recently become self-employed will be frozen out of this support package.

Please get in touch with any member of our UK Tax group or UK Labour & Employment group to discuss how the above will affect you or your business.

SEC Continues to Scrutinize Disclosure of Perks and Personal Benefits

Over the past few months, the Securities and Exchange Commission (the “SEC”) has imposed civil penalties in the hundreds of thousands of dollars against multiple publicly traded corporations in connection with their failure to disclosure certain perquisites and personal benefits provided to senior executive officers, including travel, lodging and entertainment fringes and expenses. Continue Reading

COVID-19: Further extension to the UK’s Job Support Scheme

As coronavirus infection rates rise and restrictions tighten across the UK, the UK Chancellor has extended the Job Support Scheme (again). Last week we reported on the extension of the Scheme to businesses legally required to close under tier 3 of the alert system (https://www.proskauertaxtalks.com/2020/10/covid-19-extension-of-the-uks-job-support-scheme/). Yesterday (22 October) the UK Chancellor announced the following updates:

  • Employees must work a minimum of 20% of their usual hours per month (previously 33%) and the employer’s contribution for non-worked hours is 5% (previously 33%), capped at £125 per month.
  • The government will pay 61.67% of hours not worked, up to a cap of £1,541.75 per month (for businesses in tier 3 forced to close the government will pay 67%) so that employees will earn at least 73% of their usual salary (based on the cap of a monthly reference salary of £3,125).
  • The support available to the self-employed (previously reported by us https://www.proskauer.com/blog/uk-chancellor-announces-winter-economy-plan) has been increased with the taxable grants now covering 40% of average monthly trading profits over a three month period (previously 20%) with a maximum grant of £3,750.
  • Additional funding is being provided to Local Authorities to support businesses in tier 2 areas which have been severally impacted (but are not legally required to close) by the restrictions on household mixing. The level of funding received by the Local Authorities will depend on the number of hospitality, hotel, B&B and leisure businesses in their area and it is assumed that such businesses receive grants equivalent to 70% of the grants which tier 3 businesses required to close are eligible.

 

COVID-19: Extension of the UK’s Job Support Scheme

As lockdowns loom across the land with the introduction of a three-tier system of restrictions based on local COVID-19 alert levels, at the highest alert level (tier 3) certain businesses will be forced to close, including pubs and bars (unless they serve substantial meals).

To support businesses that are legally required to close as a result of the restrictions, the Job Support Scheme announced as part of the UK Chancellor’s Winter Economy Plan (reported by us https://www.proskauertaxtalks.com/2020/09/uk-chancellor-announces-winter-economy-plan/) is extended. Below are the key points:

  • The government will pay two-thirds of each employees’ salary up to a maximum of £2,100 a month.
  • Employers will still have to pay employer national insurance contributions and pension contributions; however, they are otherwise not required to contribute towards wages but can top up employee pay if they wish to do so.
  • For the extended support to be available, employees have to be off work for at least seven consecutive days.
  • The extended scheme commences on 1 November and will last for six months (with a review in January).
  • Payments to eligible businesses will be made in arrears via the HMRC claims service that is expected to be available at the beginning of December.
  • The extended scheme will apply in England and each of the devolved regions and is available for businesses that were required to close before 1 November, including premises that are restricted to delivery or collection only services.
  • Alongside the extended Job Support Scheme, the Local Restrictions Support Grant is being increased so that eligible businesses may now receive up to £3,000 per month (rather than up to £1,500 per three weeks) and businesses can now receive the grant after closure for two weeks (rather than the previous position of three). This grant supports businesses that are required to close due to local lockdown restrictions and that pay business rates on their premises.

As mentioned in our post on the Winter Economy Plan, the Job Support Scheme (including the extensions discussed above) only applies to jobs which are considered “viable” and will not be available if an employee is made redundant or put on notice of redundancy during the period the employer is claiming the grant for that employee.

Section 1446(f) Final Regulations: Key Changes to Guidance on Non-Publicly Traded Partnership Interest Transfers by Non-U.S. Persons

On October 7, 2020, the U.S. Internal Revenue Service (“IRS”) and Treasury Department released final regulations[1] providing guidance on the rules imposing withholding and reporting requirements under the Code[2] on dispositions of certain partnership interests by non-U.S. persons (the “Final Regulations”). The Final Regulations expand and modify proposed regulations[3] that were published on May 13, 2019 (the “Proposed Regulations”), and which we described in a prior Tax Talks post.[4] Unless otherwise specified, this post focuses on the differences between the Proposed Regulations and the Final Regulations affecting transfers of interests in non-publicly traded partnerships.

Enacted as part of the “Tax Cuts and Jobs Act,” Section 1446(f) generally requires a transferee, in connection with the disposition of a partnership interest by a non-U.S. person, to withhold and remit ten percent of the “amount realized” by the transferor, if any portion of any gain realized by the transferor on the disposition would be treated under Section 864(c)(8) as effectively connected with the conduct of a trade or business in the United States (“Section 1446(f) Withholding”).[5]

Prior to issuing the Proposed Regulations, the IRS had issued Notice 2018-08 and Notice 2018-29 to provide interim guidance with respect to Section 1446(f) Withholding.

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