UK: Tax Update- 21 February 2011

1. General

1.1. HMRC to scan incoming post

HMRC has announced that it intends to scan incoming post.

Scanning will enable HMRC to create electronic images of the post received. The scanned material will be assigned to cases using electronic document management systems.

Scanning will be introduced in phases. The first phase of the roll out will begin in March 2011 and will continue in phases during 2011/12.

A single PO Box address will be used to identify the mail that is part of this process. HMRC will clearly state this address on outgoing correspondence.

In addition to the PO Box address, HMRC will provide a reference on outgoing correspondence. This reference must be clearly stated on replies to them. The reference will be prefixed by one of the following letters listed below:

• CFS
• CFSS
• CFSC.

If we wish to send replies for more than one customer in the same envelope, HMRC ask that we separate the documentation with individual covering letters ensuring the customer case reference is clearly stated on those letters.

When HMRC receive our correspondence, they will scan and link it to the relevant case usually within 36 hours of receipt.

Some original documents will be returned to us as a matter of course after they have been scanned. These include:

• P60's
• Birth, death and marriage certificates
• Passports.

We must clearly state if we want any other supporting documents to be returned. If we do not ask for documents to be returned they will be securely destroyed, together with our covering letter, within 40 days of receipt.

HMRC identify the benefits of scanning as follows:

• Scanning will ensure documents get to the relevant HMRC caseworker as quickly as possible.
• By assigning paperwork to cases electronically, HMRC avoid the need for manual distribution of letters and documents received to caseworkers.
• HMRC will be able to handle calls to the caseworker about the case, without the delay of locating original paper copies.
• The new process helps HMRC to handle post more efficiently.

1.2. Email scams update

HMRC has issued the following warning to taxpayers to be vigilant following a surge in scam emails:

"The email informs the recipient they are due a tax rebate, and provides a click-through link to a replica of the HMRC website. The recipient is asked to provide their credit card details. Fraudsters then try to take money from the account using the details provided. Victims risk having their bank accounts emptied and their personal details sold on to other organised criminal gangs.

In the last three months, HMRC has shut down 99 websites that were responsible for sending out the fake tax rebate emails.

As a matter of policy, HMRC will only ever contact customers who are due a tax refund in writing by post. If anyone receives an email offering a tax rebate claiming to be from HMRC, we recommend they send it to phishing@hmrc.gsi.gov.uk before deleting it permanently.

HMRC thoroughly investigates phishing attacks and works with other law enforcement agencies in the UK and overseas. In the last 18 months, scam networks have been shut down in a number of countries, including Austria, Mexico, the UK, South Korea, the USA, Thailand and Japan.

HMRC strongly advises customers to:

• Check the advice published at www.hmrc.gov.uk/security to see if the email you have received is listed;
• Forward suspicious emails to HMRC at phishing@hmrc.gsi.gov.uk and then delete it from your computer/mail account;
• Do not click on websites, links contained in suspicious emails, or open attachments; and
• Follow advice from www.getsafeonline.co.uk .

If you have reason to believe that you have been the victim of an email scam, report the matter to your bank/card issuer as soon as possible. If in doubt, please check with HMRC at www.hmrc.gov.uk/security/fraud-attempts.htm ."

1.3. Judicial review of case involving tax agent status.

HMRC started a criminal investigation against a firm of tax advisers (CLAC) and searched the firm's premises in June 2010. In November 2010 HMRC wrote to the firm to say they were no longer prepared to deal with the firm as tax agents for several thousand clients. The Court allowed the firm's appeal against HMRC's decision on the basis that CLAC should have been given the right to make representations before the decision was taken. The Court also held that reasons should have been given to explain the termination of its agent status.

The case report is interesting in so far as it sets out the background to the status of tax agents as follows:

"4. Under Section 5 of the Commissioners for Revenue and Customs Act 2005 ("CRCA 2005"), the Commissioners are responsible for the collection and management of revenue, defined as including taxes, duties and national insurance contributions.

5. By Section 9 of the CRCA 2005 "

(1) The Commissioners may do anything which they think –

(a) necessary or expedient in connection with the exercise of their functions, or

(b) incidental or conducive to the exercise of their functions."

6. HMRC has adopted the practice of dealing with agents on behalf of taxpayers in the exercise of its general statutory powers. There is no specific statutory provision which requires HMRC to deal with agents authorised by taxpayers.

7. HMRC's guidance on agents, posted on its websites, states, inter alia:

i) Tax agents, advisers or accountants must be formally authorised by an individual or business to deal with HMRC on their behalf.

ii) HMRC defines an "agent" as someone who is appointed to discuss, correspond or transact with them about matters they are responsible for.

iii) Once an agent is authorised to act on a client's behalf, HMRC can discuss and exchange the client's personal and financial information with the agent, and send letters, forms or returns relating to their tax affairs.

iv) Agent authorisation will not transfer a client's legal obligations to his agent.

v) Under the heading "How long does the authorisation last?", the guidance states:

"The authorisation will continue until HMRC are told that you or your client has withdrawn it or when your client dies."

8. HMRC has no formal procedure to deal with the termination of an authorised agency for suspected fraud or other serious misconduct.

9. HMRC Business Customer Unit issued a confidential Note to HMRC staff on 30 June 2009 giving guidance on dealing with agents.

10. The Summary of the Note states that it is:

"designed to help HMRC staff identify agent conduct that falls below that which HMRC and the major agent representative bodies would consider appropriate in a professional relationship and sets out the reporting mechanisms to use when issues of this nature arise".

11. The Note identifies four main headings of poor agent behaviour:

i) Suspected repayment fraud or evasion;

ii) Abusive, threatening or discriminatory behaviour;

iii) Technical ability that puts tax at risk;

iv) Agent behaviour, which though legal, give HMRC cause for concern.

12. The Note sets out "general principles and guidance" to apply when HMRC is considering what can be done on a practical level when poor agent behaviour is encountered. Under the heading "Refusal to deal with an agent entirely – is this an option?" the Note states that HMRC should not refuse to deal with an agent completely other than in "the most exceptional and extreme circumstances", in which case legal advice should be sought. Under the heading "What can we tell our customers if we refuse to deal with their appointed agent?" the Note indicates that, generally, disclosure of information regarding an agent's behaviour is prevented by Section 18(1) of CRCA 2005 but "there are ... exemptions within Section 18(2) CRCA 2005 that would enable a necessary, relevant and proportionate disclosure to be made to our customer about the behaviour of their agent."" www.bailii.org/ew/cases/EWHC/Admin/2011/240.html "

2. Private Clients

2.1. Self Assessment (SA) Autocoding and the National Insurance and PAYE Service (NPS) interface

HMRC has written to us as follows:

"I am writing to let you know that we will be switching on our new SA Autocoding functionality early in 2011-12.

SA Autocoding will allow relevant information from an SA Return with a PAYE source to flow to NPS, and automatically calculate and issue revised codes. This will mean that the tax code will be more accurate and the right amount of PAYE tax paid.

In advance of switching on the SA Autocoding functionality, we have been routinely updating tax codes when dealing with telephone calls and correspondence from customers.

Where a tax code has been revised for 2011-12 following a contact from a customer with up to date information, SA Autocoding will not override that adjustment but it will continue to update the code with any additional relevant information from the return.

Customers who file SA Returns will continue to receive their annual statement of tax due. Payment dates remain the same.

We will continue to code established SA underpayments of up to £1,999.99. This is a separate interface and so not affected by the introduction of SA Autocoding.

We will open the SA Autocoding interface early in 2011-12. This will be well in advance of returns being filed in any significant numbers, enabling 2011-12 codes to be updated as returns are filed. Should a return be filed before the interface is opened, the information in the return relevant to the coding will be stored and will flow to NPS once the interface is live.

Those submitting their SA Returns early in the year will receive most benefit from a coding adjustment as the revised code will operate for a longer period.

In many cases, customer's agents/representatives will submit SA Returns. Any revised autocoding will be sent to the customer. No copy will be sent to the agent/representative.

Some Q&As about SA Autocoding (may assist in dealing with clients' queries)

What sort of information will you use from my SA Return and include in my tax code?

We will use information from your SA Return that will help keep your tax code accurate so you pay the right amount of PAYE tax. We can include tax reliefs you are entitled to plus make a deduction for other income you may have that isn't taxed before you get it. A few examples are shown below.

Income that could be included as a deduction in your code

Interest not taxed before you get it

Tips from your job, such as a hairdresser

Commission

Income from property you let out

Tax relief for payments you make

Flat rate expenses

Expenses incurred in doing your job

Professional Subscriptions

Gift Aid donations Personal pension payments

Trade union subscriptions

I contacted you and asked for my SA Return to be reflected in my tax code – what does starting the SA Autocoding process mean for me?

If your code has already been changed because you contacted us and asked us to review it then it will already reflect data from your latest return. SA Autocoding will only update your code if your 2010-11 SA return shows changes in your income or deductions.

Why didn't you switch the SA Autocoding functionality on in 2010-11?

We have taken the decision not to open the interface between SA and NPS during 2010-11 because we do not want to divert resources from the work being done to make sure that the End of Year Reconciliation and Annual Coding exercises run as smoothly as possible."

2.2. Social security (NIC) where working in two or more EEA countries

HMRC has updated form CA8421to assist in determining which country's social security legislation will apply where an individual normally works in two or more countries in the European Economic Area.

The form should only be completed by, or on behalf of a:

• UK resident who normally works in two or more countries within the EEA, or
• person resident in another EEA country that normally works in two or more countries within the EEA only if the transitional provisions apply (see transitional provisions below), or
• non-EEA resident that works in two or more countries within the EEA for a UK employer.

The transitional provisions apply where a person that was subject to UK social security legislation prior to 1 May 2010, under EC Reg 1408/71, will continue to remain subject to UK legislation if EC Reg 883/04 would mean a change of applicable social security legislation, throughout the transitional period (of up to 10 years) unless:

• there is a change of circumstances, or
• the person asks to be dealt with under EC Reg 883/04. www.hmrc.gov.uk/forms/2007/ca8421.pdf

3. PAYE and Employee Benefits

3.1. Official rate of interest 2011/12

HMRC have announced that the official rate currently standing at 4.00% will be frozen for the 2011-12 tax year, subject to review in the event of significant rate changes.

3.2. Employers Bulletin

The latest Employers Bulletin issued by HMRC has articles on: updated June Budget information; online filing; employers' liability insurance; forms P14 & P60; NICs holiday; manual tables; employer annual returns; moving towards real time information; PAYE late payment penalties; PAYE starter and leaver forms penalties; revised employer compliance guidance; HMRC bank account details; additional statutory paternity pay; national minimum wage; illegal working; salary sacrifice; VAT businesses; tax relief on pensions; changing state pension age for women; contracting out and defined contribution pension schemes; and new toolkits. www.hmrc.gov.uk/paye/employer-bulletin/bulletin37.pdf

3.3. New HMRC Toolkits

HMRC has issued a new toolkit covering National Insurance contributions and statutory payments. www.hmrc.gov.uk/agents/prereturn-support-agents.htm

4. Business tax

4.1. Statement of Practice 1/11 Transfer Pricing Mutual Agreement Procedure (MAP)

A new Statement of Practice (1/11) describes the UK's practice in relation to methods for reducing or preventing double taxation and supersedes Tax Bulletins 25 and 31 which previously provided the guidance in this area. Below are some extracts with reference to transfer pricing enquiries:

Experience has shown that it is advantageous for taxpayers involved in transfer pricing enquiries to present a case early to invoke MAP because early action by the competent authority can sometimes help to ensure that unrelievable double taxation does not arise from the actions of one fiscal authority. This might be the case, for example, where the UK's treaty partner is adopting an inappropriate transfer pricing methodology during the course of an audit and the UK is able to persuade it to use the most appropriate methodology. As noted above, the taxpayer is not directly involved in the negotiations between the competent authorities but, as happens in the UK, it may participate indirectly through discussions with the competent authority of the state of residence/nationality. .....

The UK follows the approach adopted by most countries and described in the Commentary on Article 25 at Paragraph 76. Under this approach a person cannot pursue simultaneously the MAP and domestic legal remedies. Thus a case may be presented and accepted for MAP while the domestic remedies are still available. In such cases, the UK competent authority will generally require that the taxpayer agrees to the suspension of these remedies or, if the taxpayer does not agree, will delay the MAP until these remedies are exhausted. Where the adjustment giving rise to MAP has been made in the other state the UK competent authority does recognise that whilst a taxpayer may be willing to suspend domestic legal remedies, the other fiscal authority may be unwilling to do so.

Similarly, the UK competent authority may recognise that pursuit of domestic legal remedies in another state may take a considerable amount of time. In such cases the UK competent authority may be willing to continue the MAP while the domestic legal process continues, but of course cannot guarantee that the other competent authority will be willing to do so. In order to invoke MAP under a UK tax treaty it is necessary for a person to present a case showing why taxation has arisen that is not in accordance with the terms of the treaty (S124(1) TIOPA 2010, formerly S815AA(1) ICTA 1988). To invoke MAP under the Arbitration Convention it is similarly necessary to present a case showing that the arm's length transfer pricing principles set out in Article 4 of that Convention have not been observed.

Where MAP is invoked under one of the UK's tax treaties, such a case must be presented before the expiration of:

• the period of six years following the end of the chargeable period to which the case relates; or
• such longer period as may be specified in the tax treaty for claims after 27 July 2000.

See S125(3) TIOPA 2010, formerly S815AA(6) ICTA 1988. The time limit for invoking MAP will therefore depend upon the specific terms of the particular UK tax treaty under which MAP is invoked. ...

Clearly the UK cannot leave itself exposed indefinitely to requests to enter MAP. For the purposes of both a UK tax treaty or the Arbitration Convention, HMRC will therefore regard the first notification as being the finalisation of a transfer pricing enquiry which gives rise to double taxation. This stage will be marked by the determination of the quantum of the additional profits arising from a transfer pricing adjustment such as the issue of a closure notice, or the amendment of a return during an enquiry (Paragraphs 30/31 Schedule 18 FA1998). HMRC considers that at this point, the taxpayer must be aware of the possibility that double taxation may arise and should therefore present a case to protect its position.

Because HMRC will admit a case to MAP prior to first notification, it may be that at the time the case is presented it is not certain that a transfer pricing adjustment will be made or that double taxation will arise. In particular, it may not be possible to gauge the quantum of profits that might be subject to double taxation. In such cases, HMRC may well defer MAP negotiations with the competent authority of the treaty partner until it becomes clear that such negotiations are likely to prove meaningful and effective in avoiding double taxation. Nevertheless, in cases of doubt, HMRC will contact the other state or states involved to explain why it does not consider it appropriate to commence MAP negotiations at that point and to seek the agreement of the other state as to the point at which negotiations should commence.

However, it should be noted that even if the UK is prepared to commence MAP negotiations, its treaty partner may not be and the UK has no power to compel it to enter negotiations. www.hmrc.gov.uk/practitioners/sop.pdf (page 342 onwards)

4.2. E-filing of amended CT returns

We have received the following note from HMRC regarding e-filing of amended CT returns:

"Most e-filed amended returns are not processed automatically within our CT computer system (COTAX) and are individually reviewed before they are then manually processed. The reasons why they cannot be processed automatically include:

• a mismatch between the amended return accounting period details and those held on COTAX
• COTAX is still processing the original return or an earlier e-filed amendment
• The amended return contains items that cannot be dealt with automatically within COTAX, such as loss carry backs, negative CT chargeable
• The amended return is not a complete return, for example, the accounts or computations are not included
• The amended return includes a PDF attachment.

The Revenue Manual COM, accessible from the HMRC website, contains details of all of the reasons why efiled amended returns may not be processed automatically at COM 130010 to COM 13030 [ www.hmrc.gov.uk/manuals/commanual/COM130030.htm ].

We recognise that we need to amend our published guidance on amending a company tax return online to make it clear that most e-filed amended returns will not be processed automatically and there may be an interval before details are captured online.

A small number of amended returns will, however, be processed automatically by the computer system before a post processing review of the attachments takes place.

This will happen when a complete amended return is being resubmitted, the accounts and computations have XBRL tagging to the minimum standard, and there are no other issues. The amended return details will automatically be processed and where there is a repayment, it will be made automatically unless the circumstances of the repayment themselves show a need for manual review to provide assurance.

We are currently considering how we can reduce the need for manual review of any e-filed return, whether an amendment or otherwise, without compromising assurance. This will provide a better service to customers and reduce our costs. It may, however, take time to implement improvements where changes to computer systems are required, which will usually be the case.

You sent us details of two cases where the e-filed amendments were not automatically recorded. We have reviewed both cases and they were not automatically recorded because no accounts were included in the amended return and they included PDF attachments."

4.3. The role of Tax and Customs in the re-launch of the Single Market

Algirdas Semeta, EU Commissioner responsible for tax, spoke in Brussels on 8 February on forthcoming proposals to help reduce the tax burden for business in operating in the EU. The text of his speech with added comments is as noted below.

"CCCTB

Let's begin with corporate taxation. The tax-related costs that businesses bear when they operate cross border are still far too high. The administrative burdens and compliance costs linked to having to deal with up to 27 different tax systems across Europe is a serious obstacle to their expansion.

Current estimates of these compliance costs are in the range of 3% of corporate income tax revenues; that is more than 12 billion EUR a year. It goes without saying that these costs weigh more heavily on SMEs, discouraging discourage them from expanding across borders.

To improve the business environment, I will propose very soon a Common Consolidated Corporate Tax Base, better known as the "CCCTB". This initiative has substantial benefits to offer companies operating within the Single Market, as the business community itself fully recognises.

What are these benefits? First, companies would only have to apply one set of tax rules and deal with only one tax administration across the EU.

Second, an EU group of companies would no longer have to deal with the very burdensome transfer pricing compliance requirements of several different Member States.

Third, cross-border loss relief would be allowed within the group. This would eliminate the current overtaxation of EU groups that arises from the inability to set off losses incurred by one company against profits of another company in the group.

I must stress that the CCCTB is not about harmonising tax rates in Europe. Member States would remain fully responsible for setting their own corporate tax rates at the levels that they choose.

Implementing CCCTB would benefit EU businesses in their expansion across the Single Market, especially SMEs. It would also make the EU a more attractive market for foreign investors. International restructuring operations would be made simpler and situations of double taxation and discrimination would be eliminated.

CCCTB is a pro-Growth initiative: every euro that businesses can save in compliance costs can be used instead for investment, research and innovation or professional training, leading ultimately to more job creation.

S&W comment:

Large business is already in the process of assessing the potential implications of moving to a system of tax based on CCCTB. The evidence of one report summarising the simulated impact on five groups was that while transfer pricing costs reduced, an increase in compliance costs in other areas resulted in an overall increase in tax compliance costs for the sample. There was also a predicted increase in internal staffing costs related to tax compliance and a reduction in the use of external advisers. One of the sample experienced a decrease in effective tax rate, while another experienced no change. All the others experienced an increase in the effective rate of tax, due to a reallocation of profit to the different countries in Europe. This may be a function of the method of formulary apportionment and its lack of attention to intellectual property and entrepreneurial risk assessment, though the adverse impact may be limited by improved loss relief cross border. There was also some concern that any savings in transfer pricing compliance costs would be lost if each member state wanted to verify the apportionment factors. The transitional costs of changing from the existing system to CCCTB are unlikely to be insignificant.

"VAT

Let me now turn to another important initiative which I am pursuing: the reform of the Value Added Tax system. We estimate that the burden that VAT compliance places on business in 2009 amounts to around EUR 69.5 billion, or on average 8.5% of VAT receipts.

Despite many Commission initiatives in recent years, the VAT system continues to suffer from numerous shortcomings. Examples include differences in the VAT treatment of domestic and intra-EU transactions, the complex system of rates and exemptions, and the multiplication of special derogations and options offered to individual Member States. Moreover, reporting obligations and VAT collection procedures have not evolved in line with recent IT developments. Finally, the current system is susceptible to fraud, evasion and avoidance: an estimated 12% of VAT remains uncollected for these reasons.

Modernising the VAT system is an ambitious challenge but it is one that we must meet. It would benefit the Single Market and boost growth, whilst securing major revenue for Member States' budgets.

With the green paper adopted last December, the Commission launched a wide public debate on the future of VAT. This debate will run until end of May and your contributions are welcome.

n this basis, the Commission will publish a new VAT Strategy by the end of 2011."

S&W comment

The main areas for consideration are: implementation of a definitive system of taxation at origin (which would require harmonisation of tax rules and a clearance mechanism to redistribute VAT collected to the State of consumption); consistency of treatment of B2B and B2C supplies and the application of reverse charge procedures; harmonisation of legal structures; standardised documentation. Progress towards the goal is likely to be long and fraught with difficulty in a system where unanimous consent is required from a body consisting of 27 member states.

"Energy Taxation

I remain committed to pursuing a green taxation agenda, in line with the ambitious European climate change goals. This is the third point that I wanted to share with you today. The revision of the EU Energy Taxation Directive is central to this goal.

The current system creates incentives for more polluting products and causes distortions in the treatment of households and businesses. It does not ensure that all sectors contribute appropriately to the energy and climate change targets. It fails to foster the use of renewable energies and creates difficulties for the Member States that wish to introduce CO2 taxes.

As you can see, it is imperative that we re-structure the current taxation framework. Energy sources should be treated in a consistent manner, according to their quality rather than their quantity. Energy consumers should be treated equally regardless of the source of energy that they consume. Energy taxation should contribute to CO2 reduction target policy.

These are the main objectives that I will pursue with the forthcoming revision of the Energy taxation Directive."

S&W comment

We support these broad policies for improved targeting of environmental taxes. We would also hope that as an EU green tax system develops, due consideration is given to cross border matters and competition, avoiding the introduction of a myriad of new taxes, ensuring that any amounts payable are certain and that the time for payment is clear.

"Double taxation

I will now move to my fourth point: the fight against double taxation. This is a problem encountered by many businesses and citizens operating across borders, and one that I fully intend to tackle. This year, I will propose a general framework to address double taxation within the EU, which will be followed next year with specific measures to solve this problem.

Let me highlight at this stage the specific issue of access to long-term financing. Venture capital is an essential source of finance, in particular for start-up EU businesses and innovative SMEs. Nevertheless, venture capital markets in the EU are fragmented and underperforming. The industry claims that cross-border tax difficulties, including double taxation, contribute significantly to this fragmentation.

As stated in the Single Market Act, the Commission is aiming to ensure by 2012 that venture capital funds set up in any Member State can operate and invest freely in the European Union. In that context, tax treatment which disadvantages cross-border activities should be eliminated.

Beyond businesses, the Single Market must also bring tangible benefits to citizens. However, a large number of tax problems still arise when EU citizens work, retire, shop or invest across borders.

Last December, the Commission adopted a Communication announcing plans in many areas where EU citizens have identified problems. It should be the starting point for a broad dialogue amongst national authorities and stakeholders. I invite you to contribute to this debate."

S&W comment

We support any changes which make cross border financing of entrepreneurial and investment activity more efficient.

Customs

Allow me now to turn to my last point: the flow of goods crossing the external borders of the EU.

Making the most of our Single Market also means making sure that our manufacturers have easy access to the input they need. Facilitating trade is the main objective of the ongoing modernisation of customs.

A study of trade logistics from the World Bank confirms that the customs administrations in all European Member States perform consistently well. But more can and will be done to ensure a smooth flow of goods while safeguarding the interests of European businesses and citizens.

One important task for customs is to protect consumers from dangerous goods entering the EU market. This year, the Commission will issue guidelines for customs controls on product safety, including tools to ensure better cooperation between customs and market surveillance authorities. This will be a first step towards reinforcing European market surveillance at the external borders.

Another critical task of customs is to protect intellectual property rights or IPR.

Customs are well placed to intervene in the supply chain to combat the trade in IPR infringing goods. Last year customs detained more than 43,000 shipments containing about 120 million articles, suspected of infringing IPR.

The policy framework is in place. But the current legislation can be improved. I will present a proposal for a new customs regulation on IPR before the summer.

However, action at the EU border is not enough. Together with Commissioner Barnier, we are developing a comprehensive action plan against counterfeiting and piracy to strengthen IPR enforcement and raise awareness of the potential dangers of fake goods. The European Observatory will play an important role in this context.

S&W comment

Initiatives to strengthen the legal framework for protecting legitimate rights to reward for intellectual property is to be supported. It is to be hoped that the practical application of such measures will be effective in their purpose. http://europa.eu/rapid/pressReleasesAction.do?reference=SPEECH/11/78&format=HTML&aged=0&language=EN&guiLanguage=en

4.4. Transfer of assets abroad and attribution of gains to members of non-resident companies

The European Commission has formally requested the United Kingdom to amend two discriminatory antiabuse tax regimes which concern the transfer of assets abroad and attribution of gains to members of non-UK resident companies. The requests take the form of Reasoned Opinions (the second step of an infringement procedure). In the absence of a satisfactory response within two months, the Commission may refer the UK to the European Court of Justice.

The first infringement relates to the UK's "transfer of assets abroad" legislation (ITA07 s714-751). Under this legislation, if a UK resident individual invests in a company by transferring assets to it, and if this company is incorporated and managed in another Member State, then the investor is subject to tax on the income generated by the company to which he/she contributed the assets. However, if the same individual invested the same assets in a UK company, only the company itself would be liable for tax.

The second infringement relates to the attribution of gains to members of non-UK resident companies (TCGA92 s13). Under this legislation, if a UK-resident company [the legislation refers to person, so this would catch individuals and companies] acquires more than a 10% share of a company in another Member State, and the latter company realises capital gains from the sale of an asset, the gains are immediately attributed to the UK company, which becomes liable for corporation tax [or if an individual, capital gains tax] on these capital gains.

If, on the other hand, the UK company [or person] had invested in another UK resident company, only the latter would be taxable on its capital gains. In both cases, the Commission considers there to be discrimination, because investments outside the UK are taxed more heavily than domestic investments. The difference in tax treatment between domestic and crossborder transactions restricts two fundamental principles of the EU's Single Market, namely of the freedom of establishment and the free movement of capital contrary to Articles 49 and 63 of the Treaty on the Functioning of the European Union (TFEU) and Articles 31 and 40 of the EEA Agreement. The Commission is of the opinion that both restrictions are disproportionate, in the sense that they go beyond what is reasonably necessary in order to prevent abuse or tax avoidance and any other requirements of public interest. http://europa.eu/rapid/pressReleasesAction.do?reference=IP/11/158&format=HTML&aged=0&language=EN&guiLanguage=en

4.5. SDLT returns – specified filer (lead purchaser) reference requirements

A new IT system to assist in the management of Stamp Duty Land Tax is planned to be introduced in July 2011. This new system will be based on taxpayer reference, rather than transaction reference. Each lead purchaser will need to have a unique identifier. Individuals will use their National Insurance number, and companies will use either their Company Registration Number or their VAT registration number. Arrangements for lead purchasers that do not have any of these unique identifiers will be published later.

There will be changes to both the paper notification (SDLT1) and the online screens. There will also be minor consequential changes to the paper forms SDLT3 and SDLT4.

The new paper forms will be available from the beginning of April 2011, along with a new edition of the guidance notes for completion (SDLT6). Help for online filing will be updated when the online screens change.

For a short period (approximately three months), the new or the old version of the paper form will be accepted. Using the new form is mandatory from the introduction of the new system.

It is likely that this new method of referencing will enable HMRC to assess the number of land transactions undertaken by any taxpayer, with a consequent influence on their risk assessment process. www.hmrc.gov.uk/so/change-info-req-sdlt.htm

4.6. March 1982 share valuation

To be based on information available at that time rather than on related information published later

The case of Patrick Erdal (TC00964) considered the March 1982 valuation of unquoted company shares (17,131 ordinary shares (1.19% holding) and 53,476 "A" ordinary shares (a 1.6% holding)) on which gains were made in 1995/96, 2000/01 and 2001/02. HMRC contended the March 1982 values were: ordinary shares – between £1.20 and £1.25; "A" ordinary shares - between £1.10 to £1.15. The taxpayer contended initially that the value of all the shares was £4, but revised his contention to £3.29. The outcome of the Tribunal's deliberations was a share price for both types of share of £2.42, after taking account only the financial information available at 31 March 1982, and the available news and position of the company in its market sector at that time.

Market value of shares at 31 March 1982 was considered in accordance with TCGA92 s35 and s272 & s273. Market value is the price which the assets in question might reasonably be expected to fetch in the open market. No reduction is to be made on account of the whole of the assets being placed on the market at the same time. In relation to unquoted shares, it is to be assumed that in the open market, there is available to any prospective purchaser of the asset in question:

Some valuation principles were set out:

• Although the sale is hypothetical, the open market is not. Thus, restrictions which prevent shares being sold in the open market are disregarded so far as the assumed sale is concerned, but such restrictions and any others attaching to shares, which one might find for example in the company's Articles of Association, are taken into account in the valuation exercise, as they may affect the price which the shares might reasonably be expected to fetch in the open market.
• A majority holding is usually worth more than a minority holding. Views differ as to what the discount or premium should be in any given case. Where the shares relate to a family controlled company, this too may affect the valuation.
• The valuer stands at the valuation date looking forward into the future with reasonable foresight, rather than looking back today with hindsight at the valuation date. However, regard may be had to later events for the purpose only of deciding what forecasts could reasonably have been made on 31 March 1982

The company's business was the production of high quality photographic paper. The Financial Times of 9 March 1982 contained a short article about the Company's investment in a new kind of coated gloss paper. It described the process (Truflo) and the product (Trulux). It noted that the Company had invested £12m, having made a trading loss of nearly £80,000 in the half-year to 30 September 1981. A prudent prospective purchaser of shares in the Company on 31 March 1982 would have been aware of the content of that article.

The Glenrothes Gazette of 11 March 1982 also contained an article about the new process and product. The process was described as unique and revolutionary. A prudent purchaser of shares in the Company on 31 March 1982 would have been aware of the content of that article. As at 31 March 1982 the issued share capital of the company comprised 1,440,000 Ordinary £1 shares, 3,360,000 non-voting "A" Ordinary £1 shares and 480,000 4% Preference Shares of £1 each. The Company was a close company within the meaning of s282 of the Taxes Management Act 1970. 51% of the Ordinary shares were held by the Russell Trust, whose objects were to exercise its rights in the best interests of the employees and the continued maintenance of the Company as an independent business.

A substantially improved profit had been achieved for the second half of the year to 31 March 1982. The small trading profit amounted to £176,000. However, interest charges of £500,000 and coating development costs of £1.6m resulted in a net loss of £170,000 for the six month period. For the year there was an overall loss of just over £1m after deduction of £900,000 of interest charges and £2.4m of coating development costs (so that the management accounts would indicate a profit before tax and exceptional items of £1.4m). There was, however, a positive cash flow of £900,000, and net current assets as at 31 March 1982 were £2.9m. However the company's annual report for the year ended 31 March 1982 (issued in October 1982) showed profit before tax from ordinary activities was reported as £950,379. By about 1986 the Company's annual profits had risen to about £6m.

The appellant said he (as a prudent purchaser in possession of the relevant facts) would base his offer on profits of about £2m and apply a price to earnings ratio of 14 or higher. He proposed a discount of 25% in relation to marketability and other factors and finally submitted a share price (not distinguishing between the different types of share) of £3.29.

The view of the HMRC's expert share valuer Miss Hennessey was that the profit figure of £950,000 should be used and an earnings multiple of 12 to 14 applied. However a discount should be applied to reflect difficulties with marketability, low dividend, exit availability and uncertainty. This was not a scientifically calculated figure. There was some discussion of the extent to which hindsight could be taken into account. She applied a price earnings ration (PER) of 12.6 to earnings of £937,000 to reach a market capitalisation of £11.8m and a share price of £2.45. The valuer proposed a discount of 50% to take account of (i) the very low dividend payments, (ii) the lack of quotation and therefore marketability, and (iii) the very low prospect as she assessed it, of an exit by trade sale in view of the stated intention of the controlling shareholder (the Russell Trust) to maintain the Company as an independent business and safeguard the interests of employees as well as shareholders, and (iv) the fact that the latest audited accounts related to the year to 31 March 1981. The nonvoting "A" shares should be discounted by a further 5-10% to reflect their lack of voting rights.

British Venture Capital Association's guidelines suggested 30% discount where there was no prospect of exit (i.e. re-sale of the entire holding being purchased).

Lonsdale (trading as Lonsdale Agencies) v Howard & Hallam Ltd 2007 UKHL 32 at paragraph 39 was cited for the proposition that the court is not required to shut its eyes as to what actually happened which may provide evidence of what the parties were likely to have expected to happen. Gray's Timber Products Ltd v R&CC 2010 STC 782 at paragraph 49 was mentioned for the proposition that the valuation exercise had to focus on what was received in the hypothetical sale not what was given. IRC v Gray (Lady Fox's Ex) 1994 STC 360 at pages 372-3 was mentioned for the proposition that one must look realistically at the situation as at 31 March 1982. Cash & Carry v Inspector of Taxes 1998 STC (SCD) 46 was referred to for the proposition that the size of the shareholding may have a bearing on the discount.

The Tribunal concluded that the company accounts issued in October 1982 would not have been available at 31 March 1982 and that the management accounts (showing a profit before exceptional items of £1.4m) should be used. They agreed with the PER of 14. After considering discount factors applied in various cases (where a 50% discount was not uncommon), they concluded that each situation depended on specific facts and decided that in this particular case 40% was reasonable. Due to the relatively small proportion of voting and non voting shares being considered, the Tribunal concluded a purchaser would not deem any difference in voting rights to be important and therefore concluded the price should be £2.42 per share for both types of share. www.financeandtaxtribunals.gov.uk/judgmentfiles/j5332/TC00964.doc

4.7. P Mellor v HMRC (First Tier Tribunal TC00906)

Mr Mellor was a self-employed electrician who worked for various building contractors. He claimed a deduction for the cost of driving from his home to the sites where he worked, but HMRC rejected his claim.

The First-Tier Tribunal upheld Mr Mellor's contention that his home was the base of his business operations and allowed his appeal in principle (subject to agreement regarding the precise figures), applying the principles laid down in Horton v Young (CA1971, 47 TC 60) and distinguishing Newsom v Robertson, (CA1952, 33 TC 452). Consequently the expenses of travelling from his home to the building sites where he worked were allowable as a deduction.

Judge Powell noted that M could not 'have coordinated his business activities without having somewhere to receive the electrical drawings which allowed him to make quotes'.

5. VAT

5.1. VAT on membership fees - European Tour Operators' Association

The EU Sixth Directive Article 13A(1)(l) (now Directive 2006/112 Article 132(1)(l)) provides for VAT exemption of:

The relevant UK legislation is the exemption granted by Item 1(d) of Group 9 in Schedule 9 VATA:

"Item No 1

Note 5 to Group 9 qualifies this:

The Tribunal determined that in the case of the European Tour Operators Association that its principal purpose met the requirements of VATA Sch9 Group 9 item 1(d). Its principal purpose was to establish relations with the European Institutions and it gave prominence to that of making political representations on behalf of the tour operators industry. It had ancillary activities such as its desire to access funds to enable it to undertake its activities, and running networking and marketing events (for which it can charge attendance fees to raise funds). However these ancillary activities did not distract from its primary purpose. The Tribunal noted however, that Note 5 to VATA Sch9 Group 9 requires membership to be restricted wholly or mainly to persons whose business interests are directly connected with "the purposes" of the Association. The reference is to "the purposes" rather than "the primary purpose".

Thus despite the fact that its membership might principally come from those looking to access its networking and marketing events, this did not preclude VAT exemption applying to its membership charges. www.financeandtaxtribunals.gov.uk/judgmentfiles/j5339/TC00965.doc

5.2. VAT status of freshly prepared food

Food supplied for human consumption is zero rated for VAT unless it is supplied in the course of catering, or is within one of the specific exceptions to this rule not covered by an overriding exception. "Supplied in the course of catering" is further defined as being:

i) the supply of anything for consumption on the premises on which it is supplied, or

ii) the supply of hot food for consumption off the premises.

Hot food is further defined as that which has been heated for the purpose of enabling it to be consumed above ambient air temperature, and is above that temperature at the time it is provided to the customer (see VATA94 Sch8 group 1).

The First Tier Tax Tribunal's decision in the case of Deliverance Limited discussing this issue was covered In Informal of 10 February 2010. In that case, the casting vote of the chairman determined that food delivered to customers hot could only be delivered as such with the purpose of enabling the customer to eat it hot. This was despite the taxpayer maintaining that his purpose in supplying the food hot was to demonstrate its freshness rather than for the express purpose of enabling the customer to eat it hot.

The Upper Tribunal clarified that the relevant test to consider is the purpose of the supplier, not the customer and agreed with the taxpayer's contention and thus allowed the appeal (so that the hot food in this instance could be zero rated). www.tribunals.gov.uk/financeandtax/Documents/decisions/DeliveranceLtd_v_HMRC.pdf

5.3. VAT treatment of medical reports – whether disbursements or not

Barrett Goff & Tomlinson, a firm of lawyers acting for clients in personal injury cases appealed a decision (reviewed by the HMRC internal review process) that costs incurred for medical legal reports and medical records on behalf of their clients were not disbursements and were liable for VAT. The firm were supported in their appeal by The Law Society.

The firm's work could be undertaken on a no-win, no-fee basis, though in this case insurance to cover the firm's disbursements would be taken out. As part of the work required to defend their client's case, the firm would obtain medical records and expert medical reports, for which they would pay. In each case the name of the firm's client would be clearly stated on the invoice provided by the supplier of the records or report. Prior to 1 May 2007 these reports were VAT exempt within VATA Sch9 group 7 as the services of practitioners registered with the register of medical practitioners or similar organisations. Since that date the Group 7 exemption has been qualified by the requirement that the service must consist of the provision of medical care by such a person.

Article 79(c) of Directive 2006/112 provides that:

The taxable person must furnish proof of the actual amount of the expenditure referred to in point (c) of the first paragraph and may not deduct any VAT which may have been charged."

The medical reports and records obtained belonged to the individual who was the subject of the claim, and that individual could keep the report should they chose to change lawyers part way through a case.

When the firm re-charges the client for the cost of obtaining medical records / reports, the amounts invoiced for the medical records / reports are itemised separately on the bill from the cost of the services supplied by the solicitor himself. There is no profit element included in the disbursements. The client rarely, if ever, ultimately bears the cost of the medical records and reports as these are covered by recoveries from the defendant or their insurer.

HMRC contended that the medical reports were a necessary part of the services supplied by the firm. In the same way that travel costs incurred by a lawyer in connection with work undertaken for a client would be part of the lawyer's own costs incurred in providing his overall service and would be part of the taxable supply of legal services, so would the costs of obtaining the medical records and reports.

The case of De Danske Bilimporter v Skatteministeriet [2006] ECR I-4945, a decision of the Court of Justice of the European Communities, was also cited where it was held that the registration duty for cars was a disbursement by a car dealer on behalf of the purchaser and not subject to VAT. In that case the following comments were made:

Using these comments as support, the Tribunal agreed with the firm and the Law Society that the firm was acting as the client's agent in obtaining the records and report. Therefore the costs of obtaining the reports and records were a disbursement and did not get included in the value of the firm's supply of services for VAT purposes. www.financeandtaxtribunals.gov.uk/judgmentfiles/j5317/TC00949.doc

5.4. Construction of a college building

Whether the construction of a college building can be zero rated as construction for a relevant charitable purpose.

VATA Sch8 Group 5 item 2 provides that:

"The supply in the course of construction of –

a) a building ... intended for use solely for ... a relevant charitable purpose; ...

NOTES...

Wakefield College is a charity and the building in question (the SkillsXchange, used for educating students ranging in age from 14 upwards, and for other purposes) is used for a relevant charitable purpose, but HMRC contended that it was not used solely for a relevant charitable purpose and therefore did not meet the conditions for zero rating.

Wakefield College contended that much of the College's activities were non-business activities and that, even though some of its activities might be characterised as business if conducted by a differently constituted legal entity, the nature of its funding, its mode of operation and its general characteristics were such that it was not in business at all so far as the activities intended to take place at the SkillsXchange were concerned.

The building work on SkillsXchange began in May 2007 and cost around £29m. In the year ending 31 July 2008 81% of the College's income was received as direct grant funding from the LSC and the Higher Education Funding Council for England ("HEFCE"). The students include those studying for NVQs, apprenticeships, foundation degrees, degrees, and pleasure studies. Despite the fact that it receives grant income to fund its educational activities the college is permitted to charge fees to students of 19 years and older. As it can do so, in determining its grant funding it is assumed that it will succeed in doing so at a predetermined rate (37.5% in 2007-08 rising each year until 2010-11 when it will reach 50%). Under paragraph 40 of the Funding Guidance document applicable to the college, the relevant grant is reduced by that percentage whether or not it recovers any fees. In fact the College recovered less than the assumed fees and so suffered a reduction in the grant received.

The college also gains extra revenue from hairdressing (at reduced rates) provided by trainee hairdressers, a café and sales of goods such as protective clothing. There is an aggressive effort to target fee paying students in order to supplement the grant funding. Despite the fact that it could be argued the fee paying students are subsidised by the grant income, the Tribunal agreed that obtaining fee paying students in this way was a business activity. HMRC operate a concession where the amount of fee paying income is small, so that in such cases the whole activity is deemed to be charitable. The Tribunal therefore also commented on other sources of income besides fees, contending that the activities of the café and hairdressing were business activities. Some students receive a partial remission of their fees and provided that remission was not applied without regard to personal circumstances there was agreement that these fees could be regarded as nonbusiness income.

The Tribunal also concluded that the college could not be regarded as a state, regional or local government authority which controls or governs some aspect of the life of a community. It was therefore precluded from being disregarded as a business as per Directive 2006/112 article 13(1) interpreted by HMRC briefs 27/2008 and 96/2009. In conclusion the Tribunal agreed with HMRC that the construction of the building did not qualify for zero rating. www.financeandtaxtribunals.gov.uk/judgmentfiles/j5316/TC00948.doc

5.5. New HMRC toolkits

HMRC has issued new toolkits on: VAT output tax and VAT partial exemption. www.hmrc.gov.uk/agents/prereturn-support-agents.htm

6. Tax Publications

Briefing note: Keyman Insurance Policies

This briefing note discusses the tax deductibility of premiums for keyman insurance policies.

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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