Highlights this month include: Details of several new Finance Bill 2016 clauses A further case on the problem of submitting the wrong EIS form A summary of the latest non-dom proposals out for consultation The reversal of the loss streaming case, Leekes A standard letter from HMRC about “phoenix” clearances Latest instalment of the Zipvit postal supplies VAT case A summary of recent defeated tax avoidance schemes A practice note on the use of electronic signatures Paul Howard Monthly Tax Review Gabelle MTR Ltd A Periodic Update for Professional Advisers September 2016 (Copy Date 22 August 2016)
Transcript
Highlights this month include:
Details of several new Finance Bill 2016 clauses
A further case on the problem of submitting the wrong EIS form
A summary of the latest non-dom proposals out for consultation
The reversal of the loss streaming case, Leekes
A standard letter from HMRC about “phoenix” clearances
Latest instalment of the Zipvit postal supplies VAT case
A summary of recent defeated tax avoidance schemes
A practice note on the use of electronic signatures
Paul Howard
Monthly Tax Review
Gabelle MTR Ltd
A Periodic Update for Professional Advisers
September 2016 (Copy Date 22 August 2016)
September 2016 1
CONTENTS 1. CAPITAL TAXES ..................................... 2 1.1 Share for share stamp duty relief ......... 2 1.2 Wrong EIS form ........................................ 2 1.3 No ER on business property sale .......... 2 1.4 EIS and preferential rights ..................... 3 1.5 Further non-dom consultation ............... 3 1.6 New guidance ............................................ 4 2. INCOME TAX & NI ................................. 4 2.1 Finance Bill – dividend taxation ............ 4 2.2 Dividends, savings and trustees ........... 4 2.3 Forfeitable loan notes .............................. 5 3. BUSINESS DIRECT TAXES ................. 6 3.1 Overseas property development tax .... 6 3.2 Loss streaming, Leekes ........................... 6 3.3 Order of loss relief.................................... 7 3.4 “Phoenix” clearance ................................ 8 3.5 Forfeited deposits ..................................... 8 4. VAT ............................................................. 9 4.1 Retrospective ESC .................................... 9 4.2 Postal supplies .......................................... 9 4.3 Partial exemption ................................... 10 4.4 New insurance industry rules .............. 10 5. COMPLIANCE & ADMIN .................... 11 5.1 Finance Bill 2016 .................................... 11 5.2 Tax avoidance cases .............................. 11 5.3 Accelerated payment provisions ......... 11 5.4 Divorce a reasonable excuse ............... 11 5.5 Security payments ................................. 12 5.6 Daily penalties......................................... 12 5.7 Death and discovery .............................. 13 5.8 Personal bank statements .................... 14 5.9 Reasonable excuse, SDLT..................... 14 5.10 Defeated avoidance schemes .............. 14 6. EUROPEAN & INTERNATIONAL ..... 16 6.1 Withholding tax ....................................... 16 6.2 CBC reporting .......................................... 17 7. RESIDUE ................................................. 17 7.1 Electronic signature ............................... 17 7.2 List of recent consultations and
1.1 Share for share stamp duty relief The government has announced a new clause for Finance Bill 2016 introducing a change to the rules on stamp duty share-for-share relief with effect from 29 June 2016. Where shareholders in the acquiring company after the share for share transaction mirror those in the target company immediately prior to the transaction, relief from stamp duty, arising on the disposal of shares in the target company, can be claimed under FA 1986, s 77. The new clause provides that no relief for stamp duty on such a transaction will be available where arrangements are in place for a change of control of the acquiring company at the time of the share-for-share exchange. Although further guidance is awaited, it would appear that the changes, which were introduced without consultation due to HMRC’s concern over the loss of tax from certain transactions, will not affect family reconstructions and commercially driven demergers where there are no arrangements at the time of the transaction for a change of control of the acquiring company. The new clause will however prevent relief applying in IPO transactions where the interposing of a new company by way of a share for share is used to change control of the company. The new clause will have effect for any instrument executed on or after 29 June 2016 and will include arrangements entered into before that date. Gabelle Tax News, available at http://tinyurl.com/huo8fsh
1.2 Wrong EIS form The taxpayer was incorporated in June 2013. In August it issued 42,856 £1 shares to two investors and completed forms for the enterprise investment scheme (EIS) and seed enterprise investment scheme (SEIS). In September 2014, the taxpayer’s accountant filed form EIS1 asking for HMRC’s agreement that the shares qualified for EIS relief. The department authorised the relief in December 2014. The accountant then asked to withdraw the EIS application on the ground that the form had been completed in error; instead the SEIS compliance
form should have been submitted. HMRC refused and the taxpayer appealed. Referring to the similar case, X-Wind Power (TC5086), the First-tier Tribunal said the combination of the taxpayer issuing shares and submitting the EIS1 on the same day meant that EIS investment took place on 15 August. The requirement for SEIS in ITA 2007, s 257DK that no EIS investment had been made by the issuing company on or before the day on which the shares were issued was not met. The judge expressed sympathy that a ‘small mistake’ had led to ‘significant financial consequences’, but the law was clear. As stated by the tribunal in X-Wind Power, the legislation did ‘not ask why a compliance statement under ITA 2007, s 205 has been made, it simply asks whether it has been made’. The taxpayer’s appeal was dismissed. GDR Food Technology Ltd v HMRC 2016] UKFTT 466, reported in Taxation 13 July, reproduced with permission, and available on Bailii at http://tinyurl.com/h5wxtea
1.3 No ER on business property sale The First-tier Tribunal has denied a taxpayer's appeal against HMRC's rejection of his claim to entrepreneur's relief on the partial disposal of his business premises. The appellant, a sole practitioner accountant, had sold, in three tranches, a 50% interest in his business premises to the pension fund of which he, his wife and son were trustees. He had also transferred (for 99p) the goodwill of his audit practice to a relative who was qualified to carry out the audits, as he was no longer qualified to do so himself. He retained the other accounting work in relation to the audit clients transferred. The tribunal decided that there had been a disposal of a separate identifiable part of the business, despite the 99p notional consideration, the evidence of the purchaser (a relative) was that he had issued new letters of engagement to the nine clients acquired and billed them £70,000. However, the tribunal found that there was no disposal of a distinct part of the building. Had the appellant sold an interest in a distinct part of the building that was no longer required as a result of the cessation of a separately identifiable audit business, the outcome could have been different. This case illustrates the difficulty faced by a sole trader claiming entrepreneurs' relief on business
assets if there is not a complete cessation of the business or of an identifiable part of it. On the other hand, it is not immediately clear why that is required, since the requirement is only that the asset is in use for the purposes of the business at the time when the business ceases to be carried on. There does not appear to be any requirement that the use is exclusive. Dilip Amin v HMRC [2016] UKFTT 515, adapted from Practical Law Tax and reported on Bailii at http://tinyurl.com/zmr3u43
1.4 EIS and preferential rights The Upper Tribunal has upheld a decision of the First-tier Tribunal that shares carrying insignificant preferential rights to a company's assets on its winding up breached the requirements of section 173(2)(aa) Income Tax Act 2007 (which prohibits any preferential rights on a winding-up) and, therefore, were ineligible for relief under the enterprise investment scheme. The Upper Tribunal acknowledged the de minimis principle of statutory interpretation but agreed with the FTT that this could be disapplied by contrary intention. On the basis that section 173(2)(aa) expressly prohibited "any" preferential rights, the tribunal identified a contrary intention. The Upper Tribunal also found that the exception for "insignificant amounts" in the "return of value" provisions in the EIS rules did not mean that insignificant preferential rights were permissible; rather, where Parliament had intended to permit minor deviations from the rules, it had expressly stated that. The tribunal disagreed with the FTT's conclusion that the preference of £933 (which the FTT compared with the value of the total issued share capital of £2.2 million) was de minimis. The tribunal found that the preference afforded to the ordinary shareholders should, instead, be compared with the nominal value of the deferred share capital of £150 and on this basis, was not de minimis. However, as the tribunal concluded that any preference infringed section 173(2)(aa), this did not assist the taxpayer. Flix Innovations Ltd v HMRC [2016] UKUT 301, reported on Practical Law Tax, and available on Bailii at http://tinyurl.com/hv9u32f
1.5 Further non-dom consultation A further consultation document has been issued on IHT for non-domiciles. This is still expressed as being at the second stage of consultation, determining the best option, including detailed policy design, even though it is accompanied by draft legislation. To implement the extended IHT charge on residential property, the government proposes to remove UK residential properties owned indirectly through offshore structures from the current definitions of excluded property currently provided by sections 6 and 48 IHTA 1984. The effect will be that such UK residential properties will no longer be excluded from the charge to IHT. This will apply whether the overseas structure is owned by an individual or a trust. Once the legislation comes into effect, shares in offshore close companies and similar entities will no longer be excluded property if, and to the extent that, the value of any interest in the entity is derived, directly or indirectly, from residential property in the UK. There will be no change to the treatment of companies other than close companies and similar entities. Similarly, where a non-domiciled individual is a member of an overseas partnership which holds a residential property in the UK, such properties will no longer be treated as excluded property for the purposes of IHT. The proposal is that this will be effective for all chargeable events occurring after 5 April 2017, although that is one of questions asked in the consultation. It is suggested that the non-resident CGT definition of residential property will be used as a basis, rather than the ATED definition, mostly because the number of amendments needed to the former will be smaller. Change of use will be covered by a BPR-style two-year limit, so that a property will be within the charge to IHT where it has been a dwelling at any time within the two years preceding a transfer. The charge will be on the extent that any underlying assets consist of UK residential property, looking through companies etc. The legislation will include an anti-avoidance rule. To deal with the difficulty of enforcing reporting, it will be possible for HMRC to charge indirectly-held property for any unpaid IHT liability. The
government has decided not to offer any incentives for de-enveloping. On deemed domicile for long-term residents, the government has confirmed the 15 out of 20 years test, including split years. There will be transitional relief for those already non-resident before the announcement in 2015 intending to return within five years who would have expected to be exempted from the charge on gains already made before the announcement. The consultation reconfirms the right to rebase overseas assets to market value. However, this is limited to those who become deemed domiciled in April 2017 because they have been resident for 15 out of 20 years. The proposed solution for mixed accounts is to allow non doms one year from April 2017 to rearrange them into separate clean capital, foreign income and foreign gains. While this will only apply to bank deposits, it will be possible to sell other assets and separate the cash in the same way. However, there is no way to use this provision without identifying the separate components of their funds. For excluded property trusts, the government has dropped its proposal for a charge on benefits received from the trusts. Instead, existing anti-avoidance provisions such as TCGA 1992, s 86 and the Transfer of Assets Abroad legislation will have exemptions legislated covering situations where no additions to the trust have been made since the settlor became deemed domiciled. Any addition is specifically said to taint the settlement. The three year deemed domicile period after leaving the UK would inadvertently have been extended to five according to the original proposals; this will be amended to bring it back to three. The spousal election will also be retained at three years. No change in the principle of deeming those with a UK domicile of origin to be domiciled in any year in which they are UK resident is proposed, and the idea of a grace period, raised in a former consultation, is not being taken forward. Finally, the government is consulting further on Business Investment Relief. It has so far resulted in over £1.5 bn being invested in UK businesses. Consultation 18 August available on GOV.UK at http://tinyurl.com/jpuhve3
1.6 New guidance A slightly revised version of RDR3 on residence has been issued, with new examples of transit days and clarification on days ignored due to exceptional circumstances. A new version of CC/FS25a on follower notices has also been issued. It does not specify the changes made since the previous version, but these appear to be about the guidance being issued to joint owners and partnerships in potential SDLT and ATED avoidance schemes. Available on GOV.UK at http://tinyurl.com/jxma5lu and http://tinyurl.com/jo7gpuz respectively
2. INCOME TAX & NI
2.1 Finance Bill – dividend taxation On 28 June 2016, the government proposed amendments, to be considered by the Public Bill Committee, to clause 5 and Schedule 1 Finance Bill 2016, which relate to the taxation of dividends. The amendments will ensure that:
Even though trustees of non-interest in possession trusts will pay tax on dividend income at the higher rate of 38.1% with no tax credit, beneficiaries will get a credit for the tax so that the income is only taxed once. This will be achieved by a change to the types of tax that will be included in the trust tax pool. Without these changes, the overall tax rate paid on discretionary payments by trustees would be 11% more than that paid by an individual receiving the dividend directly where they paid tax at the dividend additional rate.
The tax credit given to a beneficiary for dividend income distributed from a deceased's estate will reflect the tax actually paid so that the estate beneficiary will either receive a tax credit or a tax repayment where they do not pay tax.
On parliament.uk at http://tinyurl.com/j3yr9xg and reported in Practical Law Tax
2.2 Dividends, savings and trustees This year’s changes to savings and dividend taxation are causing problems for trustees and personal representatives, as the allowances are not available
to deceased persons’ trustees or estates. Rebecca Cave explains on AccountingWeb that when the estate of a deceased person receives taxable income during the period of administration it is taxable at the basic rate: 20 per cent on interest and 7.5 per cent on dividends. However, PRs are not entitled to a personal allowance, savings allowance, dividend allowance or savings rate band, ‘so in theory every penny received is taxable’, she says. The procedure to pay the tax due would impose a significant administrative burden on small estates and to prevent this HMRC has announced that for 2016–2017 HMRC will not require trustees and PRs to notify them of taxable interest received, where the tax due on that interest is less than £100. It is expected that this concession will be codified in the Finance Bill 2017. STEP analysis of an article on AccountingWeb at http://tinyurl.com/hwn9h8y
2.3 Forfeitable loan notes The First Tier Tribunal handed down its decision in the case of Cyclops Electronics Ltd on 12 July 2016. The case concerned two companies who had undertaken very similar planning, involving the award of loan notes to senior members of their management teams, who also just happened to be the main shareholders in each company. The planning involved the following steps:
A “money box” company was established for each participant;
The main employer entity subscribed for loan notes issued by the money-box companies;
The loan notes were transferred to the participants.
The loan notes were immediately redeemable, but were structured as “forfeitable securities”: if the participant died within a year of the date of issue, the loan notes would revert to the employer company. The planning was structured this way because the loan notes would be treated as “employment-related securities” and be subject to the special regime in ITEPA 2003, Part 7.
The fact that they were forfeitable securities and the forfeiture condition lasted less than five years meant that the promoters of the planning believed that ITEPA 2003, s425 would apply, which meant that there would be no charge to tax when the loan notes were awarded to the participants and instead a tax charge should arise when the forfeiture condition lifted (i.e. at the end of the year from the date of issue in this case). The intention was that the loan notes would be redeemed before the forfeiture condition lifted, the argument being either:
that the redemption of the loan notes was not a chargeable event for the purposes of the restricted securities rules; or,
In the alternative, the way that the formulas in ITEPA 2003, Part 7, Chapter 2 work means that any charge would have been zero.
In a decision that drew heavily on the Supreme Court judgment in UBS/DB Group Services v HMRC [2016] UKSC 13, the FTT held that there was no commercial reality behind the forfeiture clause in the loan notes – it had been inserted simply to avoid tax and there were a number of work-arounds that deprived the forfeiture provision of its operative effect. For this reason, the FTT determined that the forfeiture condition was not of a sort that Parliament intended to grant tax relief to when it enacted ITEPA 2003, s425 and should be ignored for the purposes of working out the tax treatment of the loan notes. This decision meant that the value of the loan notes was treated as taxable employment income on the date that they were received by the participants. The FTT did not consider the fiscal value of the loan notes, instead focussing on the money-box companies and arguing that the participants were entitled to the cash in the money-box companies and should be taxed on the value of that cash. The case highlights the approach that the courts are taking to the interpretation of tax legislation, looking beyond a construction of the words on the page and towards the objective that Parliament had in mind in enacting the legislation. It also highlights the risks associated with complex tax avoidance: in each of the cases the participating employees were also shareholders in the company –
it would have been possible for them to take dividends and pay tax at a far lower rate if they had not been willing to gamble all on a zero tax rate.
Cyclops Electronics Ltd & Anor v Revenue and Customs [2016] UKFTT 487 reported on Gabelle Tax News at http://tinyurl.com/znylx66
3. BUSINESS DIRECT TAXES
3.1 Overseas property development tax On 5 July, as part of the Committee Reading sessions of the Finance Bill 2016, the Government published the draft legislation in respect of overseas property development of UK property. This legislation is effective from the date of publication with tabled amendments to existing legislation. The legislation is very much in line with the Government’s technical note issued at the time of the Budget and is part of the suite of provisions introduced to combat the perceived “unlevel playing field” between UK and offshore property developers involved in developing UK property. For further details, see our Budget note. Under the new legislation, a non resident company will be subject to corporation tax where it carries on a trade “of dealing in or developing UK land”, regardless as to whether it has a Permanent Establishment here or not. Non resident individuals are also brought into the scope of UK income tax where they are undertaking the same activities. Such a trade is defined as “dealing in UK land and developing UK land for the purposes of disposing of it” and must satisfy one of four conditions to fall within the scope of the legislation:
One of the main purposes of acquiring the land was to realise a profit or gain from disposing of the land;
One of the main purposes of acquiring any property deriving its value from land (eg shares) was to realise a profit or gain from disposing of the land;
The land is held as trading stock; or
One of the main purposes of developing the land was to realise a profit or gain from disposing of the land when developed.
Therefore, for example if an offshore investor holding a long term investment property decided, prior to sale to be redeveloped it, the element of
the profit made from the redevelopment will fall within the scope of this new tax. The profits will be chargeable as they are realised through the company’s accounts, so the timing of recognition of sales may be critical for some offshore property developers. Further anti-avoidance provisions are also set out in “anti-flipping” provisions to related parties, the fragmentation provisions to prevent offshore developers using contractual or structural arrangements with related parties to shift profits away from the development company, as well as provisions to ensure that disposal of the property deriving their value from UK land are within its scope (for example shares). For these provisions to apply at least 50% of the value of the shares must be derived from UK land value. Finally, there is a specific clause to counter obtaining a relevant tax advantage by virtue of the any provisions of double tax arrangements, where the relevant tax advantage is contrary to the object and purpose of the double tax arrangements. For many offshore property developers, serious consideration may well now be made to bring the project onshore, particularly with the level of corporation tax continuing to fall. Reported on Gabelle Tax News at http://tinyurl.com/hc4pue5
3.2 Loss streaming, Leekes The Upper Tribunal, overturning the decision of the First-tier Tribunal, has held that a taxpayer that acquired a loss making company (predecessor) and succeeded to its trade was not entitled to set the predecessor's carried-forward trading losses against the trading profits from its combined trade. Rather, section 343(3) ICTA 1988 (now section 944 CTA 2010) required the taxpayer's post-acquisition trading profits to be streamed so that the carried-forward losses could only be set against the trading profits that derived from the predecessor’s former trade. The appellant ran out-of-town department stores. On 18 November 2009, it bought the entire share capital of another company (Coles), the trade of which comprised furniture
stores and warehousing facilities. At that time, Coles had trading losses (both for the period preceding the share purchase and carried forward to then). The following day, the business of Coles was hived up to the appellant at fair value and Coles became dormant. All stores formerly belonging to Coles were rebranded as the appellant's stores and continued to trade, continuing to sell the same types of product. These stores sustained an aggregate trading loss for the accounting period ending 31 March 2010. The appellant, in its corporation tax return for the year ended 31 March 2010, sought to offset against its profits carried-forward losses from the business carried on by Coles. HMRC refused and the company’s appeal to the FTT was successful. The Upper Tribunal reached its decision for the following reasons:
To interpret section 343(3) in any other way would put the successor in a better position than the predecessor would have been in had the predecessor continued to carry on the trade.
It was unnecessary for section 343(3) to contain an explicit reference to streaming because it was clear that references to "the trade" in section 343(3) were to the predecessor's trade. As the predecessor could not set losses against profits from the combined trade, neither could the successor.
As there was no real doubt about the correct interpretation of section 343(3), commercial reality was not relevant. In any event, any practical difficulties with streaming were avoidable by keeping appropriate records.
It is not surprising that HMRC appealed the First-tier Tribunal's decision given HMRC's view that succeeded trades must continue in an identifiable form and that losses must be streamed (see HMRC, CTM06120 - Company Taxation Manual). More surprising is the fact that HMRC's view has never previously been challenged. Now that it has been (albeit
unsuccessfully in this instance), taxpayers will no doubt be hoping for an appeal. HMRC v Leekes Ltd [2016] UKUT 0320 reported on Practical Law Tax and available on Bailii at http://tinyurl.com/zdoyldh
3.3 Order of loss relief In Countryfield Village Homes v HMRC the FTT found that loss relief should be applied in chronological order with the effect that some losses remained unrelieved. Countryfield had made profits in the 2005 and 2006 accounting periods and losses in the 2007, 2008 and 2009 periods. It was agreed that the loss for the 2007 period had been properly carried back to be set off against the 2006 period, leaving £48,445 profit for the 2006 period unrelieved. The issue was the priority in which losses for corporation tax purposes can be set off against the profits of earlier accounting periods under ICTA 1988 s 393A, and more specifically the meaning of the phrase 'subject to…any relief for an earlier loss' in s 393A(1). Counsel for the taxpayer submitted that the fact that Countryfield had claimed relief for the loss of the 2009 accounting period before it claimed relief for the loss of the 2008 accounting period meant that no ‘relief for an earlier loss’ had been given in relation to the claim for relief of the loss of the 2009 accounting period. HMRC contended that relief was to be given for losses in chronological order so that a loss for an earlier accounting period should be relieved before a loss of a later accounting period. The FTT agreed with HMRC, finding that s 393A(1) referred to a loss incurred earlier and that the provision did not refer to the order in which claims for loss relief were made. Countryfield Village Homes v HMRC [2016] UKFTT 468 adapted from Tax Journal and reproduced with permission, and available on Bailii at http://tinyurl.com/hc8hfkz
3.4 “Phoenix” clearance Practical Law Tax report that HMRC circulated a new standard letter of response to non-statutory clearance applications concerning the Finance Bill 2016 legislation on distributions in a winding up. The letter indicates that HMRC will not give clearance under the legislation but provides guidance on when the rules will apply. In particular, the letter confirms that Condition C (that the individual carries on the same or a similar trade or activity within two years of the distribution) will be widely construed. However, the "main purpose" test in Condition D (that it is reasonable to assume, having regard to all the circumstances, a main purpose of obtaining a tax advantage) limits the application of the rules to situations where a tax avoidance motive exists (despite the fact that Condition C is met). The letter also contains illustrative examples of the application of the new rules and confirms that HMRC will publish guidance "within the next few months". The examples include:
A landscape gardener who liquidates his company on retirement, but still does a small amount of gardening locally to supplement his pension – not caught, main purpose test not met.
An IT contractor who sets up separate companies for each contract and liquidates them for a capital distribution once the project is complete – caught.
An accountant who decides the risk of running her own practice as a company is not worth it and takes a job with her brother’s established accountancy company instead – not caught, main purpose test not met.
Reported on Practical Law Tax 2 August.
3.5 Forfeited deposits The Upper Tribunal decision in Hardy [2016] UKUT 0332 is one which is at the same time unsurprising to most tax professionals and astonishing to the layman. The facts were simple. Mr Hardy contracted to buy a flat off-plan, paying a deposit of £72,000. When the time came to complete the purchase, he wasn’t able to do so and under the terms of the contract he lost his deposit. He claimed that for the purposes of CGT he had made
an allowable loss of £72,000 which he sought to offset against other capital gains. Mr Hardy had argued unsuccessfully before the First-tier Tribunal that on entering into the contract he had acquired beneficial ownership of the flat, which was an asset: and that when the vendor rescinded the contract he had disposed of that asset at a loss. Before the Upper Tribunal he put a subtly different argument: that on entering into the contract he had acquired not a beneficial interest in the flat but valuable contractual rights (principally the right to require the flat to be transferred on payment of the purchase price). That argument was also rejected by the Upper Tribunal. The “valuable contractual rights” and the “beneficial interest in the property” were really nothing more than two ways of describing the same thing. The Upper Tribunal, like the First-tier Tribunal, relied heavily on Jerome v Kelly [2004] UKHL 25 and its detailed analysis of TCGA 1992 s28 and, like the First-tier Tribunal, concluded that “when a seller and a buyer enter into a contract for the sale of land, the seller does not dispose of an asset and the buyer does not acquire an asset”. Of course, if and when the contract is completed, the disposal is normally treated by s28 as taking place on the date of the contract: but if the contract is never completed (as was the case for Mr Hardy) there is simply no disposal and no acquisition. A layman who comes across this case may be bemused. He might vaguely recall having heard it said somewhere that CGT is supposed to be a tax on real gains which makes allowance for real losses (actually by Lord Wilberforce in Aberdeen Construction Group [1978] AC 885). And he might wonder whether the denial of loss relief to a man who manifestly made a genuine and painful loss of £72,000 of real money sits well with pronouncements of HMRC and others of the desirability of paying “the right amount of tax”. A tax professional will be less bemused: the law is what it is and it sometimes leads to odd results. But he might then reflect on what would have happened if Mr Hardy had assigned his rights under the contract (assuming them to be assignable). We now know that the rights are not assets for CGT purposes (because HMRC and two Tribunals have just told us so). It must necessarily follow that any profit on an assignment of such rights would not arise from the disposal of an asset and would not be chargeable to CGT. Granted that in many circumstances a profit on assignment of rights may be subject to Income Tax as arising from an
September 2016 9
adventure in the nature of trade, or possibly even as a land transaction within the scope of the current Finance Bill provisions: but this will not always be the case. And where it isn’t, the logic that cooked Mr Hardy’s goose will also be fatal to HMRC’s gander. BKL blog 2 August, at http://tinyurl.com/gwcn9xf
4. VAT
4.1 Retrospective ESC In R on the application of ELS Group v HMRC the Court of Appeal found that an extra-statutory concession (ESC) could not apply retrospectively. ELS supplied lecturers to colleges. It applied for judicial review of the decision of HMRC not to allow it to take advantage of an ESC (outlined in Business Brief 10/04 (BB10/04) and now withdrawn) which limited the amount of VAT that a business was required to charge when seconding its own staff. The concession applied provided that the client paid the salaries of the staff supplied directly to the personnel involved. It meant that employment bureaux which provided self-employed staff, as principals, to their hirer clients could opt to be treated as agents and so limit the VAT payable for their services to the commission element of their charges. ELS had restructured its business in 2006 by establishing PNL as an employment bureau which would take over the supply of lecturers to the colleges. It continued to supply some colleges, and HMRC considered that ELS's supplies were non-exempt educational services supplied by a non-eligible body. The aim of the arrangements was that PNL would be able to take advantage of BB10/04 so as to limit its VAT liability to the commission it charged. However, HMRC told the group that it could see no difference between the supplies made by ELS and those made by PNL to the colleges it was now contracted with. It therefore refused PNL the relief claimed under BB10/04. Following the CJEU's decision in Stichting Regionaal Opleidingen Centrum (Case C-434/05), HMRC informed PNL that it accepted that the company was making supplies of staff and was entitled to take advantage of BB10/04. PNL wrote to HMRC claiming that there were no differences between the supplies made by PNL and those made by ELS; accordingly, ELS should benefit from BB10/04 to the
same extent as PNL. HMRC's position was, however, that the choice to be taxed as an agent required to be made no later than the date of the relevant supply and could not be made with retrospective effect. ELS sought permission to apply for judicial review of HMRC's decision on two grounds: HMRC was wrong about BB10/04 not being capable of being applied retrospectively; and, even if the choice to be taxed as an agent had to be made by the date of the relevant supply, that had in fact occurred in this case as part of the arrangements made in 2006/07 for the transfer of the ELS colleges to PNL. In relation to the first ground, the Court of Appeal found that nothing in the language of the concession indicated that the necessary choice was capable of being made with retrospective effect after the date of the relevant supply. Furthermore, BB10/04 was a decision by HMRC not to collect tax that became statutorily due; it should therefore not be given too great a scope. The Court of Appeal also dismissed the second ground of appeal. ELS had not made a choice to be treated as providing supplies of staff as an agent at the relevant time. R on the application of ELS Group v HMRC [2016] EWCA Civ 663 reported in Tax Journal and reproduced with permission, and available on Bailii at http://tinyurl.com/jmh3xqk
4.2 Postal supplies The Upper Tribunal has upheld the First-tier Tribunal's decision to reject a claim for input tax recovery by the recipient of postal supplies that were treated as exempt but were, in law, standard-rated. The decision is interesting because the tribunal disagreed with the FTT's reasoning and because the issue of whether, where a contract for standard rated supplies is silent on VAT, part of the contractual price constitutes the VAT chargeable on the supplies, was actually an academic point in the tribunal’s decision. Given this and the amounts involved (in excess of £1 billion) a further appeal is likely. Zipvit supplied vitamins and minerals by mail order. It used the services of Royal Mail to send its mail orders and to distribute advertisements. Both Royal Mail and HMRC believed that the supplies made by Royal Mail were exempt and no VAT invoices were issued for these supplies. In April 2009, the CJEU ruled, in R (oao TNT Post UK Limited) v HMRC (Case C-357/07), that the postal exemption did not apply
to individually negotiated supplies; so it became clear that the services supplied by Royal Mail to Zipvit were actually taxable. The issue was whether Zipvit was entitled to an input tax credit in respect of the supplies, since they were actually standard rated. In considering the input tax recovery requirement that VAT be "due or paid", the tribunal held, following the ECJ in PPUH Stehcemp sp. J. Florian Stefanek, Janina Sbetefanek , Jaroslow Stefanek v. Dyrektor Izby Skarbowej w Łodzi (Case C-277/14) (in a judgment given more recently than the FTT's decision) that this referred to the customer, not, as the FTT had held, the supplier. The judge said that “the FTT clearly went off on a frolic of its own in deciding otherwise”. The tribunal preferred the appellant's argument that as the contract was for standard rated supplies, any payment automatically included the VAT chargeable on those supplies (meaning that VAT was, as required, "paid") to that of HMRC, no express contractual provision was required. However, the tribunal stated its view to be academic, as it found, following the FTT, that the recipient did not hold valid VAT invoices for the amounts claimed. Although HMRC had failed to properly exercise its discretion to accept alternative evidence, it would have reached the same conclusions had it exercised its discretion correctly, meaning that the appellant's claim failed on this basis. Zipvit Ltd v HMRC [2016] UKUT 294 adapted from a report on Practical Law Tax and available on Bailii at http://tinyurl.com/zwyzwy5
4.3 Partial exemption In HMRC v Imperial College of Science, Technology and Medicine the UT found that HMRC had agreed a partial exemption special method (PESM) so that it applied to Imperial's claim for repayment. Imperial had made a claim for repayment of residual input tax relating to overheads of its academic departments. The dispute was about the basis on which the net VAT originally paid for the relevant years had been calculated. Imperial's case was that the relevant calculations of recoverable VAT had been made pursuant to a method whose terms had been agreed with HMRC as a PESM; whilst HMRC contended that the
relevant calculations had been made under a compromise of claims made by Imperial in respect of specific accounting periods. If Imperial was right, the PESM applied to the repayment claim; whereas if HMRC was correct, the calculations would need to be made afresh. The UT observed that the agreed method was a single formula which combined attribution of input VAT between business and non-business activity with attribution of input tax between taxable and exempt supplies. It found that it had been agreed as a PESM and that, insofar as it was a means of attributing input tax between taxable and exempt supplies, HMRC had had the power to approve it under the VAT Regulations 1995 reg 102. HMRC v Imperial College of Science, Technology and Medicine [2016] UKUT 278, reported in Tax Journal and reproduced with permission, and available on Bailii at http://tinyurl.com/gtuegjf
4.4 New insurance industry rules The provision of insurance is exempt and insurance companies cannot recover input tax on their purchases. This can give rise to significantly increased costs to an insurance company, with purchases including advertising from UK suppliers and repair work from UK garages. This VAT cost would be minimised if the insurance company established itself in a country outside the EC. It was announced in the Summer Budget 2015 that this opportunity would be closed by new legislation. On 10 August 2016, HMRC announced that the new legislation would require repair services which were carried out in the UK for UK policyholders to be subject to UK VAT irrespective of whether the insurer belongs outside the EC. Insurance repairs which take place outside the EC will be outside the scope of UK VAT. This change will come into effect from 1 October 2016, six months later than announced in the Summer Budget. An additional review is awaited in 2017 with respect to the supply of advertising and other services, which will continue to be zero-rated when supplied from the UK to insurance companies established in non-EC countries. Insurance companies should be reviewing their position and their procedures to determine what amendment should be made, in respect of
insurance repairs carried out within the UK and outside the EC. Gabelle Tax News, available at http://tinyurl.com/jjy2ugk
5. COMPLIANCE & ADMIN
5.1 Finance Bill 2016 As anticipated in previous issues of MTR, the passage of the Finance Bill was not completed before Parliament rose for the summer recess. The Report Stage is scheduled for the first day Parliament returns, 5 September and third reading for 6 September, presumably with the intention of completing its parliamentary stages prior to the recess for the party conferences starting on 15 September. See http://calendar.parliament.uk/
5.2 Tax avoidance cases There have been a number of tax avoidance cases decided in the period covered by this issue of MTR. They are not reported in full because they adopt the principles of the recent leading cases, but are set out in brief below: Ingenious Games LLP & others v HMRC, UKFTT 521 was more successful than some previous cases in establishing that the partnerships carried on a trade with a view to a profit, but only a third of the expenditure was allowed, meaning the scheme was ineffective. In Union Castle [2016] UKFTT 526 a scheme designed to create a loss from derivative contracts failed, because there was no actual loss. Chappell [2016] EWCA Civ 809 was a scheme based on deductions for payments in respect of manufactured overseas dividends; following the approach of UBS/DB a purposive construction of the statutory provisions did not give any relief. Acornwood & ors [2016] UKUT 361 is part of the Icebreaker litigation, challenging the FTT decision against them in 2014. Only certain issues relating to the partnerships, rather than the partners, were considered in this case, but the FTT decision was upheld.
5.3 Accelerated payment provisions The High Court, dismissing the claimants' judicial review application, ruled that the partnership accelerated payment provisions in Schedule 32 Finance Act 2014 apply to corporate members of limited liability partnerships and that, on the facts, the partnership accelerated payment notices (PPNs) were validly issued. The claimants argued that Schedule 32 does not apply to LLPs because, unlike section 1273 CTA 2009)and section 863 ITA 2007, Schedule 32 does not contain a provision that equates an LLP to a general partnership (GP). Rejecting this argument, the High Court noted that the terms "partnership" and "partners" ordinarily cover both GPs and LLPs and their members. It would be inconceivable that Parliament would adapt the accelerate payment regime for GPs but not LLPs. Likewise, section 863(2) ITA 2007 provides that all references in the Income Tax Acts to a partnership include an LLP (the court noted that section 1273(2) CTA 2009 is drafted in slightly different terms). Thus, individual members of LLPs are expressly caught by Schedule 32. It would make no sense for corporate members of LLPs to be excluded. Further, Schedule 32 operates in tandem with section 12AA TMA 1970 and case law has established that LLPs are caught by that provision. The High Court also dismissed the argument that the PPNs were invalid because HMRC's notices of enquiry were invalid: HMRC had failed to issue them to the nominated partners. While HMRC had been notified of the names of the nominated partners, the claimants had failed to comply with their statutory obligations to disclose the existence of the nominated partners on the partnership tax returns in question. That being the case, they could not complain about HMRC's failure. Further, the purpose of the requirement that HMRC must give a notice of enquiry to the nominated partner is to ensure that the partner knows of the enquiry and can put its case in reply. That purpose is satisfied if, as here, the partner has actual knowledge of HMRC's intention. Sword Services Ltd & Ors v HMRC [2016] EWHC 1473 reported on Practical Law Tax and available on Bailii at http://tinyurl.com/h6rtf2b
5.4 Divorce a reasonable excuse Mrs Porter was in two partnerships with her husband until February 2013. They separated in
January 2008, and her husband excluded her from the business premises (where she had been the administrator) from August 2010. They divorced in July 2012. It became clear to her that her husband as the nominated partner and the firm’s accountant had not submitted 2010/11 returns. She could not produce an estimate of her liability because she was excluded from access to the records. The tribunal found she had a reasonable excuse for failing to make returns, and in part for failure to pay tax, although it held that she could have made earlier payments of some of the amount due. Eugena Porter [2016] UKFTT 401 available on Bailii at http://tinyurl.com/gt7sz27
5.5 Security payments The First-tier Tribunal has, for the first time, considered its jurisdiction regarding notices of requirement to provide security for PAYE and NICs. Both the Income Tax (PAYE) Regulations 2001 (SI 2001/2682) and the Social Security (Contributions) Regulations 2001 (SI 2001/1004) permit HMRC to require security from an employer and connected parties if there is doubt over the employer's ability to meet its obligations. The consequence of failing to provide security when required is a summary conviction and an unlimited fine. Ceasing to trade does not obviate the offence. Unlike the powers given to the tribunal by the VAT Regulations 1995 (SI 1995/2518), which are purely supervisory, the tribunal's powers under the PAYE Regulations extend to varying the amount of the penalty. While agreeing that it was reasonable for HMRC to require security, the tribunal found that HMRC should have considered the employer's ability to pay. The appellant had arrears of PAYE and NICs, and had submitted to HMRC cashflow projections in connection with an earlier "time to pay" arrangement. Its failure to clear the arrears resulted from cashflows being lower than projected. The tribunal found that to require security in a sum that the employer had no prospect of paying (£147,135) was unreasonable, given that failure to pay was a criminal offence, and reduced the required security payment to £25,000. D-Media Communications Ltd v HMRC [2016] UKFTT 0430 reported on Practical Law Tax and available on Bailii at http://tinyurl.com/zwvvogj
5.6 Daily penalties The taxpayer’s appeal against daily penalties amounting to £900 for a late filed tax return was allowed by the First-tier Tribunal. This was on the ground that HMRC had not given proper notice to the taxpayer from what date the penalties would be imposed. The Upper Tribunal allowed HMRC’s appeal. Rebecca Murray, appearing pro bono for Mr Donaldson in the Court of Appeal, argued that the penalty could only be imposed under para 4 Schedule 55 FA 2009 if HMRC made a ‘decision’ to do so, and did not cover automatic penalties imposed by computer. The Master of the Rolls agreed with the Upper Tribunal that it could not have been the draftsman’s intention that HMRC should have to make individual penalty decisions for every taxpayer who fails to submit the form for more than three months after the due date. Rather, HMRC ‘decide in advance that all taxpayers who default for more than three months should suffer daily penalties’. On whether HMRC had decided that the penalty was payable, the judge accepted that ‘a generic policy decision of the kind taken by HMRC in June 2010’ that all taxpayers who were at least three months late in filing their returns would be liable to a daily penalty satisfied the requirement of FA 2009, Sch 55 para 4(1)(b). On whether HMRC had given notice of the penalty to the taxpayer, the court found that, by giving the taxpayer notice in advance of his failure to file the return after the end of the three-month period, it had complied with the requirement of para 4(1)(c). Finally, the Master of the Rolls found that the notice had been valid even though it did not state the period for which the penalty was assessed, as required by para 18(1)(c). The information was in the self-assessment reminder and the notice of assessment. The taxpayer could have been in no doubt about the period for which he had incurred a penalty. The penalty for late filing was valid. The taxpayer’s appeal was dismissed. Keith Donaldson v HMRC [2016] EWCA Civ 761, reported in Taxation and reproduced with permission, and on Bailii at http://tinyurl.com/hwmhqyo
5.7 Death and discovery The Upper Tribunal has upheld the decision made by the First Tier Tribunal in the case of Michael Wood (deceased) in relation to assessments raised under Section 29 TMA for a 20 year period and the validity of these on the grounds of deliberate behaviour, following the taxpayer’s death. In June 2010 Mr Wood, a dentist, made a disclosure of previously unpaid tax totalling £743,424 through the Tax Health Plan, a disclosure opportunity available to medical professionals. However, HMRC were not satisfied that his disclosure met the terms of the disclosure facility and opened a Code of Practice 9 investigation, opening up his tax affairs for the previous 20 years. It was agreed that a disclosure report would be submitted to cover the relevant years. Unfortunately, the taxpayer failed to do so by the September 2011 deadline and in August 2012 HMRC raised discovery assessments for the tax years 1992/93 to 2005/06, in the continued absence of the report. Mr Wood appealed against the assessments in September 2012 and subsequently died on 22 May 2013. In September 2013 Mr Wood’s advisers wrote to HMRC, contending that it was impossible to have a fair trial on the main issue as to whether or not their client had acted deliberately, since Mr Wood had died. His widow and personal representative, Mrs Greer Wood, argued that to contest the disputed assessments would be a breach of her human rights under Article 6 ECHR as HMRC’s use of the powers conferred under Section 36 TMA 1970 constituted charging her husband with a criminal offence. In advance of the hearing, HMRC vacated the penalty notices for deliberate behaviour on the basis that the penalty under Section 95 TMA 1970 was a criminal charge. The FTT ruled that the Section 29 discovery assessments should not be set aside by reason of Mr Wood’s death and a subsequent appeal was made to the UT. The UT therefore had to consider whether HMRC raising assessments on Mr Wood under the extended time limit provisions at Section 36 TMA 1970 amounted to a criminal charge. The appellant argued that charging a penalty under Section 95 TMA 1970 and using the extended time limit provisions at Section 36 TMA 1970 are the same in that both require deliberate behaviour and
are penal in nature. On the basis that HMRC abandoned the Section 95 penalties which had been imposed on Mr Wood during his lifetime, the same should apply for the Section 36 assessments. The UT found that Section 36 is not penal in nature on the basis that the purpose of the provisions is to enable HMRC to recover the tax due for earlier years, and no more. Section 36 is merely ‘a gateway through which the path to a discovery assessment can be opened’. It was agreed that the burden of proof in relation to deliberate behaviour lay with HMRC but that this had already been established at the point at which the 20 year assessments were issued. The burden of proof then shifted to the taxpayer to demonstrate the correct amount of tax. The UT found that: ‘the combination of a 20 year time limit and a reverse burden of proof equally does not produce the result that there is a criminal charge or a penalty’. The case was referred back to the FTT to progress the substantive hearing of the appeal and determine the tax due. HMRC have historically levied penalties on the Personal Representatives where the deceased’s tax affairs were not up to date. However, the current practice accepts that applying penalties to the Personal Representatives breaches Article 6 ECHR and this was demonstrated in the case of Michael Wood as HMRC withdrew the penalties which had been raised during his lifetime. It is accepted that for the purposes of EU law, ‘civil penalties’ that are calculated as a percentage of the tax due are classified as criminal and not civil charges. Automatic penalties (penalties of a fixed amount rather than a percentage of the tax at stake) such as automatic late filing penalties do not strictly breach Article 6. However, HMRC’s guidance suggests that in many cases it may be possible to appeal the penalties. The basis of the appeal will depend on whether the deceased died before or after the due date for submitting the return. Generally speaking therefore, the Personal Representatives should not normally be liable to penalties in respect of any irregularities in the deceased’s tax affairs. The Personal representatives of Michael Wood (deceased) v HMRC [2016] UKUT 346 reported on Gabelle Tax News and available on Bailii at http://tinyurl.com/zgewgzp
5.8 Personal bank statements The First-tier Tribunal has confirmed that a taxpayer's statutory records can include statements for personal bank accounts used for business purposes. Therefore, the taxpayer had no right of appeal against HMRC's information notice. HMRC may request statutory records under an information notice. Statutory records are information and documents that taxpayers must keep under tax legislation (paragraph 62, Schedule 36, Finance Act 2008). For VAT purposes, this includes business records, such as bank statements. While HMRC requests for "non-business" records are subject to appeal, taxpayers have no right of appeal where statutory records are requested (paragraph 29, Schedule 36, Finance Act 2008). HMRC information requests concerning "non-business" records, such as private bank accounts, are often disputed. The tribunal did not accept that, following Beckwith v HMRC [2012] UKFTT 181, personal bank accounts could only be statutory records if they were an "operational part" of a business. It held that the taxpayer's personal account bank statements were statutory records because VAT repayments relating to his business activities were paid into the account and it was the only account notified to HMRC (although the tribunal suggested that if a taxpayer only notified a personal account to HMRC but was always in a net VAT payment position, with payments made only from another (business) account, that might not render personal account statements statutory records). Unsurprisingly, the tribunal commented that occasional transfers of funds from personal accounts into a taxpayer's business would not themselves render statements for that account business records because such transfers were investments rather than business transactions. Akrill v HMRC [2016] UKFTT 0550 reported on Practical Law Tax and available on Bailii at http://tinyurl.com/hzyuw9x
5.9 Reasonable excuse, SDLT In dismissing the taxpayer's appeal against a penalty for the late filing of an SDLT return for lack of a reasonable excuse, the First-tier Tribunal (obiter) concluded that the taxpayer may have had a reasonable excuse if the land transaction
counterparty had failed to return the completion document before the SDLT return filing date. The tribunal's tentative view is almost certainly wrong. The taxpayer had agreed a lease extension with the freeholder of a property, which was completed by a lease extension deed. The taxpayer did not receive the executed deed until three days before the SDLT filing date. Although the tribunal held that the taxpayer did not have a reasonable excuse for the late filing of the return because the deed had been returned before the filing date, the tribunal concluded that had the freeholder not returned the deed until after that date, "that may well have amounted to a reasonable excuse". It is unlikely that this view is correct and should be treated with caution as the tribunal decided this case on the basis of the papers agreed by the parties. Unlike for stamp duty, the SDLT filing process does not require the transaction documents to be in the possession of the party making the return. If the taxpayer has completed a transaction, he should have all of the information necessary to file the SDLT return, without having to wait for the counterpart completion document. Marzouk and another v HMRC [2016] UKFTT 0548 reported on Practical Law Tax and available on Bailii at http://tinyurl.com/jrt9vxo
5.10 Defeated avoidance schemes On 17 August 2016, HMRC launched a consultation on penalising those who enable tax avoidance and those who use schemes that HMRC defeats. The proposals include a penalty of 100% of the tax at stake for, and naming of, enablers of avoidance and increasing the likelihood of a user of an avoidance scheme being subject to a penalty for a careless error. The consultation closes on 12 October 2016. HMRC's aim is to provide disincentives for those who provide advice in relation to avoidance arrangements, act as intermediaries between scheme developers and users, introduce users to avoidance or facilitate the implementation of avoidance schemes. The proposed penalties target anyone in the "supply chain" of avoidance arrangements who benefits from the end user implementing the arrangements and without whom the arrangements as devised could not be implemented. HMRC states that this includes:
Those who develop, or advise or assist those developing, avoidance arrangements.
Independent financial advisers, accountants and others who earn fees and commissions in connection with marketing avoidance arrangements, regardless of whether their activities amount to promoting the arrangements.
Company formation agents, banks, trustees, accountants, lawyers and others who are intrinsic in, and necessary to, the machinery or implementation of the arrangements.
An example given by HMRC is a QC or an accountant paid by the developer of an avoidance scheme to advise on it. However, HMRC does not intend to charge penalties on those who are unaware that their services are connected to wider tax avoidance arrangements (such as an agent who merely completes a client's tax return). To ensure proper focus of the rules, HMRC proposes developing a definition of an "enabler" based on the broad criteria used in the rules on offshore evasion but "specifically tailored to the avoidance supply chain" and with appropriate safeguards for those who are unwittingly party to enabling avoidance. HMRC suggests that those safeguards could be modelled on the exclusions from the definition of "promoter" in the DOTAS rules. HMRC's favoured approach to penalties is broadly to follow that in the rules on offshore evasion but designed specifically to deal with avoidance defeated by HMRC. Enabler penalties will be chargeable regardless of whether the relevant user incurs a penalty. One suggested approach is for the basic penalty to equal 100% of the financial or other benefit enjoyed by the enabler in providing its services as such (with provision for mitigation), although HMRC comments that this could be hard to measure. Alternatively, the penalty could be a percentage of the tax understated by the user(s) to whom the enabler has (directly or indirectly) provided its services as such as a result of the avoidance arrangements being defeated. Particular consideration will need to be given to widely marketed schemes as enablers might otherwise be subject to penalties in relation to an enormous number of users. A cap on the aggregate amount of penalties might be appropriate. A cap might also be appropriate in cases involving several enablers as, otherwise, the total penalties chargeable in relation to particular arrangements could exceed the tax advantage denied.
Safeguards for those potentially subject to penalties would include rights to appeal or request a review by HMRC, reductions of penalties depending on the nature, timing and quality of any disclosures by the enabler about their activities as such, and maximum aggregates if multiple types of penalty might otherwise apply (with the cap being the highest maximum of the differing penalties). HMRC notes that those using tax avoidance schemes that are defeated are likely to have submitted an inaccurate return, making them potentially liable for penalties. In many cases in which tax avoidance is defeated, the question of whether a penalty is chargeable revolves around whether the taxpayer has taken reasonable care when submitting their tax return (that is, whether the inaccuracy is careless). It is this category that HMRC wishes to amend to make it more likely that those entering into defeated avoidance arrangements will fall within it. HMRC's proposals in this area are twofold. First, explicitly stating that certain sets of circumstances do not constitute taking reasonable care in cases of defeated avoidance. This might include:
advice addressed to a third party, or without reference to the taxpayer's specific circumstances and use of the scheme;
advice commissioned on the basis of incomplete or leading facts;
advice commissioned or funded by a party with a direct financial interest in selling the scheme, or not provided by a disinterested party; and
material produced by parties without the relevant tax or legal expertise or experience to advise on complicated tax avoidance arrangements (such as marketing material).
HMRC considers the "important point" to be that legal advice is properly considered, from an appropriately qualified person taking the user's personal circumstances fully into account when formulating that advice. The second proposal is shifting the burden of proof to the taxpayer. Given the evidential burden currently on HMRC to demonstrate lack of reasonable care, HMRC considers that it would be "helpful" to place the burden on the taxpayer to show that they have in fact taken reasonable care. HMRC is also considering a wide range of measures intended to provide "real-time" discouragement of avoidance. These suggestions, aimed at increasing
September 2016 16
the transparency of tax arrangements and awareness of risks, are:
Requiring promoters to provide lists of all those to whom arrangements are marketed so that HMRC can send them real-time warnings and alerts.
Requiring anyone marketing arrangements to tell the user for whom it is marketing the arrangements how much they are being paid for signing people up.
If a promoter has not notified arrangements under the DOTAS rules, requiring them to explain to the user that they have not done so, and providing information on the consequences and risks if the arrangements are later challenged and ruled notifiable.
Clarifying the language used in relation to arrangements notifiable under the DOTAS rules to make it clear that the issue of a scheme reference number never constitutes HMRC "approval". This could include renaming SRNs as "avoidance enquiry references".
Requiring promoters to provide users with HMRC information on the risks of avoidance alongside marketing material (including specific information if arrangements are already subject to HMRC enquiry or attention).
Requiring promoters to tell HMRC about any other parties who will be involved in marketing or facilitating arrangements so that HMRC can target messages to them. This requirement would continue as new enablers became involved during the life of the arrangements.
Introducing a penalty for not informing existing and potential users and enablers when an arrangement becomes subject to HMRC challenge.
Introducing a real-time (digital) SRN reporting requirement on every signed-up user (as named on the DOTAS client list), with escalating penalties for failure to report.
Providing real-time (digital) warnings to every signed-up user (as named on the DOTAS client list) and linked enabler as soon as arrangements become subject to an enquiry, HMRC pronouncement or litigation.
Introducing a requirement on users of notified arrangements to certify that they understand the risks of proceeding, with a
specific warning to users of arrangements already subject to an enquiry, HMRC pronouncement or litigation that HMRC will pursue an automatic penalty for careless behaviour if the arrangements are subsequently defeated.
Providing a warning that users of any arrangements not notified under DOTAS will face an additional surcharge if the arrangements are subsequently challenged and shown to be both notifiable and ineffective.
Introducing an escalating surcharge for frustrating an enquiry by withholding or delaying responses to information requests seeking to establish potential avoidance.
Introducing a requirement on promoters of non-notified schemes subject to a DOTAS enquiry to provide HMRC with a full client list to help establish the facts of the case and to target communications to users.
Requiring promoters and enablers to provide regular updates to all signed-up users on the numbers of other users who have withdrawn from the arrangements or settled with HMRC.
HMRC consultation available on GOV.UK at http://tinyurl.com/jaug7fa and reported on Practical Law Tax
6. EUROPEAN & INTERNATIONAL
6.1 Withholding tax In Brisal the CJEU found that imposing withholding tax on interest paid to EU financial institutions was contrary to article 56 of the Treaty on the Functioning of the European Union (TFEU) (concerning the freedom to provide services), unless the financial institutions could claim a deduction for their financing costs and other expenses. Brisal, a Portuguese company, had entered into an external financing agreement with a syndicate of Portuguese banks, which had been extended to KBC, an Irish bank, by a transfer of contract. Brisal had withheld tax at source on interest accrued in favour of KBC and Brisal and KBC claimed that this taxation contravened the principle of freedom to provide services. The CJEU observed that the application of withholding tax to non-resident service providers, whilst constituting a restriction on the freedom to provide services, may be justified by overriding
reasons in the general interest, such as the need to ensure the effective collection of tax. However, the fact that non-resident institutions were not given the opportunity to deduct business expenses directly related to their activity, whereas such an opportunity was given to resident financial institutions, constituted a prohibited restriction on the freedom to provide services. This decision may mean that some businesses which are currently incurring withholding tax in the EU, will be able to obtain a refund. In this respect, the CJEU roundly rejected the contention that banking services should be treated differently from other services due to the fact that it is difficult to establish a link between costs incurred and interest income received. Brisal — Auto Estradas do Litoral SA, KBC Finance Ireland v Fazenda Publica (Case C-18/15), reported in Tax Journal and reproduced with permission, and available on Bailii at http://tinyurl.com/jd5922p
6.2 CBC reporting HMRC has announced that partnerships will be in scope as reporting entities for country by country reporting, following further guidance published by the OECD. Amendments to the regulations to include partnerships will be put forward in the autumn. The regulations will be applicable to periods beginning on or after 1 January 2016, in line with the OECD recommendations and previous government commitments. HMRC news story available on GOV.UK at http://tinyurl.com/haenb26
7. RESIDUE
7.1 Electronic signature The Law Society has issued a practice note on the use of e-signatures for commercial contracts. The practice note has been developed by a joint working party from the Law Society, the City of London Law Society and leading City law firms, and reviewed and approved by leading counsel Mark Hapgood QC. It clearly sets out the relevant law around the use of e-signatures on commercial contracts, and addresses issues around their use. Law Society press release, available online at http://tinyurl.com/hjv7lok
7.2 List of recent consultations and responses issued
Tackling offshore tax evasion: a requirement to correct 24 August 2016 Soft Drinks Industry Levy 18 August 2016 Strengthening tax avoidance sanctions and deterrents: discussion document 17 August 2016 Making Tax Digital: Voluntary pay as you go 15 August 2016 Making Tax Digital for Business - An overview for small businesses, the self-employed and smaller landlords 15 August 2016 Business Income Tax: Simplifying tax for unincorporated businesses 15 August 2016 Business Income Tax: Simplified cash basis for unincorporated property businesses 15 August 2016 Making Tax Digital: Bringing business tax into the digital age 15 August 2016 Making Tax Digital: Tax administration 15 August 2016 Making Tax Digital: Transforming the tax system through the better use of information 15 August 2016 Simplification of the tax and National Insurance treatment of termination payments 10 August 2016 Consultation outcome Gift Aid Small Donations Scheme 10 August 2016 Consultation outcome Simplification of the tax and National Insurance treatment of termination payments 10 August 2016 Stamp duty land tax: changes to the filing and payment process 10 August 2016 Gift Aid and intermediaries: technical consultation 10 August 2016 Tackling Disguised Remuneration: technical consultation 10 August 2016 Salary sacrifice for the provision of benefits-in-kind 10 August 2016 Statistical consultation: Possibility of ceasing publication of HMRC's Personal Wealth National Statistics 9 August 2016 ‘Lifestyling’ of Child Trust Funds 9 August 2016 Aggregates Levy - whether to exempt aggregate extracted when laying underground utility pipes 9 August 2016 Partnership taxation: proposals to clarify tax treatment 9 August 2016 Simplifying the PAYE Settlement Agreement (PSA) process 9 August 2016 Alignment of dates for ‘making good’ on benefits-in-kind 9 August 2016 Authorised contractual schemes: reducing tax complexity for investors 9 August 2016 Personal portfolio bonds – reviewing the property categories 9 August 2016
Tax treatment of freeplays in Remote Gaming Duty 9 August 2016 Lease accounting changes 9 August 2016HMRC Available on GOV.UK at http://tinyurl.com/jpmctyv
This publication contains public sector information licensed under the Open Government Licence v3.0. The extracts reported from HMRC documents have not been approved by HMRC. For the precise words of the original article, reference should be made to the original publication. The extract should be read subject to the qualifications mentioned therein, to which reference should be made before reliance is placed upon an interpretation. YOU SHOULD NOT ACT (OR OMIT TO ACT) ON THE BASIS OF THIS REVIEW WITHOUT SPECIFIC PRIOR ADVICE. GABELLE LLP PROVIDES A TAX CONSULTANCY SERVICE, OR WE CAN DIRECT YOU TO AN ALTERNATIVE SOURCE OF ADVICE.
