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DSG - SIMPLIFIED TAX REPORTING PROPOSALS FOR THE SELF EMPLOYED
New proposals for ‘simplified tax reporting’ for the selfemployed will see the often complex ‘current year basis’ rules abolished, aligning the treatment of self-employed trading profits with that for other forms of income. Businesses will be taxed on profits arising in a tax year, rather than on profits of the accounts ending in that year.
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The Government is consulting on the detail of the proposed changes, with comments invited until 31 August 2021. For those businesses already adopting a 31 March or 5 April year-end, the impact should be minimal. However, with implementation proposed from 2022/23, others should act now to plan for the changes:
• Some profits will be taxed earlier, creating cashflow challenges during the transition period as nearly two years of profits could become taxable in a single year.
Spreading rules may mitigate the impact. • Relief should not be overlooked for ‘overlap’ profits from early years of trade.
• Businesses with year-ends later in the tax year will may need to submit tax returns including provisional/ estimated figures, with amendment once finalised information is available.
• Consideration should be given to implementing an effective software package for accounting and tax reporting, especially given the also upcoming introduction of Making Tax Digital for Income Tax.
• Particular complication may arise for partnerships, where joiners/leavers are involved. In certain cases, incorporation may be worth considering.
Brexit: Impact for withholding taxes
As a result of the UK’s exit from the EU, from 1 July 2021 UK companies will no longer be able to benefit from the two EU Directives that provide automatic relief from withholding taxes on the payments of interest, royalties and dividends.
The basic rule is that a UK company must withhold Income Tax at 20% on interest or royalties to a non-UK resident person (there is no UK withholding tax on dividends). The withheld tax is paid to HMRC (typically via a quarterly reporting) and the payee receives the remaining 80%. Often the foreign recipient will be able to benefit from a domestic double tax relief regime to offset the withholding tax suffered, but this will not always be the case and there is also a cash flow disadvantage.
Whilst the UK was a member of the EU, UK companies, like those in the EU, benefited from two Directives relating to withholding tax:
1. the Interest and Royalties Directive 2. the Parent-Subsidiary Directive Each of these Directives has the effect of eliminating the withholding tax requirement between residents of EU member states, where qualifying conditions are met. The UK continues to benefit from these two Directives for a short period after the end of the Brexit transition period, but from 1 July 2021, unless the payment qualifies for another relief, UK companies will need to withhold tax on the payment of interest and royalties to EU persons in the same way as for payments to a person elsewhere. The same applies for payments from an EU resident company to a UK resident, who may now find themselves subject to withholding taxes that were not previously applied. Interest and penalties may be levied where tax is not withheld when required.
Fortunately, there are other reliefs, most commonly by reliance on a double tax treaty between the two countries. A common clause within a treaty will limit the extent of withholding tax that applies, either to a reduced level or possibly to nil, and the UK has a very extensive network of such treaties.
However, there are conditions for treaty reliefs to apply and the relief is rarely automatic, requiring the companies party to the arrangement to make a claim to the relevant tax authorities. The claim should be made in advance and can be a time-consuming process, requiring certification of residence and exchange of physical papers between the two jurisdictions.
UK companies should review their debt, intellectual property and dividend arrangements and establish if they receive or pay any interest, royalties or dividends to/from EU-resident persons. If they do, they should then review the withholding tax position and, as a result, may then need to make a claim for a relief under a double tax treaty. In more complex situations, it may be necessary to consider reorganising the relationship. EU companies should give similar consideration to arrangements with UK residents.
DSG’s tax team are highly experienced in assisting our clients in managing their withholding tax position, working closely with client teams to establish a commercial approach to resolving any concerns. We will always be happy to discuss your situation with you, so please get in contact if you have any concerns.
