Ai vs. legacy industry

Artificial intelligence is undoubtedly a growing segment of technology and society, but history shows that technological advances don’t eliminate the need for work, though they can shift its pattern.

This applies to agricultural production. In the UK, more than 20 per cent of the workforce was employed in the agricultural sector at the turn of the 20th century, while today, thanks to mechanisation, less than one percent work in agricultural roles. However, that small group produces vastly more food than their predecessors a century ago, which is a clear benefit to society.

Ai is likely to drive other significant productivity gains too, and that should also feed through into the cost of providing some public services. However it’s difficult to see many inroads being made into the welfare bill, particularly if fewer working hours per capita lead to the introduction of a Universal Income paid by governments to their citizens.

Taxes & a need for change

If income tax receipts should fall as automation rises, there are a number of levers governments can pull to push up tax revenues, while other existing taxes may have to pull more weight.

Consumption taxes like VAT could be hiked, and if people are working less then they may have time to consume more, which would swell coffers from this kind of taxation even without a rise in the headline rate.

Taxes on business or wealth could also enter the equation if governments find the rise of the robots opens up a black hole in their budgets.

Alternatively, new taxes may be introduced which directly tax automated production, or the gains made by owners of that production.

Indeed, the UK is now forging ahead with a digital sales tax which shows some governments are not simply going to give technology a free pass when it comes to contributing to the tax take. However, ti should be noted an alliance of Ireland, Sweden, Denmark and Germany blocked the proposal in Brussels for an EU digital sales tax on 29 November 2018.

Why Ai could spur a change in taxes

Artificial intelligence will undoubtedly deliver progress in many important areas, particularly in health care.

The accountancy firm PwC reckons that UK GDP will be around 10 per cent higher in 2030 as a result of the Ai revolution, mainly through its ability to drive consumption by the production of better and more tailored products. In the long term the impact of Ai is likely to be bigger yet, and the tax system will have to adjust accordingly.

It’s too early to call how this will happen – however, one thing we can be relatively sure of is that different models will be adopted across the globe, as political ideologies feed into the equation.

Laith Khalaf

Laith Khalaf is a senior analyst with Hargreaves Lansdown and has worked for the retail investor platform since 2001, after graduating from Cambridge University.

His research encompasses funds, markets and investment trends.

Laith is a well-known commentator and frequently features on television and radio, as well as in the national press.

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Mike Smith, the senior director of Companydebt.com and a business insolvency expert, talks to IMS StratNews:

Reverse charge measures, which were first announced in the Autumn Budget of 2017, are set to be implemented by HMRC next year, and could add to the cash-flow woes in the already struggling construction sector.

It’s estimated the changes could affect up to 150,000 construction businesses, with the end customer rather than the supplier being made responsible for certain VAT payments.

There are fears across the sector that the changes, which are an attempt to reduce the huge hole left in the public purse by ‘missing trader fraud’, could force small and medium-sized construction firms out of business and push larger operators into a state of bureaucratic limbo. 

What is missing trader fraud?

Missing trader fraud is a scam that takes place across a range of industries but that has recently taken hold in the supply chains of the construction industry. Fraudsters exploit a loophole in the UK’s complex VAT system which allows them to steal government money.

In a legitimate transaction, a subcontractor charges the contractor for the work they’ve done, plus 20 percent VAT. This VAT is then paid over to the government by the subcontractor on a quarterly basis. As a service or product moves up the supply chain, VAT is added for every new transaction and subcontractors recoup the VAT they have paid their suppliers.

Fraudsters exploit the weaknesses in this process by setting up shell companies that initially appear to operate normally, but quickly disappear without filing tax returns after they have been paid for work. The result is that the VAT owing to the exchequer is never paid over to HMRC.

Although this type of scam is relatively new in the construction industry, it is still believed that fraudsters operating in this area cost the government around £100m a year in lost VAT. That’s a small proportion of the total £13bn lost to missing trader fraud in the UK every year, but it’s still something the government is eager to stamp out.

The new reverse charge taxation system

Although the loss to the exchequer is relatively small, under the new reverse charge system, the whole of the construction industry will have to bear the brunt of the crackdown. Coming into force in October 2019, the reverse charge taxation system will cease the flow of cash between construction businesses. For every transaction that takes place, the VAT will be a paper exercise only and registered as a ‘reverse charge’ on the invoice. That means only the client-facing organisations at the top of the chain will be responsible for paying the VAT.

Understanding whether the new rules apply to a particular construction firm is relatively simple. Any company registered with the Construction Industry Scheme (CIS) will have to register a reverse charge for VAT on their invoices.

Any business that’s not CIS-registered will continue to charge VAT when the transaction takes place.

Construction firms that sell directly to domestic customers will continue to charge VAT on their products and services and will not be affected by the changes.

What are the potential implications of the new system for construction firms?

Arguably the most damaging implication for construction firms is the impact the new system will have on cash-flow. Without VAT to rely on, many businesses could struggle to make their own payments and potentially become insolvent as a result.

The new system could also create problems for the large firms at the top of the chain, as the onus will fall on them to pay over large sums of money to HMRC. That could create its own range of financial issues. The construction industry as a whole will also have to get its head around the new accounting system, which will inevitably take time and potentially cause accounting errors that could lead to unsustainable levels of debt.    

Construction firms should start preparing

For larger firms with professional tax advisors, these changes should be relatively simple to implement and absorb, but smaller subcontractors that handle their own tax obligations should start preparing now.

The risk is that subcontractors who do not educate themselves and adapt to the new system could make costly mistakes on their invoices.

If suppliers continue to charge VAT on their invoices then they will have to reverse those invoices out of their accounting system: Although that sounds like a simple process, the VAT that has been raised will automatically be owed to the state.

The consultation on the implementation of the new system concludes in October 2018. After that point, construction firms have a year to prepare before the changes are made.  

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The company has has been named an Approved Supplier by the employment industry recognition scheme, Professional Passport, the compliance and risk management firm, which offers  solutions to the temporary workers market place.

ePayMe has also revealed it has become an affiliate member of the Association of Professional Staffing Companies (APSCo), which operates as an international trade association for the recruitment industry.

Through providing specialist payroll support for recruitment agencies and for contractors – an area which is becoming more complex and more regulated as time goes by – ePayMe tells IMS StratNews that it is currently exploring a range of industry accreditation schemes to ensure it, and the contractors and agencies it works with, continue to follow best practice.

WHAT DOES THE PROFESSIONAL PASSPORT MEAN FOR ePAYME?

The Professional Passport accreditation scheme involves rigorous auditing of ePayMe’s service levels, in-house systems, work practices and staff training.

Combined with the APSCo affiliate membership, this means that ePayMe has been recognised for exceeding the standards required by Government departments of any company involved in supplying employees or contractors.

Alongside the ‘stamp of approval’ from APSCo, ePayMe will also now be able to participate in networking events alongside leading professional staffing agencies within the UK.

WHAT ePAYME SAYS

Sarah Johnston, managing director of ePayMe, says: “The fact that we have successfully gained the Professional Passport accreditation is a testament to the hard work and dedication of our team.

“We have elected to join APSCo after gaining this accreditation to further cement our commitment to clients, especially those within the education sector in support of the CCS framework (Crown Commercial Services). We are excited for the coming months and meeting more fellow APSCo members, attending events and helping members to grow and thrive.”

WHAT APSCo SAYS

APSCo Global CEO Ann Swain added: “APSCo is delighted to welcome ePayMe into its affiliate membership, and we are looking forward to representing, promoting and supporting their brand now and in the future.

“All of our affiliate members have to commit to a strict Code of Conduct and a rigorous, independently verified, referencing process before they join. As such, APSCo affiliates provides a valued stamp of best practice, quality, integrity and expertise.”

“Additionally, the Professional Passport accreditation means agency and end client members who use ePayMe are covered by the organisation’s unique 5 mln stg debt transfer liability insurance.”

THE FUTURE BENEFITS OF THE PASSPORT FOR ePAYME

ePayMe’s Johnston adds: “[The] Professional Passport aims to provide industry-recognised standards for service providers, agencies, end employers and contractors within the recruitment industry. At ePayMe, we fully support their efforts to create a level playing field and raise the level of professionalism within our industry.

“With our market becoming ever more complex and new rules and regulations being introduced all the time, it’s vital that we all pull together to ensure best practice in everything we do.”

ePAYME AND BEST PRACTISE

Membership of a recognised trade body and proof of best practice are now required by any services provider operating within the Public Sector.

Many of the contractors who use ePayMe’s services work in nursing and education, areas which are covered by rules and framework agreements stipulated by the UK Government’s procurement agency, the CCS:

These aim to make it easier for smaller suppliers to bid for government work, while ensuring that everyone in the supply chain adheres to best practice.

At the same time, Her Majesty’s Revenue and Customs (HMRC) is cracking down on what it sees as tax avoidance, and is scrutinising many of the business practices within the recruitment industry, including the use of ‘umbrella companies’ and what it considers to be ‘fake self-employment’.

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Mark Tighe, the CEO of specialist tax relief firm Catax, talks to IMS StratNews about Research and Development tax relief.

 

Let’s start with the basics of Research and Development.

Despite Research and Development (R&D) tax relief being introduced at the turn of the Millennium, the reality is that significant confusion remains over which businesses are eligible and what they can actually claim for: R&D tax relief is a form of government subsidy, designed to encourage greater investment and economic growth in the UK, by stimulating innovation.

 

And to put it simply, any business of any size and in any sector can qualify for Research and Development tax relief.

 

 

So long as a firm has developed a new product, service or business process in the past two years, they could be unknowingly missing out on these lucrative government tax breaks on work they’ve already done.

 

 

The time taken, materials used and other money spent are all potentially eligible.

 

 

Crucially, the innovation does not need to be successful for it to qualify for the relief.

 

When executives aren’t up to speed on Research and Development

If I had a penny for every time a CEO bet me their firm wouldn’t qualify for Research and Development tax relief, I would be at least £50 richer. This relief should not be seen as some mythical pot of gold at the end of a rainbow that only large corporations, employing a retinue of workers dressed in white coats, can reach.

 

 

The truth is SMEs are just as likely to qualify, and are even able to claim a higher rate of relief than larger companies.

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Limited Company

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Mario d’Aragona is the Managing Partner at TML Venture Ltd and supports companies in finding tailor-made investment solutions. His industry focus is on renewable technology, energy and food companies.

He is a seasoned finance executive who serves as CFO for fire & security, food, energy and clean-tech global companies; has ‘turn-around’ experience and has been involved in the management of re-financing growing businesses:  TML Venture Ltd supports companies in finding tailor-made investment solutions.

• Quill Narrative Science’s technology which provides automated written articles
• Amazon’s and Netflix’s capability to generate automated book and movie recommendations
• Workfusion’s provision of RPA (Robotic Processes Automation)
• Computerised unsupervised Algorithms like blockchain
• Watson – the ‘cognitive’ computing analytics provider for the trading floor,

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In its Global Enforcement Review, complied for the financial services industry, the regulatory advisor presents analysis highlighting that the degree penalty amounts against individuals have dropped to new lows.

The 2018 review, a long-running annual report which is now in its fifth year, states that between 2016–2017, the  fall in UK penalty amounts against individuals can be attributed to global financial regulators switching their focus from imposing large fines against firms to making individuals more accountable; pushing those individuals to improve their ability to detect misconduct earlier through both data and technology.

Takeaways

• UK penalty amounts against individuals dropped from £18.8m to £970,000 from 2016 to 2017, its lowest since the financial crisis.
• U.S., European (excluding UK) and Hong Kong penalty amounts against individuals rose over the same period.
• Hong Kong, Singapore and Australia had a greater proportion of their total penalty amounts against individuals than northern hemisphere markets from 2013-2017.

Regulatory risk insights on global & UK penalty levels

Duff & Phelps’ analysis of large enforcement cases, which has been collated by Corlytics – a global provider of insight analysis into regulatory risk –  shows total penalty amounts globally climbed 30% between 2015 and 2017 to 26.5 bln usd.

However, total penalty amounts globally are forecast to be lower this year (2018), reaching just 8.1 bln usd in the first six months of 2018 compared to 18.35 bln over the same period in 2017.

The data shows this decline is particularly evident in the U.S., UK and Europe.

Of the total global penalties in 2017, the U.S. remains the dominant force, levying penalties accounting for 94% (24.4 bln) of the global total against firms and 99% (621.3 mln) individual penalties: In the U.S., total penalty amounts against firms and individuals rose by 2% and 23% respectively from 2016 to 2017.

UK individual penalties

Total UK individual penalties rose markedly to 866 mln stg in 2017 from 71 mln stg in 2016, though this can be explained in part by two large penalties issued separately by the Serious Fraud Office (SFO) and the Financial Conduct Authority (FCA) totalling 673.3 mln stg, Duff & Phelps’ data shows.

However, UK individual penalties dropped significantly from 18.8 mln stg to £970,000 over the same period; the lowest amount on record since the financial crisis in 2008, the data shows.

In line with the global picture, total penalty amounts in the UK are forecast to be lower this year, having reached just 175 mln stg in the first six months of 2018.

With the introduction of the Senior Managers and Certification Regime (SM&CR) for banks in 2016, which is being rolled out to all firms by December 2019, enforcement cases and penalties against individuals can reasonably be expected to rise in the UK over the next few years, according to Duff & Phelps.

Importantly, individuals holding senior management positions within the banking sector should note, the FCA published changes to the SM&CR (effective from 4 July 2018), stating:

‘The most senior people (‘senior managers’) performing key roles (‘senior management functions’) need FCA approval before starting their roles’.

Individual penalties in Europe excluding the UK

In Europe (excluding the UK), total penalty amounts from enforcement action against firms fell significantly, from 527.5 mln eur in 2016 to 109 mln eur in 2017 – however, it should be noted the 2016 total is skewed by three large benchmark cases totalling 485 mln eur.  

According to the data, activity in Europe has been bolstered by more active enforcement from regulators such as the European Commission, Central Bank of Ireland and France’s Autorité des Marchés Financiers.

Penalty amounts against individuals in Europe, whilst still modest, grew from 1.6 mln eur in 2016 to 2.9 mln eur in 2017.

Globally, according to the data, the trend from 2013 to 2017 shows on average a notably larger proportion of total penalty amounts being levied against individuals in southern hemispheres compared to northern hemisphere jurisdictions: Hong Kong (34%), Singapore (62%) and Australia (32%) – all recorded higher proportions than the United States (2%), UK (7%) and Europe (1%).

What the expert says

Managing Director of Regulatory and Compliance Consulting at Duff & Phelps, Nick Bayley, commented for IMS StratNews on the findings:

“Massive fines on firms have lost their power to shock, not just in the industry but also among the public. The declining penalty amounts from previous years in the UK point to the end of the big benchmark manipulation cases – but also potentially suggests a change in regulators’ enforcement approach and their faith in the ability of big fines alone to change culture: Regulators globally are also using a wider range of enforcement tools in an attempt to improve conduct.

Specifically on UK individual penalties …

“The UK regulators have led the way in promoting the importance of individual accountability through the SM(&)CR, something which has been subsequently mirrored in Australia (‘BEAR’), Hong Kong (‘MIC’) and Singapore (‘Individual Accountability and Conduct’).  As a result, we can expect the FCA to increasingly focus on enforcement action against individuals, as it seeks to make the new regime bare its teeth. However, as the majority of UK financial services firms will not be in scope of the SM(&)CR until 2019, combined with the time for regulators to investigate and conclude cases, we expect it could be up to three years before a significant increase in penalties against individuals start[s] to come through.

And his wider view …

“While regulators are revising and updating their priorities, we saw the potential for unforeseen issues such as the LIBOR and FX cases to arise or new market developments and risks [to] emerge, which inevitably will shift regulators’ attention and their resources.

“Regulators globally are investing in their technology capabilities, which in conjunction with more granular regulatory reporting, should enable them to detect misconduct more quickly and [make] greater use of early intervention and disruption techniques,” Nick Bayley concludes.

More about Duff & Phelps

Duff & Phelps is a global advisor that aims to protect, restore and maximise value for clients in the areas of valuation, corporate finance, investigations, disputes; cyber security, compliance and regulatory matters, and other governance-related issues. The firms works with clients across diverse sectors, focused on mitigating risk to assets, operations and people.

Following its acquisition of Kroll, a division of Duff & Phelps since 2018, the firm has has expanded its work force to include nearly 3,500 professionals in 28 countries around the world, it reported. For more information, visit www.duffandphelps.com.

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Granville Turner, a director at Turner Little – the corporate services  provider – focuses on the tax and residential status implications for such companies; detailing for IMS StratNews just what impact this has on the tax liabilities for those companies and individuals involved.

Here information is presented in the form of a straightforward  guide. It provides clear details for Non-UK resident shareholders and directors just what requirements need to be met to ensure they are complying with UK government company – as well as individual – residential and taxation status rules!

Determining a company’s residential status

The general rule is that a company is a UK resident if either:

• It is incorporated in the UK, or 
• If the central management and control of its business is in the UK.

Therefore, a UK incorporated company will be defined as a UK resident, irrespective of having foreign directors and shareholders, says Turner. 

When special conditions apply to residency and taxation complexities

To find out more about Non-UK resident shareholders and directors taxation complexities see our guide via our ‘Gold Membership’ at https://www.imsstratnews.com/non-uk-resident-…rs-company-taxes/

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UK limited liability companies with Non-UK resident shareholders and directors have often had to tip-toe through a range of taxation complexities.

Granville Turner, a director at Turner Little – the corporate services  provider – focuses on the tax and residential status implications for such companies; detailing for IMS StratNews just what impact this has on the tax liabilities for those companies and individuals involved.

Here information is presented in the form of a straightforward  guide. It provides clear details for Non-UK resident shareholders and directors just what requirements need to be met to ensure they are complying with UK government company – as well as individual – residential and taxation status rules!

Determining a company’s residential status

The general rule is that a company is a UK resident if either:

• It is incorporated in the UK, or 
• If the central management and control of its business is in the UK.

Therefore, a UK incorporated company will be defined as a UK resident, irrespective of having foreign directors and shareholders, says Turner. 

When special conditions apply to residency 

However, this resident status can be affected by a double tax treaty. 

A typical treaty provision provides that, for treaty purposes, a company can be treated as a tax resident dependent on where its effective management and control is located.

Turner directs attention to official commentary relating to the OECD model tax treaty (which will apply in most cases, and the Revenue and Courts will follow), which defines the place of effective management and control as:

‘The place where key management and commercial decisions that are necessary for the conduct of the entity’s business are in substance made. The place of effective management will ordinarily be the place where the most senior person or group of persons (for example a board of directors) makes its decisions; the place where the actions to be taken by the entity as a whole are determined; however, no definitive rule can be given and all relevant facts and circumstances must be examined to determine the place of effective management. An entity may have more than one place of management, but it can only have one place of effective management at any one time’.

What exactly does this mean?

• The treaty provision in relation to residency is determined by where all key operational decisions are made by the company’s executives and management: ‘The place of effective management’.
•  This location needs to be where senior figures in the company – primarily the Board of Directors – make those decisions.
• This location also needs to be where company operations mainly take place.
• A caveat or condition exists that states all of the above must be fully investigated before a company qualifies for this treaty provision, despite the overarching rules within the treaty provision.
• Ultimately therefore, if, under this test, a UK resident company is managed from overseas it may be classed as treaty non resident.

In addition:

• Significantly, business may be managed from more than one location, but a company can only have one ‘place of effective management’.

and,

• Importantly, UK tax legislation states that, where this applies, the company is treated as not resident in the UK: Note that this is a special rule – so it means that all `treaty non-resident’ companies are not UK resident for all taxation purposes

The Takeaway

Non-UK resident shareholders and directors: income tax & dividends

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