HMRC have outlined revamped proposals for new regulations to deal with double taxation disputes arising between the UK and other EU member states after Brexit. These regulations, which build on the UK’s other bilateral tax treaties with EU states and the existing Union Arbitration Convention are due to come into force by January 2020.
What is double taxation?
Double taxation refers to the instance where income tax is paid twice on the same source of income. This may occur in international trade or investment when the same income is taxed in two separate countries as well as when income is taxed at both the corporate level and personal level.
Why can double taxation occur with companies and SMEs?
Double taxation can often occur as companies are legally considered separate legal entities to their shareholders. Therefore, just like individuals, corporations are required to pay tax on their annual earnings. However, when corporations pay out dividends to their shareholders, the shareholders will then have to pay income tax on these earnings despite the earnings being provided to the dividends already being taxed at the corporate level.
What is International Double Taxation?
International businesses can often be faced with double taxation as the income may be taxed in the country where it is earnt and then taxed again when it is repatriated in the business’ home country. To avoid the issue of double taxation countries across the world a have signed treaties to avoid double taxation.
What is HMRC’s proposal for the new regulations?
HMRC have outlined proposals for new regulations to combat double taxation disputes arising between the UK and other member states post-Brexit. The new measure will apply to disputes in relation to capital earned in a tax year commencing on or after 1 January 2018.
The new regulations do not replace the existing bilateral tax treaties or the Union Arbitration Convention, however will build on the UK’s network of bilateral tax treaties with other member states. HMRC have said the new regulation will build on the UK’s existing bilateral tax treaties as well as allowing another option for businesses or individuals to consider.
The new regulations will be able to be applied in respect of a connected party transaction where the other enterprise is a tax resident in another member state. It will allow the persons affected to challenge the decisions made by the member states and to refuse access to the mechanism as well as introducing a role for domestic courts to oversee adherence requirements of the mechanism.
It also aims to lessen the amount of administration involved in presenting a case of double taxation for SMEs (small and medium sized enterprises) and individuals.
What is transfer pricing and the Arbitration Convention?
The EU Arbitration Convention establishes a procedure designed to resolve disputes in which double taxation occurs between enterprises of different member states as a result of an upward adjustment of profits of an enterprise of one Member State.
The convention is designed to remove the occurring double taxation by creating agreement between the two contracting states including the opinion of an independent advisory body if it is necessary.
Why is HMRC developing new regulations?
In 2019 HMRC received 154 requests for assistance with double taxation dispute resolution where the treaty partner was another state as well as 64 requests from business relation transfer pricing issue and a further 8 requests for other reasons.
A review of the Union Arbitration Convention, in 2015, revealed a number of short comings when looking at the length of time to resolve the dispute as well as scope of the mechanism used. Therefore the new mechanism aims to cover a much wider scope, covering disputes arising from the interpretation and application of tax treaties.
Will HMRC be lenient to taxpayers making a voluntary disclosure?
Under normal circumstances if HMRC investigate your tax matters and find that you have not paid the amount of tax that you were meant to or that you have failed to disclose financial information then HMRC can penalise you in a number of ways, which could include imposing a penalty of up to 100% of your tax liability or even prosecuting you.
HMRC work out the penalties using various factors, including calculating the amount of potential lost revenue, determining ‘behaviour’ of the tax payer, deciding whether the disclosure was prompted or unprompted and considering the HMRC penalty ranges. For example is someone deliberately concealed financial information from HMRC and HMRC prompted them to provide the information then the person could face penalties of between 50% – 100% of the tax liability.
The advantage of the ‘wider impact campaign’ or a targeted campaign are that HMRC would be willing to significantly reduce the penalties and in some cases may even waive the penalties altogether. There may also be some instances where the HMRC decide not to prosecute those who have failed to disclose information previously, due to the fact that the disclosure made during the campaign was unprompted.
Our solicitors have the specialist knowledge and understanding when negotiating penalties with the HMRC. We do this by making detailed representations on your behalf to HMRC specifying any mitigating circumstances and explaining why your tax penalties are excessive.
Should you make a voluntary disclosure?
It is important to note that HMRC exercise their discretion when reducing or waiving penalties and consider each case separately. HMRC have by their own admission stated that where there are systematic fraudulent matters they will not hesitate to commence prosecution even if the disclosure of the information came as a result of a campaign. Although it is safe to assume that if you disclose your financial information voluntarily then the HMRC are likely to be more lenient when deciding what penalties to impose.
If you are under the impression that you should not disclose financial information because you have ‘got away with it’, then the advice would be to disclose the information now rather than later or never, regardless of which industry you belong to. This is due to the fact that HMRC are likely to impose harsher penalties if they later discover that you haven’t disclosed the information.
If you find yourself in a position where you need to disclose elements of your earnings or elements of your financial information for previous years then you should contact us as we work with specialist tax advisers who will be able to establish your tax liability. Our specialist solicitors are subsequently able to robustly negotiate the terms of any tax settlement with HMRC. Alternatively, we are able to work with your accountant to ensure that collectively we are able to obtain the best possible outcome for you.
Expert London Tax Investigation Lawyers
If you need HMRC Tax Investigation advice, we are available to aid you at every stage of the HMRC investigate process. Members of our legal team have first-hand experience and knowledge of the internal workings of HMRC. We can provide you with the very best representation in negotiations with HMRC and defending all forms of HMRC fraud, tax inquiry, tax fraud investigation, criminal tax evasion and HMRC enquiries and investigations. Our team specialises in successfully challenging HMRC decisions and will assist you in every aspect of the investigation.
Our specialist Tax Solicitors and Barristers deliver expert technical knowledge, strong negotiation skills and respected advice, which can make a pronounced difference to eventual tax penalties, charges and liability.
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