UK: Tax Update: A Round-Up of Recent Tax Issues - Monday 28th February 2011

Last Updated: 7 March 2011
Article by Richard Mannion

1. GENERAL NEWS

1.1. Agent Update

The 22nd edition of Agent Update has details of new penalties in respect of offshore non-compliance and late PAYE payments, latest guidance on the introduction of Basic PAYE Tools (formerly the Employer CD-Rom) and online PAYE forms and guidance, as well as news on the recently launched HMRC Twitter account.

www.hmrc.gov.uk/agents/update22.pdf

2. PRIVATE CLIENTS

2.1. Pensions: Reduction of the Annual Allowance

HMRC has published amendments to the draft guidance on the reduced annual allowance for pension savings that was published on 14 October 2010. The amendments include the following new sections on changes to the special annual allowance and the effect of pension input periods that end before 6 April 2011.

The three year carry forward rule

The revised guidance complies with the draft legislation in that it says the individual must have been a member of a registered pension scheme to have an unused annual allowance to carry forward from an earlier year. The original guidance had gone further and implied that there needed to have been actual pension savings.

Is there any way I can alter the tax charge, for example by undoing the pension contribution?

The guidance confirms that it is not possible to avoid the annual allowance charge simply by undoing the contribution. The reduced annual allowance applies to any pension saving in pension input periods ending on or after 6 April 2011.

Will there be any changes to the special annual allowance?

The guidance now includes a note that there will be no further changes to the special annual allowance rules (anti-forestalling) introduced in Finance Act 2009. However, these rules will be repealed and will no longer apply to pension savings made after 5 April 2011.

www.hmrc.gov.uk/pensionschemes/annual-allowance/guide.htm

2.2. CGT Payment by instalments

A client disposed of his shares in a company. The consideration was to be received by instalments no earlier than the date of disposal of the asset, extended over a period exceeding 18 months and continued beyond the date on which the tax would otherwise be due and payable, therefore qualifying under s280 TCGA 1992 for payment by instalments.

Section 280 used to be covered by a hardship test, but this was amended by Finance Act 1996 Sch20 (65) to remove any reference to hardship. HMRC state that "the right to pay tax in instalments if the conditions in CG14910 apply is now to be exercised solely at the option of the taxpayer. The amount of the instalments is still directed by the Board and should follow CG14912."

Paragraph CG14912 of the HMRC CGT manual says: "The vendor of an asset seeking relief under Section 280 TCGA will normally be expected to pay instalments of tax equal to 50 per cent of each instalment of consideration due under the contract until the total tax liability has been discharged. (The 50 per cent calculation is applied to the full amount of each consideration instalment due to the vendor and is not to be adjusted for any expenses incurred in selling the asset, whether or not these are allowable deductions under section 38 TCGA in computing the vendor's chargeable gain.)"

We calculated the tax instalments so that the client paid 50% of each consideration instalment in tax until the tax due was fully paid, in line with CG14912.

HMRC provide little guidance in respect of how to physically make the claim. Consequently we claimed for the treatment to apply on our client's tax return and attached a schedule detailing the due dates and the amounts of each instalment, believing this to be more efficient than writing a letter due to the current 6 to 8 week post turn-around time. However we then received a call from the debt recovery department chasing payment of the full amount of CGT. It transpired that the instalment plan had not been processed and HMRC was now seeking to charge interest on the 'overdue' payment.

The moral of the story would seem to be that it is not enough to assume that HMRC will look at the information on the tax return and an explanatory letter should be sent in addition.

With regard to the charge to interest we have written to HMRC referring them to their Self-Assessment Manual which states that "interest on unpaid tax is charged on each instalment only if it is paid late and will run from the date when the instalment was due until the date of payment."

3. PAYE AND EMPLOYEE BENEFITS

3.1. Disguised Remuneration - Frequently Asked Questions and Answers

The period of consultation on the draft Finance Bill 2011 legislation covering the Disguised Remuneration measure ended on 9 February 2011.

A number of main themes emerged from consultation responses and HM Revenue & Customs (HMRC) has published a series of Frequently Asked Questions and Answers. These FAQs cover the main issues raised by consultation respondents and indicate areas where changes will be made to the draft legislation.

www.hmrc.gov.uk/budget-updates/disguised-remuneration-faqs.pdf

The accompanying press release says that HMRC is working through other issues raised by consultation respondents regarding Disguised Remuneration and will publish an expanded set of FAQs covering the measure with the Finance Bill 2012, or earlier if possible. It is not clear whether the reference to 2012 should in fact read 2011.

As expected HMRC's response to a number of the points raised on the wide application of the rules, was to indicate that there will be some amendment to the rules before finalisation to exclude unintended consequences. However the question and response on relief for the repayment of a loan was as follows:

Q. There don't appear to be any relieving provisions if a loan is repaid. What is the tax position where a loan, which has been subject to PAYE on the full amount advanced, is repaid in full?

A: The anti-forestalling rules allow credit for repayment of any part of a loan made in the period from 9 December 2010 to 5 April 2011 (inclusive). Where such a loan is made the Part 7A charge will be based on the amount of the loan less any repayments made before 6 April 2012. However, there is no provision for credit to be given for the repayment of any loan made by a third party on or after 6 April 2011.

3.2. HMRC and coding for the 50% tax rate

The PAYE tax tables include details of the new "D1" tax code intended to provide for accounting for tax at a flat 50% additional rate of tax.

Calls to HMRC payroll advice and agent dedicated lines regarding the operation of the "D1", queries have been met with uncertainty as to what this is and when and how it is to be applied.

The mechanics should hopefully be in place as the HMRC's software developers' area includes details of the new coding.

The 2011/12 tables can be downloaded from the HMRC website via the following links:

www.hmrc.gov.uk/taxtables/2011/calc-tables.pdf

www.hmrc.gov.uk/taxtables/2011/tables-b-d.pdf

3.3. Potential overpayments of Class 1A National Insurance

HMRC has issued the following statement regarding mixed use benefits and partial deductions under sections 363 to 365 ITEPA 2003:

"Background

Where an employer provides a director or an employee with a benefit in kind that has mixed use - i.e. the director or employee uses the benefit for both private and business use - the Income Tax (Earnings and Pensions) Act 2003 (ITEPA) may allow a deduction from taxable earnings in respect of the business use

However, such deductions are disregarded when calculating the amount of general earnings on which Class 1A NICs are due. Class 1A NICs are therefore payable on the full cost of the benefit chargeable, before deduction, to income tax under ITEPA.

The exception to this is where the benefit is used solely for business purposes and ITEPA allows a deduction of the full cost of the benefit. Where this is the case, there is no liability to pay Class 1A NICs.

An appeal was heard last year by the First-tier Tribunal (Tax Chamber) in which the appellant claimed that partial deductions under section 365 of ITEPA were also deductible for Class 1A NICs for tax years from 2003-2004 to 2005-2006. The Tribunal judge found in favour of the appellant. HMRC consequently now accepts that partial deductions under sections 363 to 365 of ITEPA are not disregarded in the assessment of earnings liable to Class 1A NICs for the 2003-2004 to 2005-2006 tax years.

Legislative history and appeal against Class 1A NICs charge

Liability to pay Class 1A NICs arises under section 10 of the Social Security Contributions and Benefits Act 1992 (SSCBA). When Class 1A NICs were extended from 6 April 2000 to cover most benefits in kind a new section 10 was introduced.

Paragraph 7 of the new section 10, though allowing for no Class 1A NICs liability where there was a fully matching deduction, set out the specific deductions allowed under the Income and Corporation Taxes Act 1988 (ICTA) that were to be disregarded when assessing Class 1A NICs.

The introduction of ITEPA, which replaced ICTA, brought consequential amendments to paragraph 7 of section 10 of ITEPA, and the introduction of paragraphs 7A and 7B. Those amendments were intended to mirror the previous paragraph 7 so that all of the deductions that were previously disregarded continued to be disregarded for Class 1A NICs.

A query received by HMRC raised some doubt as to whether the new legislation did replicate the previous version. Specifically, it was suggested that deductions allowed under sections 363 to 365 of ITEPA were no longer to be disregarded when assessing liability to pay Class 1A NICs.

Although HMRC's position was that the overall application of the new legislation did achieve the intended policy, a further amendment was made to put beyond doubt the fact that the new legislation replicated the original provisions for mixed use benefits. This amended inserted, with effect from 6 April 2007, sections 363 to 365 of ITEPA into the excluded provisions listed in paragraph 7B of section 10 of SSCBA.

HMRC's position on the legislation in force from 6 April 2003 to 5 April 2006 was challenged and the case of Antique Buildings Limited and The Commissioners for HMRC (Appeal number: TC/2009/10182) was heard before the First-tier Tribunal (Tax Chamber).

Tribunal decision and current position

The appellant, Antique Buildings Limited, claimed that partial deductions allowed by section 365 of ITEPA for tax years from 2003-2004 to 2005-2006 were also deductible for Class 1A NICs. The Tribunal judge's decision (decision number TC 00408) found in favour of the appellant and allowed the appeal.

HMRC considered its position and decided not to seek permission to appeal against the decision. This means that HMRC now accepts that, for tax years from 2003-2004 to 2005-2006, partial deductions allowed by sections 363 to 365 of ITEPA are not to be disregarded when calculating liability to pay Class 1A NICs.

A refund can therefore be claimed in any case where Class 1A NICs have been calculated and paid without taking into account a deduction allowed by any of sections 363 to 365 of ITEPA.

It must be noted however, that this applies only to deductions under sections 363 to 365 of ITEPA and only to tax years from 2003-2004 to 2005-2006. The legislation prior to 6 April 2003 and from 6 April 2006 is clear in disregarding partial deductions for tax when calculating earnings for Class 1A NICs.

How to claim a Class 1A NICs refund

If you think that you have overpaid Class 1A NICs because you did not take into consideration deductions allowed by sections 363 to 365 of ITEPA you should write to:

HM Revenue and Customs
Customer Operations PAYE Employer Office
BP4009
Chillingham House
Benton Park View
Newcastle
NE98 1ZZ

Information to be provided:

  • Why you think you have overpaid
  • The tax year(s) for which you are claiming a refund
  • Evidence of the amount paid
  • The amount you are asking to be refunded
  • Time limit for making a refund claim

Refund claims for the 2003-2004 year should generally be made to HMRC no later than 5 April 2011.

HMRC can only consider claims made after that date if the applicant can show that he had a reasonable excuse for not making the application in time and that he applied without unreasonable delay after that excuse ceased.

Claims for 2004-2005 must generally be made by 5 April 2012 and claims for 2005-2006 by 5 April 2013."

4. BUSINESS TAX

4.1. Free tools to help SMEs get their business records ship-shape

HMRC has issued four free tools to assist small businesses for keeping records. They have been produced in advance of the launch of HMRC's new Business Record Checks programme later this year, which will impose penalties for significant record-keeping failures.

The four tools are as follows:

  • Keeping records for business - what you need to know: a basic guide with a helpful list of where to get more information. www.hmrc.gov.uk/factsheet/record-keeping.pdf
  • A general guide to keeping records for your tax return: detailed guidance on record-keeping covering what type of records you may have to keep, common problems and examples for different types of business. www.hmrc.gov.uk/sa/rk-bk1.pdf
  • Set up a basic record-keeping system: with examples of spreadsheets and information about setting up a record-keeping system. www.businesslink.gov.uk/recordkeeping
  • Find out what records you should be keeping: looks at the records you need to keep and assesses how well you are keeping them. If you are thinking of starting business the tool provides you with a checklist. If you are established it will give feedback and advice on improvements you may need to make. www.businesslink.gov.uk/recordkeepingcheck

4.2. Thin Capitalisation Group Litigation Order

The Court of Appeal has overturned the High Court's ruling on the group litigation order claims that the UK thin capitalisation provisions were in breach of EU law before April 2004. However Lady Justice Arden disagreed with the other two judges on the point concerning whether the arms length test was sufficient to demonstrate that the terms of any particular provision were commercial and justifiable. Also any questions relating to the right to 'Woolwich' remedies on claims was deferred as this is to be heard by the Supreme Court in another case.

The High Court decision was covered in Informal of 29 November 2009 at item 2.9, but since that decision the Court of Appeal commented there were two other cases that should be taken into account. On 21 January 2010 there was a further development in the jurisprudence of the ECJ, when judgment was given in Case C- 311/08 Société de Gestion Industrielle SA (SGI) v État Belge [2010] ECR 1-0000 (referred to below as SGI), on the compatibility of Belgian thin cap legislation with Article 43 (freedom of establishment). In addition the judgment of the Grand Chamber of the ECJ in Case C-231/05 Proceedings brought by Oy AA [2008] STC 991 [2009] 3 C.M.L.R. 1 ((referred to below as Oy AA), also needed to be considered.

Both these cases contended that it was justifiable for member states to have legislation with the objectives of ensuring the balanced allocation between Member States of the power to tax, together with the prevention of tax avoidance, that would otherwise be an unlawful interference with the freedom of establishment guaranteed by Article 43. Also these cases indicate that the application of an arm's length test is appropriate and sufficient for this purpose, and is a proportionate measure to achieve those objectives.

In the view of Lord Justice Stanley Brunton, the High Court's decision was inconsistent with the judgments of the ECJ in Oy AA and SGI. The commercial justification that the taxpayer companies could have put forward for their transactions was that their terms were those which would have been agreed between unconnected parties. Since this was the test applied by the UK legislation, the fact that the taxpayer could not put forward some other commercial justification did not render the UK legislation incompatible with their or their parent companies' freedom of establishment. The taxpayers' transactions in issue did not satisfy the arm's length test, and the UK thin cap legislation was appropriately and lawfully applied to them.

Lord Justice Rimmer agreed with Stanley Brinton LJ. However, Lady Justice Arden disagreed with both these judges on whether the arms length test was a suitable test to apply for commercial justification. In her opinion neither of the above cases overturned the decision in (Case C-324/00) Lankhorst-Hohorst Gmbh v Finanzamt Steinfurt, which concerned a situation that could not apply the arms length test because of the parlous state of the entity concerned. In circumstances where it was not possible to apply the objective test such as the arms length test. Lady Arden's view was that the taxpayer had to be given the right to demonstrate the transactions were commercial in the circumstances. It would then be up to the National Court to determine if this is justifiable if disputed by the Revenue authority and appealed by the taxpayer.

www.bailii.org/ew/cases/EWCA/Civ/2011/127.html

4.3. EU consultation on financial sector taxation

The European Commission has opened a public consultation on financial sector taxation. The questions relate to possible Financial Transaction Taxes (FTT), Financial Activities Taxes (FAT) and bank levies but not to the use of the revenues derived from such sources. The 57-question paper starts off with asking general questions on the contribution of the financial sector or some of its activities to the economic crisis and whether new taxes on the sector or particular activities should be introduced, subsequently addressing specific designs of FTTs (broad-based vs. narrow-based), FATs (addition method, rent-taxing or risk-taxing) and levies (assetbased or risk-based) and their expected effectiveness.

http://ec.europa.eu/taxation_customs/common/consultations/tax/2011_02_financial_sector_taxation_en.htm

4.4. HMRC manual updates

HMRC's Business Income manual has a new section on Domestic Microgeneration covering:

  • Renewables obligation and feed-in tariffs
  • Income tax exemption for domestic microgeneration
  • Renewables obligation certificates for domestic microgeneration.

www.hmrc.gov.uk/manuals/bimmanual/bim40500.htm

4.5. A new approach to financial regulation

HM Treasury has issued a further consultation on financial regulation. The Government's reforms focus on three key institutional changes:

  • first, a new Financial Policy Committee (FPC) will be established in the Bank of England, with responsibility for 'macro-prudential' regulation, or regulation of stability and resilience of the financial system as a whole;
  • second, 'micro-prudential' (that is, firm-specific) regulation of financial institutions that manage significant risks on their balance sheets will be carried out by an operationally independent subsidiary of the Bank of England, the Prudential Regulation Authority (PRA); and
  • third, responsibility for conduct of business regulation will be transferred to a new specialist regulator, which has had the working title 'consumer protection and markets authority'. The Government has now finalised the name of this body as the Financial Conduct Authority (FCA); the FCA will have responsibility for conduct issues across the entire spectrum of financial services.

The consultation document indicates there will be a fundamental change in the way that the new regulatory authorities carry out their functions, to deliver a more judgement-led, focused and effective regulation of the financial sector. These reforms will be implemented through primary legislation amending the Financial Services and Markets Act 2000 (FSMA). This approach, which will involve modifying, adapting, supplementing, and in some cases replacing the current legislative framework, will allow the Government to implement changes more quickly, while minimising the cost and disruption to firms that would arise from repealing FSMA and starting with an entirely new Bill.

A White Paper will be issued in the spring, including a draft Bill for Parliamentary pre-legislative scrutiny.

The consultation also comments that the FSA is on track to make the transition to the new regulatory structure at the end of 2012. In April 2011 the FSA will, as planned, replace its current Risk and Supervision business units with a prudential business unit and a consumer and markets business unit. Following that, the focus will be on progressively changing the regulatory processes (insofar as the FSA's current statutory remit allows) so that the FSA can begin to operate distinct prudential and conduct approaches to regulation. Work is underway to complete the more detailed design of the operating models for the PRA and the CPMA. The FSA and the Bank will continue to work closely together as the reform programme progresses.

www.hm-treasury.gov.uk/d/consult_newfinancial_regulation170211.pdf

4.6. SDLT and prospective change to filing requirements

The Statutory Instrument implementing the requirement to include unique identifier details for the lead purchaser (see Informal of 21 February item 4.5) has been published. The new forms will be available from April 2011, though compliance requirements until 4 July 2011 can be met by using either the old or the new forms.

www.legislation.gov.uk/uksi/2011/455/made

4.7. EU report on tax influences on climate change technologies

The EU has produced a study report considering the importance of taxation as a spur for innovation in technologies aimed at CO2 energy reduction and other low carbon energy projects. It highlights other research showing that:

  • substantial increases in energy taxation can drive forward very substantial increases in innovation;
  • tax induced innovation is significantly higher than the price induced innovation;
  • the speed and size of innovation effects from energy/carbon taxes depend on a number of well defined characteristics of the products and processes affected by the tax.

It concludes that global or at least regional tax rates should have broader and stronger effects on innovation than isolated tax rates in a few countries;

Some patience is needed in reaping the benefits of tax driven innovation with the speed depending on the length of product and innovation cycles. It is essential to establish a long term credibility of maintained high level of tax rates to fix incentives for investment.

There is also a discussion of the complementary effect of R&D incentives and taxation to stimulate development in this area.

http://ec.europa.eu/taxation_customs/resources/documents/common/publications/studies/taxation_energy_innov.pdf

5. VAT

5.1. VAT and business entertainment expenses

HMRC Brief 09/11 announces a four week consultation on draft legislation amending the VAT treatment of business entertainment expenses. The change removes the restriction of the right to recover VAT incurred on the business entertainment of overseas customers. The draft statutory instrument indicates it will come into effect on 1 May 2011.

www.hmrc.gov.uk/si/draft-si-vat-input-tax.pdf,

www.hmrc.gov.uk/briefs/vat/brief0911.htm

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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