ROSIIP QROPS Case

No round up this week (as there's nothing much to round up.)  One case that did catch my eye was the judicial review of the decision in Equity Trust Singapore Ltd v HMRC [2012] STC 998. (More commonly referred to as the ROSIIP case.)

HMRC pulled out of the case so it will not be reported but there's a good summary of what went on at

http://www.rpc.co.uk/index.php?option=com_easyblog&view=entry&id=812&Itemid=129 

It's  interesting as although the tax payer didn't win the case in a formal sense HMRC did withdraw its claim for the 55% tax on an unauthorised payment and it seems also to have met the taxpayers costs.  So judicial review clearly did work in this instance.

I also think there is a wider point that the case brings out about the way that HMRC works.  The QROPs list that HMRC publishes is in essence a very good idea.  The legislation in this area is necessarily complicated so rather than individuals having to wade through it overseas schemes can provide details to HMRC who will include them on the QROPs list. If HMRC tested applications against the legislation it should secure tax revenue by isolating rogue advisers and simplify the position for tax payers.  However, the QROPs list never has been properly maintained because HMRC do not actively vet the applications they receive. What has happened in this instance is that pension transfers have been made to pension schemes that were not QROPS but HMRC will not be able to collect the tax due.  Additionally there have been three court cases (including the judicial review) that should have been avoided.

The current QROPs list includes a statement

 

"The purpose of this list is merely to help UK registered pension schemes carry out their due diligence when transferring pension savings to another pension scheme that is not a registered pension scheme.The list is not to be taken as a recommendation for a particular scheme or product.  Nor should it be taken that any scheme featured on the list is approved or backed by HMRC."

 

But doesn't this means that there will be more legal disputes over QROPs.  That is tax payers will transfer to a QROPs on the list.  HMRC will attempt to apply a retrospective non  - qualifying payments charge and the whole thing will end back in judicial review on the basis that HMRC can't use the small print to escape its responsibilities?

 

The problem lies in the fiction that you cam somehow separate HMRC's revenue raising function (where funds will be made available) from ongoing compliance where costs have to be cut. Getting things right from the start and ongoing compliance to identify problem areas is the only effective way of protecting tax revenues.

 

 

Insurance Companies and IFRS 9

Something that I have been trying to get straight in my own mind is the impact of IFRS 9 on insurance companies and how it will interact with IFRS 4 phase ii. As with all of my musings on accounting treatments this is outside my comfort zone  - so please don't place any reliance on what follows.

IFRS 9 as it currently stands provides for two main methods of valuing financial assets.  Amortised cost which applies where

"(a) The asset is held within a business model whose objective is to hold assets in order to collect contractual cash flows.

(b) The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding."

And for everything that's not at amortised cost.

"A financial asset shall be measured at fair value unless it is measured at amortised cost with gains and losses going through profit and loss."

So in my simplistic world you are going to account for bonds at amortised cost and everything else at fair value.

Just to stop things from getting to easy there is also an irrevocable election to treat assets that would be accounted for on an amortised cost at fair value if it prevents an accounting mismatch.  Would bonds backing unit linked liabilities be an example of where a life insurer might apply the election?

However, there seems to be a problem with IFRS 9 as it stands.  Under IFRS 4 phase ii  liabilities are measured using market interest rates so there is a potential mismatch between the valuation of assets and liabilities. (Although couldn't you manage this by means of the election for market value as per above?).

However, the IASB issued ED 2012 (4).

ed link

This includes another method of valuation, fair value through other comprehensive income ("OCI").  This is to be applied where

"The asset is held in a business model in which assets are managed

both in order to collect contractual cash flows and for sale and,

The contractual terms of the financial asset give rise on specified

dates to cash flows that are solely payments of principal and

interest on the principal amount outstanding."

I think that at least part of the reason for introducing the fair value through OCI category is to deal with the insurance accounting mismatch described above.  When combined with IFRS 4 phase ii what will go through the profit and loss account for bonds / liabilities backed by bonds will be amortisation and an interest item representing the unwind of the historical valuation interest rate. In the OCI there will be an allowance for the difference between historic interest rates and market interest rates and the difference between market value and amortised cost of bonds.  If I'm correct you can see that this makes some sort of sense, probably gives fairly stable figures in the profit and loss account but at the expense of "operational complexity."

Finally the implementation date for IFRS 9 is 1 January 2015.  However, the implementation date for IFRS 4 phase ii is more like 2018.  However, the intention is that the fair value through OCI basis should dovetail with the IFRS 4 phase ii, so what happens in the interim?

Tax Update for 16th August 2013

Not a great deal this week  - height of the holiday season I guess.  But the following may be of interest.

Updated guidance notes on FATCA 

http://www.hmrc.gov.uk/fatca/index.htm

And;

HMRC has opened a consultation including proposals for information powers and penalties for HMRC with respect to high-risk promoters. 

https://www.gov.uk/government/publications?departments[]=hm-revenue-customs&publication_filter_option=consultations

Informal Consultation on Transitional Regulations

I have had a quick read through of HMRC's informal consultation on the transitional regulations.  See Friday's round up for a link to the document.

The "problem" seems to be with the treatment of DAC and was initially raised by Lindsay J' Afari - Pak at Cobham, although HMRC are saying that similar issues can arise on transitional items other than DAC and in a wider range of circumstances.

An example of the issue is where there is an inter-group part vii.  The transferor transfers DAC that is then written off in the transferee.  So say  the transferor transfers assets of £100, liabilities of £100 and pre December 2012 DAC of 10.  It shows an accounting loss of £10.  In the transferee as the DAC is not recognized then the accounting position is 0 (100 of assets and 100 of liabilities).  Generally the rule on an intergroup part vii is that you exclude accounting entries in both the transferor and transferee but if there is a difference in the accounting treatments then you adjust.  So in this instance as there is a loss of £10 in the transferor  but a 0 result in the transferee there is an additional deduction of £10 recognized in the profits computations of the transferee. But that deduction is effectively for pre 2012 DAC so its already been relieved once in the LATP comp of the transferor and there is a double deduction for the DAC.

Additionally HMRC believe there is a also problem where the transferee does recognize a DAC asset after a transfer of business.  The point here is that it seems as if the DAC is treated as post 2012 (as its being set up in a new company) and accordingly a tax deduction will be available when the DAC is written off to the income statement, again allowing double deduction.

The informal consultation includes two suggested wordings that deal with these problems.  I don't have any views on the suggested changes but I do wonder if the problem here is really that DAC should not have been treated as an excluded item.  That is if the rules calculated the difference between expenses relieved in the tax computation but not included as expenses in the GAAP accounts at 31.12.2012 and then included this amount in the transitional calculation  wouldn't everything then work as it should ?  I think it was HMRC that didn't want DAC to be a transitional item.

Friday Round Up

Topic with obvious relevance for life insurers is 

http://www.hmrc.gov.uk/life-assurance/add-trans-regs-con080813.pdf

Which is an "informal consultation" on excluded items and transfers of business.  Only went on the HMRC website today.  I'll try and do a quick post next week.

Other topics that may be of interest

There's a review of tax avoidance disclosure regimes.  Responses by 20 September 2013.

http://www.hmrc.gov.uk/news/dotas-aug13.htm

There's HMRC guidance on non  - statutory clearances that might be useful in some circumstances

http://www.hmrc.gov.uk/cap/nscg.htm#1

A statutory instrument on the 6 month deferral of the introduction of FATCA

http://www.legislation.gov.uk/uksi/2013/1962/contents/made

And a revenue and customs brief on discounted gift schemes

http://www.hmrc.gov.uk/briefs/inheritance-tax/brief2213.htm

 

Pension Business, Double Tax Treaties and Exempt Dividends

The definition of a pension scheme in a double taxation agreement will generally include a requirement that income accruing to the scheme is exempt from tax.  Taking the Japan / UK treaty as an example

"Exempt from tax in that Contracting State with respect to income or gains derived

from activities described in clause (ii) of this subparagraph."

It always seemed to me that there is a risk that there may be confusion over pension business policies of a life insurance company when this wording is read in conjunction with FA 2012 section 111

"Dividends or other distributions–

(a)which are receivable by the company, and

(b)which are referable, in accordance with Chapter 7, to the business concerned,

are to be brought into account as receipts in calculating the profits"

Of course if you happen to deal with UK life insurance companies and their pension business policies then it is clear that in terms of a double taxation treaty section 111 does not mean that the pension scheme is not exempt from tax. There is no "policyholder" tax charge on the dividend and although policyholder dividends are included in the calculation of shareholder profits they are matched by an equal and opposite movement in reserves.  However, I think a non  - UK revenue authority looking at the eligibility of a UK insurance company to a special pension scheme rate of withholding is going to take a lot of convincing.

Prior to Finance Act 2012 there was section 438 ICTA 88 that provided for exemption from corporation tax for income and gains solely linked to pension business.  But this section was not replicated in the FA 2012 regime.  I can understand the reasons for not replicating 438 (it didn't really link into any other legislation) but I am concerned that this issue of exempt dividends might cause problems in the future.

If it was up to me I would introduce a FA 2012 111A, that said that notwithstanding FA 2012 111 dividends and gains from unit linked pension business were exempt from tax, including calculations of life assurance trading profits.  But that where such amounts were exempted in the trade profits calculation an equal and opposite adjustment is made in the movement on reserves line.  A bit fussy maybe but I think may save a lot of complications in the long run. 

Friday Round Up

A flurry of documents on HMRC's web site plus FRED 49.  Grouped thematically

• Accounting

FRED 49 on FRS 103 has been published see post of  25 July for a bit more on this.
https://www.frc.org.uk/Our-Work/Publications/Accounting-and-Reporting-Policy/Exposure-Draft-of-Implementation-Guidance-to-accom.aspx

• Policyholder taxation; 

Change in time apportionment calculation for period individual is non  - resident and change in residence rules.
http://www.hmrc.gov.uk/news/tar-faqs.pdf

Guidance on the £3,600 limit for qualifying policies.
http://www.hmrc.gov.uk/news/life-ins-policy-faqs.pdf

New Reporting requirements
http://www.legislation.gov.uk/uksi/2013/1820/contents/made

• Rebates of management charges

A raft of changes so that fund managers are not required to deduct tax from annual payments made to non  - residents.  See post of 18th June for a bit more on this.
http://www.legislation.gov.uk/uksi/2013/1772/contents/made
http://www.legislation.gov.uk/uksi/2013/1770/regulation/2/made

• Pension Schemes 

 Four new statutory instruments on pension schemes
http://www.hmrc.gov.uk/news/si-pension-schemes.htm

Sundry

The birthplace of West Indian great George Headley has signed a double tax treaty with the UK (still to be ratified) that provides for 0% withholding for dividends paid to pension schemes.
http://www.hmrc.gov.uk/taxtreaties/signed/panama.pdf

New SI on exchange gains and losses, doesn't mean anything to me but may have some relevance.
http://www.legislation.gov.uk/uksi/2013/1843/contents/made