On November 15, 2023, the U.S. Tax Court held in YA Global Investments v. Commissioner that a non-U.S. private equity fund (YA Global) with a U.S. asset manager that bought equity and convertible debt of U.S. portfolio companies was engaged in the conduct of a trade or business within the United States for U.S. federal income tax purposes, all of its income was “effectively connected” to that trade or business, and the fund (which was treated as a partnership for U.S. federal income tax purposes) was liable for penalties and interest for failing to withhold with respect to its non-U.S. corporate feeder fund partner.

Background

YA Global was a Cayman Islands partnership. Yorkville Advisors (“Yorkville” or the “manager”) was YA Global’s sole general partner and investment manager. Yorkville’s employees worked from within the United States. Yorkville received a 2% management fee and a 20% incentive fee based on YA Global’s profits. However, Yorkville was also entitled to retain any fees it received directly from the portfolio companies to the extent of its overhead. Any excess fees received by Yorkville were offset against management fees owed to Yorkville, or paid to YA Global.

The Tax Court’s Opinion

YA Global’s U.S. Trade or Business

Having concluded that YA Global received fees for the provision of financial services, the court summarily held that YA Global was not a mere investor and did not qualify for the “stock and securities” trading safe harbor of section 864(b)(2). Therefore, it held that YA Global was engaged in a trade or business in the United States.

Section 475 (Mark-to-Market)

The Tax Court next held that YA Global was a dealer in securities. A dealer in securities under section 475 is required to mark-to-market its securities and treat the gain or loss as ordinary income or loss.

Effectively Connected Income

The court next held that all of YA Global’s income allocable to non-U.S. partners during the tax years at issue was effectively connected with the conduct of its U.S. trade or business and, therefore, subject to withholding.

The UK Supreme Court’s recent decision in HMRC v Vermilion provides crucial guidance on the taxation of share options or securities granted to employees or directors.

The case involved Mr. Noble, an individual investor whose company, Quest Advantage Ltd, advised Vermilion on a turnaround strategy. When project costs exceeded the budget, Vermilion granted Quest an option to acquire shares instead of payment. A year later, a restructuring led to the cancellation of the original option and the issuance of a new one over a different class of shares. Nine years later, Mr. Noble exercised the new option, seeking confirmation from HMRC that the gain was subject to capital gains tax. HMRC decided that the gain was subject to income tax. Mr Noble appealed the decision and the dispute was ultimately heard in the UK Supreme Court.

The relevant law, under section 471(1) of the Income Tax (Earnings and Pensions) Act 2003, imposes income tax on share acquisitions through options linked to an individual’s office or employment. Section 471(3) extends this to include options made available by an employer or a person connected to the employer. The Supreme Court ruled in favour of HMRC, establishing a “bright line” rule that if an employer or connected person provides the right to acquire a share option, it is conclusively treated as employment-related income.

The court rejected the argument that section 471(3) could lead to unjust results, as highlighted in Fowler v Revenue and Customs Comrs. The decision emphasizes that the employer’s reason for granting the option is irrelevant; if the employer provides the option, it is treated as employment-related security, subjecting gains to income tax.

This decision has far-reaching implications, particularly for founders, non-executive directors, and directors acquiring securities as investors. While the judgment acknowledges the potential for unjust results, it clarifies that section 471(3) should not be applied to produce absurd outcomes. Taxpayers should carefully consider the implications before implementing arrangements involving shares or share options granted to UK employees and officers. Moreover, the risk extends beyond HMRC challenges, as potential buyers or investors may scrutinize such arrangements during diligence exercises.

October 6, 2023

In the dynamic landscape of UK tax law, domicile remains a crucial factor, and recent cases shed light on the courts’ approach to determining domicile status. This update highlights key insights from a notable case, Strachan v HMRC (July 2023).

Strachan v HMRC: Challenging Domicile of Choice

Mr. Strachan’s case revolved around his claim to have abandoned his domicile of origin in England, establishing a domicile of choice in Massachusetts for tax purposes. He filed self-assessment tax returns (SATRs) for five tax years based on this claim, triggering HMRC enquiries. The central question was the time limit for investigation.

Key Points:

1. Domicile of Choice Criteria: The court emphasized that a domicile of choice is established when an individual voluntarily fixes their ‘sole or chief residence’ in a jurisdiction with the intention of residing there indefinitely.
2. Evidence Requirements: Acquiring a domicile of choice demands ‘clear, cogent, and compelling evidence.’ In Mr. Strachan’s case, having a home in Massachusetts was insufficient; the totality of relevant factors needed evaluation.
3. Careful Consideration: Determining chief or principal residence requires a meticulous examination of all facts and circumstances.

Factors Against Mr. Strachan:

1. Time Spent in London: Mr. Strachan spent the majority of each year in London, not Massachusetts.
2. Work Importance: His paid work, even post-retirement, tied him to London due to its vital importance.
3. Official Documents: Official documents listed his London address, including his US tax return, wills, and power of attorney.
4. Charitable Donations: Significant donations to UK charities and active engagement in London’s social, cultural, and sporting life.

FTT’s Verdict:

The First-tier Tax Tribunal (FTT) ruled that Mr. Strachan retained his domicile in England, emphasizing his intent to move to Massachusetts only if unable to continue his London life. The FTT stressed the need for up-to-date advice in the face of significant life changes.

Deemed Domicile and Lessons Learned:

Mr. Strachan’s assumed domicile of choice led to deemed domicile, highlighting the importance of regular advice updates. While the FTT found him careless, HMRC failed to prove that tax loss would be avoided with timely advice, limiting the investigation window.

Takeaway: This case underscores the critical role professional advice plays in navigating changes impacting domicile status. Taxpayers are reminded to seek guidance, especially during significant life changes, to ensure accurate tax assessments.

HMRC is inviting taxpayers to make a voluntary disclosure of Income Tax or Capital Gains from crypto assets.

Crypto assets include exchange tokens, e.g. bitcoin, NFTs (non-fungible tokens) and utility tokens.

There are currently two voluntary disclosure options being publicised. The first option is known as the digital disclosure for those who are not up to date with their tax affairs, or the second option is the contractual disclosure facility for those who want to admit tax fraud and want to avoid criminal sanctions.

Most individual investors will be subject to Capital Gains Tax (CGT) on gains and losses on crypto assets. For CGT purposes, a capital loss may be claimed if a crypto asset becomes of negligible value.

Digital disclosure

HMRC gives taxpayers three options to disclose to get their tax position up to date:

• Despite taking reasonable care to make sure you paid the right amount of tax.
• Through carelessness
• Through deliberate actions

Contractual disclosure facility

The contractual disclosure facility: if you want to make a disclosure because your deliberate behaviour has caused a loss to HMRC of any of the taxes, duties, levies, or payments it administers.

Please contact our team for further information.

In light of the recent government autumn statement, we would like to bring to your attention the key updates that may impact your financial planning. The government has responded to the prevailing economic challenges, and the Chancellor has outlined three primary priorities: stability, growth, and public services. To support these priorities, a series of fiscal measures have been proposed. Here is a summary of the key points:

• Income tax rates will remain the same for 2024/25 and income tax personal allowance and basic rate limit will remain fixed at £12,570 and £37,700, respectively until 2028.

• The Chancellor has confirmed that the capital gains tax (CGT) annual exempt amount will be reduced from £6,000 to £3,000 from 6 April 2024 for individuals.

• Dividend tax rates will remain the same however the government will reduce the Dividend Allowance from £1,000 – £500 from 6 April 2024.

• Major changes to National Insurance Contributions (NICs) as the government will cut the rate of Class 1 NICs from 12% to 10% from 6 January 2024.

• Class 2 self-employed NICs will be abolished from 6 April 2024. Self-employed individuals will retain access to the contributory benefits, contingent upon their profit levels.

For a detailed overview of these changes, please refer to our summary HERE. If you have any questions or require further clarification, feel free to contact us.

Taxpayers, and the accounting and legal professionals who represent them, need to be prepared as the Internal Revenue Service has begun compliance work on those who own and trade in cryptocurrencies.

Crypto compliance could be a part of the agency’s push to utilizing artificial intelligence as part of the compliance process, noting that with everything else on the agency’s plate, the IRS “literally doesn’t have the manpower.” This could make AI a tool for crypto compliance.

The Financial Crimes Enforcement Network (FinCEN) has issued a final rule regarding beneficial ownership reporting under the Corporate Transparency Act (CTA). Starting January 1, 2024, domestic (U.S.) and foreign (non-US) companies are subject to novel reporting requirements concerning beneficial owners. The rule intends to protect U.S. national security while strengthening the integrity and transparency of the U.S. financial system. It will aid in detecting criminal actors such as oligarchs, kleptocrats, drug traffickers, human traffickers, and those who would use anonymous shell companies to hide their illicit proceeds.

The final rule has an extended timeline for implementation. The rule goes into effect on January 1, 2024. Reporting companies established or registered before January 1, 2024, will have until January 1, 2025, to file their initial reports. However, any reporting companies established or registered after January 1, 2024, will have 30 days to file their initial reports. Following the initial report’s filing, current and new reporting companies must provide updates within 30 days of any change in beneficial ownership information. FinCEN is dedicated to enforcing these statutory duties and imposes significant penalties for non-compliant reporting companies.

The final rule defines” reporting companies “as domestic and foreign corporations registered to do business in any state or tribal jurisdiction in the United States.

Cryptocurrency brokers, including exchanges and payment processors, would have to report new information on users’ sales and exchanges of digital assets to the Internal Revenue Service (IRS) under a proposed U.S. Treasury Department rule published recently. The rule is part of a broader push by Congress and regulatory authorities to crack down on crypto users who may be failing to pay their taxes.

A proposed new tax reporting form called Form 1099-DA is meant to help taxpayers determine if they owe taxes and would help crypto users avoid having to make complicated calculations to determine their gains, the Treasury Department said.

Under the proposal, the definition of a “broker” would include both centralised and decentralised digital asset trading platforms, crypto payment processors and certain online wallets where users store digital assets. The rule would cover cryptocurrencies, like bitcoin and ether, as well as non-fungible tokens. Brokers would need to send the forms to both the IRS and digital asset holders to assist with their tax preparation.

The Treasury proposed that the rules would be effective for brokers in 2025 for the 2026 tax filing season.

The IRS currently requires crypto users to report on their tax returns many digital asset activities, including trading cryptocurrencies, regardless of whether the transactions resulted in a gain. Users are required to make that calculation themselves, and the platforms on which digital assets trade do not give the IRS that information.

Portugal plans to scrap tax breaks for foreigners who become Portuguese resident by spending more than 183 days a year in the country. Launched in 2009, the schemes benefits include a special 20% tax rate on Portuguese- sourced income derived from high value added activities, such as doctors and university teachers. Other benefits of the scheme are the Non- Habitual Resident regime which include tax exemptions on almost all foreign income if taxed in the country of origin and a 10% flat tax rate on foreign pensions. These benefits were also available to Portuguese citizens who have lived abroad for at least 5 years.

It was originally introduced to attract investors and professionals to Portugal which had suffered greatly from the financial crisis. However now the prime minister, Antonio Costa, has promised to close the scheme for new applicants in 2024, saying the scheme had “inflated the housing market” and calling it a “fiscal injustice that is no longer justified”.

The scheme will remain in place for those who have already qualified for it. The announcement follows on from the decision made earlier this year to abolish the ‘golden visa’ programme. The next budget announcement should give more details about this and what this will mean for individuals who want to live in Portugal.

On 22 November 2017, HM Treasury gave notice that the scheme would close. This means the Certificate of Tax Deposit scheme closed for new purchases on 23 November 2017.

HMRC will continue to honour existing certificates until 23 November 2023.

The value on HMRC’s books is £89m and Certificates need to be used by 23 November 2023. The deadline for using a certificate of tax deposit (CTD) to settle a tax bill is 23 November 2023.

After that date, the normal process for making a withdrawal will apply. However, HMRC is encouraging certificate holders to withdraw their deposits well before the scheme closes on 23 November 2023 if they are not planning to use their deposit to settle a tax liability. The current value of outstanding CTDs not yet resolved, or in the process of being resolved, is £89m.

HMRC has written to each holder of a CTD. The outstanding balance suggests that many holders still need to take action.