1.General news
1.1 General election results and tax policy
With the general election results in, we have a better idea of the tax policies that will be applied over the coming five years. The Conservative party success means that the new Government intends to introduce a triple lock on tax rate rises for the main taxes (though no clarity yet over thresholds), additional inheritance tax nil rate band and further tackling of evasion and aggressive avoidance.
An additional Finance Bill is expected before the summer recess. The new Government has already confirmed that it expects to legislate some of these items within the first 100 days of the new Parliament. It remains to be seen which issues will make the cut of the next Finance Bill, but this may include issues such as the reduction in pension contribution allowances and measures dropped from the last 'short' Finance Act and the 'dipping into bank accounts' legislation including clarity over whether the safeguards will now be put into primary legislation.
Measures around devolution of taxes to parts of the UK are likely to continue apace, especially given expected pressure from SNP, following their success in Scotland. Measures such as the mansion tax and bans on UK taxes being used to indirectly fund bullfighting may not see the light of day, although a review of business rates and potentially other property taxes are on the cards.
The Smith & Williamson summary of the tax policies included in the Conservatives' manifesto and related pledges will stay on our website for a little longer, while firm proposals are formed by the Government.
www.smith.williamson.co.uk/election-2015/political-party-tax-proposals
1.2 Professional conduct in relation to tax
The professional bodies have published an updated version of their guidance on professional conduct in relation to tax. It replaces the version issued in February 2014 and has new material on electronic filing, decisions of Courts and Tribunals, DOTAS, POTAS, Accelerated Payments and Follower Notices as well as an expanded chapter on tax planning.
The professional bodies have indicated that they intend to hold further discussions with HM Treasury and HMRC about further development of the guidance.
www.tax.org.uk/Resources/CIOT/Documents/2015/05/PCRT%20final%20CIOTATT%202015.pdf
1.3 Time limits for appealing Scottish Tax Tribunal decisions
From 1 June 2015 the time limit for appealing a First or Upper-tier Scottish Tax Tribunal decision will be 30 days from the relevant date. This covers appeals relating to the new Scottish taxes, such as the Land and Buildings Transaction Tax. The relevant date is the later of:
a.the date on which the decision appealed against was sent to the appellant; or
b.the date on which the statement of reasons for the decision was sent to the appellant.
The time limit for appealing First-tier Tax Tribunals in England and Wales is 56 days.
www.legislation.gov.uk/ssi/2015/184/pdfs/ssi_20150184_en.pdf
www.legislation.gov.uk/ssi/2015/184/pdfs/ssipn_20150184_en.pdf
1.4 Commissioner Moscovici's speech on the way forward for EU tax
Commissioners Moscovici gave a speech on 29 April setting out a road map for taxation in Europe based on "fairness, transparency and a truly single market from a taxation point of view".
On transparency he proposed:
"all Member States will have to share details with each other on all of their cross-border tax rulings, systematically, every 3 months."
He also commented:
"...the Commission has announced that we will bring forward a new Action Plan before the summer which will refocus our efforts on ensuring that profits in the Single Market are taxed where the value is generated."
One point in the related action plan will be a re-launch of the Common Consolidated Corporate Tax Base (CCCTB), aimed at harmonising the tax base for companies operating across borders in the EU and allowing businesses to consolidate their taxable profits across Member States. In addition, the Action Plan will build on global developments, in particular the work of the OECD on Base Erosion and Profit Shifting (BEPS).
http://europa.eu/rapid/press-release_SPEECH-15-4900_en.htm
2.Private client
2.1 When are scrip dividends treated as capital?
The First-tier Tribunal (FTT) has concluded that a scrip dividend received by a settlement was capital rather than income, and therefore within the scope of the computation for an exit charge before the first ten year anniversary under IHTA 1984 s.69(5)(c). This case followed the Upper Tribunal (UT) decision in Gilchrist ([2014] UKUT 0169 (TCC)) that it was not bound by the 2009 High Court decision in Pierce v Wood (EWHC 3225).
The Mrs M Seddon Second Discretionary Settlement was established on 5 March 1999 with 5 £1 ordinary shares in Seddon Seed Feeds Limited (SSL) worth £200,000. On 30 January 2000 the Trustees received a scrip dividend of 187,500 1p preference shares in SSL. These preference shares were sold two days later for a consideration of £768,194 in cash and loan notes from the purchaser of £614,556. The value of the scrip dividend was £1,382,750.
On 1 March 2009, a few days before the 10th anniversary of the commencement of the settlement, the Trustees made a distribution worth £1,260,361 to certain beneficiaries. The trustees maintained that the scrip dividend was income in the hands of the Trustees and had not been accumulated, whereas HMRC maintained it was capital and that an exit charge of £54,640 arose.
The UT in Gilchrist had concluded the decision in Pierce v Wood was based on an incorrect interpretation of the Court of Appeal, in Howell v Trippier ([2004] EWCA Civ 885). That Court had concluded in the circumstances considered that scrip dividends were income for income tax purposes. However the Gilchrist UT decision concluded there could be no read across from the Pierce v Wood decision on the income tax provisions for other purposes, particularly for trust law generally.
www.bailii.org/uk/cases/UKFTT/TC/2015/TC04344.html
3.PAYE and employment
3.1 Requirement for non-tax advantaged share schemes to file nil returns
The HMRC share schemes unit has confirmed to Smith & Williamson that where a non-tax advantaged share scheme that has not been issued with an information notice, has had reportable events in previous years (say 2013/14), but has none in 2014/15, it does not require a nil return to be filed in respect of 2014/15, where the scheme has not yet registered for online reporting.
ITEPA 2003 s.421JA(1), introduced by Finance Act 2014 (FA2014), requires annual reporting for employment related securities (including share schemes) by a person who is or has been a 'responsible person' in relation to 'reportable events'. Reportable events are defined in ITEPA 2003 s.421K. FA2014 Sch 8 para 234(2) states annual reporting has effect in relation to reportable persons whose 'reportable event periods' began before 6 April 2014 as well as those whose reportable periods begin on or after that date.
A 'reportable event period' begins when the first reportable event occurs and ends when the person is no longer the reportable person in relation to reportable events. A strict interpretation seems to indicate that a non-tax advantaged share scheme that has had reportable events in tax years prior to 2014/15, but has no reportable events in 2014/15 will have a nil reporting obligation in respect of the 2014/15 tax year. If relevant, this would apply to a 'responsible person', unless another person has fulfilled the reporting obligation as per ITEPA 2003 s.421JA(7) and s.421JA(8).
However, HMRC guidance and frequently asked questions seem to imply such a share scheme does not have a reporting obligation. For example:
- "You don't need to register non-tax advantaged schemes or arrangements until there is a reportable event."
www.gov.uk/tell-hmrc-about-your-employment-related-securities
- "You must register non-tax advantaged schemes by 6 July following the end of the tax year in which a reportable event occurs. If you have an existing arrangement but there are no reportable events in 2014-15 tax year, you will not have to register this until after the next reportable event occurs."
https://online.hmrc.gov.uk/information/faqs/ers?affinitygroup=&faqid=eng.faq.ers.faq.faq14
HMRC has confirmed to us that the guidance can be applied so that non tax advantaged schemes in a reporting period but with no reportable events in 2014/15, and which have not yet registered for online reporting, do not need to file nil returns.
3.2 Film partnership v HMRC cases
Two film partnership taxpayers, Samarkand No 3 and Proteus, have lost their linked cases against HMRC on the basis they were not carrying on a trade and so not eligible for film acquisition relief. The cases included both tax appeals and also claims for judicial review for legitimate expectation derived from the comments included in HMRC's Business Income Manual (BIM), which the taxpayers could not rely on as the cases included tax avoidance. The cases, which are a significant development in the film partnership area, were:
- Samarkand Film Partnership No 3 (Samarkand) v HMRC;
- Proteus Film Partnership No 1 (Proteus) v HMRC;
- R v HRMC ex parte Samarkand Film Partnership No 3;
- R v HMRC ex parte Proteus Film Partnership No 1 [2015] UKUT 0211 (TCC).
The appellants Proteus and Samarkand had lost their tax cases at the First-tier Tribunal (FTT) over whether or not they were trading partnerships. If they had not each been carrying on a trade they would have lost access to film acquisition relief. This depended on various conditions but boiled down to the basic question of whether a trade was being carried on. The FTT had decided they had not been carrying on a trade. The UT agreed. The transaction arrangements were basically to borrow money from a bank with the partners adding some of their own, for the partnership to buy the film using the cash, and then lease the film in return for a guaranteed license fee with the onward lessor leasing the film back to the original seller. Because of various intermediary charges, the whole transaction was effectively at a cash loss, although when the claimed tax impact on the individual partners was taken into account, it would give rise to a positive cash flow.
The court decided that the individual partners' positions in this regard were irrelevant. These were not trading activities. The UT recognised this conclusion, stating that it '...may make it difficult if not impossible for partnerships to access relief of this sort; and we say nothing about the way in which the FTT distinguished corporate bodies, a matter on which we heard little argument.' The FTT had commented that companies could factor in the use of tax reliefs (allowances) in assessing their business in a way that Samarkand/Proteus partnerships could not.
However, that was not the end of the matter. Behind the case, was the broader issue of film relief itself. The problem with the relief was that almost invariably it was not available to the film makers themselves, not least because they had little income against which to offset the relief. It therefore effectively fell to HMRC to make the relief work. HMRC had demonstrated how this worked through the publication of its internal guidance in the BIM. Here it made it clear that in situations such as the one described in their manual as 'plain vanilla', HMRC did agree that a trade was being carried on and that therefore relief could be accessed. This was importantly qualified by the statement in HMRC's introduction to its staff manuals (Government archives indicate this statement has been included since at least 2006) that HMRC effectively reserved the right to challenge this in situations where there was tax avoidance and not necessarily apply the guidance. As it happened, there was other avoidance in the Samarkand/Proteus case. The taxpayer pointed out that the BIM treatment did not represent a concession, so how could HMRC interpret the same piece of law one way if there was no avoidance and another way if there was avoidance?
This was (and is) a good question, and one that needs to be answered, as the legal standing of such a stance has been unclear. Nevertheless, this was not enough for the taxpayer to win. The decision in the tax appeal, that there was no trading, stood. The issue in the legitimate expectation claim was not whether HMRC's substantive guidance was right or wrong, but whether the taxpayer was entitled to rely on it. Given that HMRC had made it clear that it would not necessarily apply the guidance in avoidance cases, HMRC and the UT considered that the taxpayers were not able to make such reliance.
www.bailii.org/uk/cases/UKUT/TCC/2015/211.html
4.Business tax
4.1 Eurex Deutschland recognised as a designated stock exchange
HMRC has issued an order under powers set out in TCGA 1992 s.288(6) to designate Eurex Deutschland as a recognised futures exchange for the purposes of capital gains tax with effect from 13 March 2015.
TCGA 1992 s.143(1) provides that where transactions in commodity or financial futures or in traded or financial options are not part of a trading activity, gains on such transactions are taxed under capital gains rules. For commodity and financial futures this only applies if they are dealt with on a recognised futures exchange.
www.gov.uk/government/uploads/system/uploads/attachment_data/file/424517/TCGA- EurexDeutschland.pdf
4.2 CJEU and compliance of German roll-over relief provisions with EU law
The CJEU has determined (case C-591/13) that German capital gains tax rules are contrary to the principal of freedom of establishment in the Treaty on the Functioning of the EU (article 49) and the EEA agreement (article 31). UK roll-over relief rules have similar provisions, so this case may have implications for UK permanent establishments of otherwise non-UK resident entities.
The German rules only permit the deferral of gains on disposal of a capital asset of a German permanent establishment if the replacement asset is located in Germany. The UK roll-over relief provisions in TCGA 1992 s.152 are clarified for non-residents by s.159. This specifies certain conditions before roll-over relief can be permitted. These are:
- The new assets into which gains are rolled over must be 'chargeable assets' (ie chargeable to UK CGT or corporation tax on capital gains); or
- The non-resident person, whose permanent establishment has disposed of chargeable assets and acquired new assets, must be UK resident immediately after the new acquisition. Access to roll over relief due to this circumstance is, however denied where the non-resident person is dual resident and the new assets are excepted from UK tax under a double tax treaty.
4.3 OECD discussion draft on cost contribution arrangements involving Intangibles
The OECD has released a discussion draft for comment by 29 May 2015 on BEPS action 8, proposed revisions to the transfer pricing guidelines in relation to cost contribution arrangements (CCA) involving intangibles.
CCAs can often be used for the joint development, enhancement, maintenance, protection or exploitation of intangibles. A key objective in revising the guidance is to align the transfer pricing of intangibles under CCAs with the general guidance on the transfer pricing of intangibles.
In particular, there is clarification in the guidance on requiring contributions to be measured at value rather than at cost, to help ensure that outcomes for participants under a CCA should not differ significantly from the outcomes of transfers, or development of, intangibles for parties outside a CCA. The discussion draft also discusses updates to the guidance on control over risk which is relevant for determining participants in a CCA.
www.oecd.org/tax/transfer-pricing/discussion-draft-beps-action-8-cost-contribution- arrangements.htm
www.oecd.org/tax/transfer-pricing/discussion-draft-beps-action-8-cost-contribution- arrangements.pdf
5.VAT
5.1 VAT refunds for qualifying charities
HMRC has issued VAT notice 1001 setting out guidance for qualifying charities in obtaining refunds of input VAT incurred on goods and services for their non-business activities.
The entitlement to such refunds became effective on 1 April 2015 and qualifying charities are:
- palliative care charities;
- air ambulance charities;
- search and rescue charities; and
- medical courier charities.
The entitlement to refund was introduced in FA2015 s.66 and is now included in VATA 1994 s.33C and s.33D.
5.2 EU consideration of the CJEU Skandia VAT grouping decision
The possible implications of the CJEU Skandia decision (case C-7/13) have been summarised in a European Commission (EC) paper presented to the EU VAT committee meeting on 20 April 2015. Some of the issues raised indicate further consideration is required of the UK interpretation of the impact of the decision. Should the suggestions in the EU paper result in VAT being applied to intragroup services where previously none applied, this may cause an additional impact arising from the BEPS actions affecting transfer pricing.
Large financial services groups may already be considering restructuring their cross border activities, partly as a result of the Skandia decision. Other businesses with cross border supplies of services may also like to consider for their circumstances the implications of the Skandia decision, HMRC's interpretation of it, and the EU paper.
Background
HMRC's Brief 2/2015 following the Skandia decision indicated that no change to the UK VAT grouping rules was required, but that UK VAT accounting will change for services performed on or after 1 January 2016 where cross border transactions take place with overseas jurisdictions operating similar rules to Sweden.
Where the Swedish branch of an overseas entity has joined a Swedish VAT group, Sweden treats only that branch, and not the remainder of the branch's legal entity, as a member of the Swedish VAT group. Following the Skandia decision this has the consequence that supplies from an overseas head office to its Swedish branch, where the Swedish branch was in a Swedish VAT group, were treated for Swedish VAT purposes as supplies between different VAT persons.
The UK rules permit bodies corporate to be members of a VAT group where each is established or has a fixed establishment in the UK, and where one controls the other or they are controlled by the same persons. Normally this means that where the UK PE is within a UK VAT group, supplies between the overseas part of a non-UK resident entity that has a UK permanent establishment (PE) and the UK VAT group are disregarded. This is because these are regarded in the UK as made within the same legal entity and therefore not VAT supplies. There are two circumstances in the UK where this normal rule is disapplied:
- as the result of the issue of a notice of direction under VATA 1994, Sch 9A (VAT grouping anti-avoidance); and
- when a member of a VAT group receives 'reverse charge' services (VATA 1994 s.7A(2a)) at an overseas establishment and uses them to make an intra-group supply of reverse charge services on to another member established (belonging) in UK (VATA 1994 s.43(2A) – s.43(2E)).
The EC paper on the Skandia decision
The EC paper considering the Skandia decision aims to reach a common and consistent position on the consequences of the judgement. It is recognised that further developments concerning VAT groups are expected when the decision in case C-108/14 (Larentia & Minerva) is released. The paper looks in more detail at:
- the parties to a transaction – whether the Skandia decision also affects supplies between groups that are not head office to branch;
- whether the decision impacts supplies of goods as well as services, including whether cost allocations within groups constitutes consideration for supplies. The paper indicates that the Skandia decision confirmed that cost allocations did constitute consideration. Here there was a clear conclusion that where the supplier and recipient become different taxable persons (ie in contrast to the situation discussed in FCE Bank (case C-201/04), where there were cross border supplies within the same legal entity, but the UK establishment was not in a VAT group), there are potentially taxable supplies;
- whether the Skandia decision, which considered supplies from third countries to the EU, could be applied in other territorial situations and whether this affected the place of supply. The paper indicates the decision does have wider territorial application, but does not alter the determination of place of supply;
- the impact on VAT grouping provisions of different member states. Here the paper indicates there could be implications as it would be important to maintain the territorial scope of any particular EU member country's VAT rules. It also concludes that irrespective of the application of anti-avoidance provisions (which the UK indicates is a reason for it not having to change its rules following Skandia), supplies of services from head office to branch, where the branch is a member of a VAT group should remain taxable transactions where there is a supply of services for a consideration within the member state by a taxable person.
5.3 EC press release on creating a single European digital market place
The European Commission has released a 16 point plan for creating a single European digital market place. Included in that plan is a proposal to reduce the administrative burden businesses face from different VAT regimes. The aim is that sellers of physical goods to other countries will be able to benefit from single electronic registration and payment, and that there will be a common VAT threshold to help smaller start-ups selling online.
Legislation will be proposed for consideration in 2016 as follows:
i) extending the current single electronic registration and payment mechanism to intra-EU and 3rd country online sales of tangible goods;
ii) introducing a common EU-wide simplification measure (VAT threshold) to help small start-up e-commerce businesses;
iii) allowing for home country controls including a single audit of cross-border businesses for VAT purposes; and
iv) removing the VAT exemption for the importation of small consignments from suppliers in third countries.
http://europa.eu/rapid/press-release_IP-15-4919_en.htm?locale=en
5.4 New HMRC manual on VAT and charities
HMRC has published a new internal manual on VAT and charities.
www.hmrc.gov.uk/manuals/vcharmanual/index.htm
5.5 Is it a car or is it a van?
No it's a useful list of vehicles, published by HMRC, to help VAT registered businesses determine if VAT can be reclaimed as input tax on particular makes and models of car derived vans and combi-vans.
The table lists vehicles that have been notified to HMRC by manufacturers or sole concessionaires, where the vehicle has been modified from the standard model, identifying where it has or has not been modified in accordance with HMRC guidance on motoring expenses, either as:
- a van (whether a car derived van or combination van); or
- a passenger car.
Where a vehicle is classed as a passenger car input tax is not normally recoverable if the vehicle is available for private use.
www.gov.uk/government/publications/hm-revenue-and-customs-car-derived-vans-and-combi-vans
We have taken care to ensure the accuracy of this publication, which is based on material in the public domain at the time of issue. However, the publication is written in general terms for information purposes only and in no way constitutes specific advice. You are strongly recommended to seek specific advice before taking any action in relation to the matters referred to in this publication. No responsibility can be taken for any errors contained in the publication or for any loss arising from action taken or refrained from on the basis of this publication or its contents. © Smith & Williamson Holdings Limited 2015
