Tax advice: Introduction of a threshold for digitally supplied services and TAAR and distributions in winding-up

    Every year, our tax and VAT helplines receive over 55,000 calls. Each month, we provide a round-up of topical news and below is a summary of the key points our team has been discussing with accountants in September.

    Introduction of a threshold for digitally supplied services

    The current EU VAT rule for telecommunications, broadcasting and electronically supplied digital services made directly to non-business customers (B2C) is that the place of supply is “where the customer belongs”. This means that UK businesses selling B2C direct, rather than selling via 3rd party platforms, into EU countries are making supplies in those EU countries and are immediately liable to VAT register and account for VAT there. As a simplification to avoid the administrative burden and complexities that multiple EU VAT registrations would bring, UK businesses can opt to use the Mini One Stop Shop (MOSS) facility via HMRC’s portal to account for and pay over the relevant overseas VAT through a single return process. Even with the MOSS option however, these rules still place a significant additional administrative burden upon small businesses who, but for these place of supply rules, would not have to worry about VAT at all due to the high UK VAT registration threshold. 

    In December 2017 the EU member states agreed to a very welcome cross-EU €10,000 threshold for such (B2C) services, to have effect from 1 January 2019. In September this year, HMRC announced that they will be implementing this change via a Statutory Instrument under section 7 of the VAT Act to amend Schedule 4A. Only B2C supplies into other EU countries count towards the €10,000 threshold. If the total of such sales are below €10,000, in both the current and previous calendar years, the place of supply of that income from 1 January 2019 onwards will be “where the supplier belongs”; if the limits are exceeded in either year, the place of supply of that income will be “where the customer belongs”. 

    This will mean that, from 1 January 2019, where a UK business sells less than €10,000 of such services B2C into the EU (and was below this in the previous year as well) the place of supply of that EU income will be “where the supplier belongs”, i.e. UK. This income will contribute to the business’ UK VAT registration threshold and, once UK VAT registered, will be subject to UK standard-rated VAT. If this is exceeded however, from that point onwards an overseas or MOSS registration will be required.

    Unfortunately, the benefit of this new threshold may be short-lived, depending on what happens with Brexit, but that will have to be a discussion for another day.

    TAAR and distributions in winding-up

    The Targeted Anti-Avoidance Rule (TAAR) concerning distributions on a winding-up (whether on a liquidation or a striking-off) is contained in ITTOIA 2005, s396B. It was introduced in order to prevent shareholders converting what would otherwise be an income distribution to a capital payment. It is mainly aimed at phoenix arrangements and applies to distributions made on or after 6 April 2016. 

    The TAAR applies where conditions A, B, C, and D are met. The conditions are:

    Condition A – the individual receiving the distribution had at least a 5% interest in the company immediately before the winding-up, i.e. 5% of ordinary share capital or 5% of the voting rights. Ordinary share capital means all of the company’s issued share capital other than shares which have a right to a fixed rate dividend but have no other rights to the company’s profits.

    Condition B – the company was a close company at any point in the two years ending with the start of the winding-up.

    Condition C – at any time within the period of two years beginning with the date the distribution is made, any one of four trigger events takes place:

     
    • the individual receiving the distribution carries on or is involved with the same or similar trade as the wound-up company; or
    • the individual is a partner in a partnership which carries on such a trade or activity; or
    • the individual or a person connected with them is a participator in a company in which they have at least a 5% interest and which carries on such a trade or activity or is connected with a company that carries on such a trade or activity; or
    • the individual is involved with the carrying on of such a trade or activity that is conducted by a person connected with the individual. 

    Connected person is as defined in ITA07/S989 (read in accordance with ITA07/S993 and S994).

    Condition D – it is reasonable to assume that the main purpose, or one of the main purposes, of the winding up is the avoidance or reduction of a charge to income tax. 

    HMRC’s guidance on how they will apply the TAAR starts here CTM36300.

    HMRC has recently updated their guidance on conditions C and D. 

    Condition C CTM36330 - the three HMRC examples given here have been amended to add the words "the carrying on of" after “involved with” so that the guidance matches the legislation.

    In example two they have added “condition D will still need to be satisfied”, so that it now mirrors example one. 

    Condition D CTM36340 - HMRC has added to the guidance on this condition to clarify how they see the 'main purpose' rule applying in certain cases, e.g:

     
    • A decision not to make an income distribution prior to commencing winding-up does not, in itself, mean that condition D is met. 
    • It is for the taxpayer to decide whether it is ‘reasonable to assume’, having regard to all the circumstances, that tax-avoidance is not the main, or one of the main, purposes of the winding-up, and to make their self-assessment on that basis. Should HMRC disagree then it is up to them to demonstrate that the taxpayer’s decision was not reasonable. 
    • The test is applied by reference to the facts and intentions known at the time of making the decision to wind the company up, but HMRC will also look at events that take place after the winding-up.
    • To provide clarity that the condition will not be met where a person takes a position as an employee, provided they have “ no involvement in or influence over the direction or decision-making of the entity carrying on the activities”.

    The following points should be borne in mind regarding this TAAR:
     
    • it applies to both trading and investment businesses
    • where it applies, it taxes what was a capital distribution as an income distribution
    • the two year period after any distribution needs to be considered 
    • the intentions at the time of the winding-up are important in determining the motive
    • keep any supporting evidence of events/decisions made in the time leading up to the liquidation and for the two years afterwards 

    For further information regarding these topics, please contact us on 0345 223 2727 or email  marketing@abbeytax.co.uk.

    The information provided on this site is of a general tax nature and may not apply to any particular set of facts or under all circumstances. It should not be construed as tax advice and does not constitute an engagement of Abbey Tax. Tax laws are constantly changing. The information on this site was accurate at the time of posting and we make every effort to keep it current, however we are not responsible for outdated material.