UK: Tax Update – A Round Up Of Recent Issues - Monday 19 July 2010

Last Updated: 20 July 2010
Article by Smith & Williamson

1. General news

1.1. Equitable Liability – draft legislation

The coalition Government is honouring the previous Government's intention to legislate for the concessionary treatment known as 'Equitable Liability'. By concession and subject to certain conditions HMRC reduce legally due direct tax liabilities to the sum that would have been due had the taxpayer complied on time with his obligations under the tax system. It is proposed to do this by Statutory Instrument and draft legislation is published for consultation on or before 1 October 2010. http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=page
Library_ConsultationDocuments&propertyType=document&columns=1&id=HMCE_PROD1_030578

The proposal is to insert a new type of relief, entitled "special relief", into Schedule 1AB Taxes Management Act 1970 (TMA) (for income and capital gains tax and Class 4 NICs), and into Part 6 of Schedule 18 to the Finance Act (FA) 1998 (for corporation tax).

It is felt that where other remedies and appeal procedures are available, those rules should apply in place of equitable liability. Therefore in drafting this new relief HMRC has limited it to those taxpayers within the self assessment regime who have been issued with determinations, because there is no appeal against determinations issued under the self assessment system.

Under the proposals the relief can be claimed only if:

  • the claimant can demonstrate the determined sum is excessive (new paragraph 3A(1)(a) of Schedule 1AB TMA and new paragraph 51BA(1)(a) of Schedule 18 FA 1998 and paragraph 2(5)(b) Sch 1A TMA);
  • the claimant indicates the actual amount he believes is due for the period (paragraph 2(5)(a) Schedule 1A TMA);
  • there is no other remedy available ("Case B", paragraph 2(3) Schedule 1AB and paragraph 51A(3) Schedule 18 FA 1998);
  • the claimant brings his affairs up to date (new paragraph 3A(5) Schedule 1AB TMA and new paragraph 51BA(5) Schedule 18 FA 1998);
  • the relief has not been claimed before (new paragraph 3A(1)(c) Schedule 1AB TMA and new paragraph 51BA(1)(c) Schedule 18 FA 1998); and
  • it would be unconscionable for HMRC to pursue the determined sum (new paragraph 3A(4) Schedule 1AB TMA and new paragraph 51BA(4) Schedule 18 FA 1998).

There is no time limit for making a claim (new paragraph 3A(1)(b)(ii) Schedule 1AB TMA and new paragraph 51BA(1)(b)(ii) Schedule 18 FA 1998).

2. Private Clients

2.1. Removing the requirement to annuitise by age 75

HM Treasury has issued a consultation document on the proposal to remove the requirement to purchase an annuity at age 75. www.hm-treasury.gov.uk/d/consult_age_75_annuity.pdf

2.2. TC00555: Peter Hadfield v The Commissioners for HMRC

In response to an 'exchange offer' by Royal Dutch Shell ('RDS') of two 'A' shares in RDS for every share in Royal Dutch ('RD') Mr H obtained 2,640 'A' shares. When Mr H submitted his 2005/6 tax return he reported his exchange of RD shares and stated by way of explanation that he had completed the return on the basis that 1992 TCGA s135 applied to treat the exchange as a reorganisation.

HMRC opened an enquiry and in January 2009 HMRC informed Mr H that the enquiry was complete and that they had concluded relief under s135 was not due. They assessed Mr H to included taxable capital gains of £8,178. Mr H appealed against this amendment to his return for the year ended 5 April 2006.

The First -tier Tribunal dismissed the appeal for the following reasons:

"Mr Hadfield received his interest in the RDS 'A' consideration shares as the result of his tender of his RD shares on 8 July and of RDS' response by allocating 2,640 RDS 'A' shares to him. HMRC are, in my view, correct in treating Mr Hadfield as having disposed of his RD shares at that time in return for a consideration represented by the RDS "A" shares.

HMRC are also correct in refusing to allow section 135 relief for capital gains tax in respect of that disposal. There was no "issue" of the RDS "A" consideration shares to Mr Hadfield. For completeness I need to add that Mr Hadfield specifically disclaimed arguing that there had been an 'issue'." www.financeandtaxtribunals.gov.uk/judgmentfiles/j4920/TC00555.doc

2.3. Penalties for late filing of partnership returns

The level of penalty assessable for late filing of a partnership return was examined in the case of RG & Mrs B Beebe. A paper return was submitted for the tax year ended 5 April 2008, but after the 31 October 2008 deadline. Under TMA70 s93A (failure to make partnership returns) there was no equivalent to s93(7) (the section for personal self assessment returns) that would reduce any penalty to nil if there was no outstanding tax liability. Thus each partner was assessed to a £100 penalty.

The new penalty regime in FA2009 Sch55 is expected to come into force for income tax self assessment for the 2010/11 tax year for returns filed after 31 October 2011 or 31 January 2012. It contains no mitigation of flat filing penalties where there is no outstanding tax liability, other than for a 'special reduction' in 'special circumstances' (FA09 Sch55 para 16).

www.bailii.org/uk/cases/UKFTT/TC/2010/TC00559.html

3. Business tax

3.1. Cross-border tax impediments to venture capital investment

The European Union has produced a report considering the tax obstacles to cross border venture capital investment in the EU. It concludes that:

There is a need within the European Union (EU) for a dynamic venture capital (VC) industry that is capable of providing early-stage equity financing to the EU's most innovative high-growth small and medium-sized enterprises (SMEs). SMEs and businesses backed by financial and business support such as VC can generate economic growth, create new jobs and contribute to the design and use of new knowledge and technology. Active VC markets would be important drivers of the more competitive, entrepreneurial, innovative and dynamic European economy that the EU's Lisbon Strategy2 aims to achieve. VC investment can also play a significant role in strengthening European economies in the current economic turbulence and downturn.

However the EU venture capital market currently works below its potential, with the differing tax systems across the EU contributing to inefficiency, particularly with regard to concerns over creating permanent establishments. The possible solutions considered by the tax experts who undertook the report were:

1) The optimum solution to the taxation problems would be for the tax authorities of the state of the portfolio company to confirm that the activities of the Manager of a VC fund in connection with the VC fund and its investors can be classified as those of an independent agent, as defined in the OECD Model, and therefore cannot be treated as a permanent establishment of the VC fund or its investors in the country where it carries out its management functions. This could be achieved through clear statements from tax authorities that they agree with this treatment of VC Fund Managers.

2) If, however, an investor has a permanent establishment in another jurisdiction and the investment in the fund is properly attributable to that establishment, the profits arising to the investor could be taxed in that other country.

3) The state of the portfolio company would still retain full taxing rights over any income/gains arising to the VC fund in its jurisdiction. If the VC fund is non-transparent for tax purposes, then the state of the portfolio company would apply the DTC between itself and the jurisdiction of the fund vehicle (if one exists and if the fund meets the conditions provided by the relevant article of this DTC to be considered a resident) in order to determine whether to apply tax on dividends, interest and capital gains flowing to the fund. If the VC fund is transparent, the state of the portfolio company would apply the DTCs between itself and the countries of residence of the investors.

4) The VC Fund Manager should be taxed on an arm's-length basis on the management fees that it earns in respect of services that it performs in each jurisdiction in which it has a presence.

5) Those Member States agreeing with the conclusions of this report should arrive at guidelines or at a legally binding agreement concerning mutual recognition of the classification for tax purposes of the legal forms of VC funds. This would provide that all Member States would recognise the tax classification and tax treatment applied by the home country of a VC fund (i.e. as transparent or non-transparent; subject to tax or not subject to tax; trading or nontrading). Where a VC fund is treated as non-transparent in its home country, Member States would, as a result of this mutual recognition, agree that the fund is resident in that country for the purposes of the application of DTCs if it meets the conditions provided by the relevant articles of these conventions to be considered a resident. This would help to increase legal certainty and reduce the risk of economic and/or juridical double taxation.

6) Another solution would be that EU Member States would agree on a list for the classification as either transparent or non-transparent of certain specific legal forms which are often used for VC funds. http://ec.europa.eu/taxation_customs/resources/documents/taxation/company_tax/initiatives_small_business/venture_capital/tax_obstacles_venture_capital_en.pdf

3.2. HMRC guidance on corporate residence

HMRC has issued further guidance (currently in draft form) on corporate residence in the form of examples of situations where they would not normally expect to question the company's residence position.

The example highlighting situations where they would normally expect to raise an enquiry is:

The majority of directors habitually perform a significant part of their duties in the UK, merely leaving the UK to attend board meetings. HMRC may wish to examine all relevant factors in such a case to determine whether or not the company should be regarded as resident in the UK.

On the impact of the directors' residence on company residence the following is indicated:

The relevance of individual directors' tax residence to the place of central management and control of the companies that they serve is sometimes raised as an issue. In principle it is the place from which an individual exercises central management and control that is the relevant factor for locating the residence of a company rather than the territory in which their personal tax liabilities arise. www.hmrc.gov.uk/international/intm120130-draft.pdf

3.3. Capital or revenue nature of an exclusivity payment

The case of Countrywide Estate Agents FS Ltd considered whether a £25m payment by Friends Provident Life pursuant to an agreement in August 2002, was to be regarded as capital (as payment for 'goodwill') or revenue. Countrywide received the payment in return for the grant to Friends Provident of the exclusive right to distribute "Life Products" to Countrywide's customers for 15 years, thus precluding Countrywide from exploiting its customer base in that regard during the contract term.

In addition to the exclusivity payment, the contract provided that "Initial Commission" would be paid in respect of each life product sold by Countrywide and that a "Further Commission Element" would be paid. The initial commission was paid on each Life Product Countrywide sold, subject to an adjustment. The Further Commission Element covered the necessary in-house system development working and ongoing running costs to allow the Appellant's "Point of Sale" system to distribute Friends Provident's products.

The £25m payment was made to Countrywide in its capacity as a financial intermediary. Countrywide's goodwill as a financial intermediary has at all times depended on its position in the market. The name "Countrywide Estate Agents FS Limited", and its association with and presence in the Countrywide Estate Agents' premises are continuing features of its goodwill. Those were the features that have given it access to customers. The effect of the Friends Provident Distribution Agreement therefore was to give Friends Provident access, through the Appellant, to those customers. It did not, in the opinion of the Tribunal, result in any significant disposal of goodwill. Rather Countrywide was using its access to customers by giving FP the right to be introduced to them.

The conclusion was that Countrywide has used its goodwill and turned it to account through the FP Distribution Agreement as its "method of trading"; it had not parted with part of its property for a purchase price, and that the payment was therefore of a revenue nature. www.bailii.org/uk/cases/UKFTT/TC/2010/TC00557.html

3.4. Consultation on introduction of a bank levy

On 12 July 2010 Mark Hoban MP gave a speech to the British Banker's Association reiterating many of the comments made in the budget about banking reform, bank regulation and how the Government sees the involvement and administration of banks in the British economy. www.hm-treasury.gov.uk/press_24_10.htm .

On 13 July a consultation was issued on the implementation of a bank levy – for responses by 5 October 2010.

www.hm-treasury.gov.uk/consult_bank_levy.htm

www.hm-treasury.gov.uk/d/consult_bank_levy_condoc.pdf.

The intention is to introduce a Bank Levy from 1 January 2011 encouraging banks to move away from riskier funding models, reducing systemic risk. Once fully in place, the Government expects the Levy to generate around £2½ billion of annual revenues.

With respect to international issues and in particular in relation to France and Germany, the level at which each country's levy is set will take into consideration the need for a level playing field. The Government appreciates the need to avoid double taxation where possible and will urgently take forward discussions on resolving this with other countries that plan to introduce bank balance sheet levies.

The Levy will apply to the following entities with relevant aggregate liabilities of £20bn or more:

  • the global consolidated balance sheet of UK banking groups and building societies;
  • the aggregated UK subsidiary and branch balance sheets of foreign banks and banking groups operating in the UK; and
  • the balance sheets of UK banks in non-banking groups.

Relevant liabilities will be total liabilities and equity, but excluding:

  • Tier 1 capital;
  • insured retail deposits;
  • repos secured on sovereign debt; and
  • policyholder liabilities of retail insurance businesses within banking groups.

It is proposed that the Levy will be set at 0.07 per cent. However, there will be a lower rate of 0.04 per cent for 2011. There will also be a reduced rate for longer-maturity funding (i.e. greater than one year remaining to maturity at the operative balance sheet date) to be set at 0.02 rising to 0.035 per cent; half the main rate.

The Levy will not be deductible for Corporation Tax, and HMRC will administer the Levy.

The definition of 'bank' and 'banking group' for the purpose of the levy will be the same as for the Bank Payroll Tax (FA2010 Schedule 1 part 3 – although the consultation document refers to schedule 3). The intention is to look at consolidated banking group financial statements prepared under either IFRS2 or US GAAP. Where the UK business is represented by a UK group or sub-group, then the consolidated results of that group will apply. Where there is no UK sub-consolidation, or a UK company of a foreign bank is not within a UK sub-consolidation, then aggregation will apply. For branches, the Government proposes that the UK Corporation Tax capital attribution tax adjustment (CATA) method will form the basis for determining the branch taxable liabilities. In relation to branches there is a request for input on methods of attribution.

With regard to the tax base, in the case of intra-group liabilities of the UK part of a foreign group with its parent or other overseas entities, for the purposes of the Levy, this funding will be treated as short-term unless it can be demonstrated by the group that it is backed by external long-term funding. It is also proposed that net derivative liabilities should be used for calculation of the Levy.

A single company of the group will be required to submit a return and supporting computation calculating the bank levy liability. The levy will be included in the quarterly instalment payment system for corporation tax.

This will inevitably add a further level of administration in tax compliance and one wonders why the bank levy could not be incorporated within the Corporation Tax legislation in a similar way to the oil & gas ring fence regime.

4. VAT

4.1. Sporting and exemption from VAT

The First Tier Tax Tribunal has reconsidered the VAT exemption of subscription fees for the British Association for Shooting and Conservation in accordance with the High Court's direction (see informal of 16 March 2009 and (www.bailii.org/ew/cases/EWHC/Ch/2009/399.html ), following the EU decision in the case of Canterbury Hockey Club (www.bailii.org/eu/cases/EUECJ/2008/C25307.html ).

The Canterbury Hockey Case reviewed whether supplies to it by England Hockey were to unincorporated associations or to individuals, and whether these supplies were entitled to the VAT sporting exemption. The conclusion was that the type of 'person' to whom the supplies were made was irrelevant, but what mattered was that the supplies were made by a non-profit making organisation and were closely linked and essential to participation in the sport. Observations in the High Court hearing appealing the BASC case on the VAT exemption for sporting services (item 3 of group 10 of Schedule 9 VATA94) and the outcome of the Canterbury Hockey case included the following:

i) The policy underlying the inclusion of 'closely related' services within the sports exception is to ensure that participation in sport is not hindered by the increased cost of participation that would result if the services in question were taxable;

ii) The exception is intended to apply to sport generally, rather than to limited categories of sport;

iii) Services are closely related to participation in sport only if they are ancillary to that participation;

iv) Services will be regarded as ancillary to a principal service if they constitute not an end in themselves but a means of enhancing the enjoyment or benefit of the principal service."

In the light of these observations the Tribunal judge therefore considered whether the BASC supplies were closely related with sport and added value, concluding that they were and that BASC succeeded in its appeal against a VAT assessment of £397,551. http://www.bailii.org/uk/cases/UKFTT/TC/2010/TC00562.html

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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