UK: Weekly Tax Update - Monday 28 March 2011

Last Updated: 1 April 2011
Article by Richard Mannion

1. Private Clients

1.1. Budget – March 2011

Our 2011 Budget Brochure and other Budget related information can be found our website:

2. Private Clients

2.1. Dr Andreas Helmut Tuczka v Revenue and Customs Commissioners

The Upper Tribunal has confirmed the decision of the First Tier Tribunal that Dr Tuczka was ordinarily resident in UK – see detailed analysis in Informal dated 22 February 2010.

3. IHT & Trusts

3.1. IHT DOTAS guidance

HMRC has published its guidance on the requirements, with effect from 6 April 2011, to disclose Inheritance Tax arrangements that seek to avoid IHT charges associated with transfers of property into trust. This consists of a flow chart, directions to HMRC's other DOTAS guidance and a note on IHT implications including grandfathered schemes. The grandfathered schemes (for which disclosure is not required) include:

A: Arrangements where property does not become relevant property. Relevant property is defined in s58(i) IHTA 1984 as settled property in which no qualifying interest in possession subsists, subject to certain exceptions which include property held on charitable trusts, a qualifying interest in possession and a disabled person's interest.

B: Arrangements that qualify for relief/exemptions.

C: The purchase of business assets with a view to transferring the assets into a relevant property trust after two years.

D: The purchase of agricultural assets with a view to transferring the assets into a relevant property trust after the appropriate period.

E: Pilot Settlements.

F: Discounted Gift Trusts/Schemes.

G: Excluded property trusts; disabled trusts; employee benefit trusts which satisfy s. 86 and a qualifying interest in possession trust.

H: Transfers on death into relevant property trusts.

I: Changes in distribution of deceased's estates.

J: Transfers of the Nil Rate Band every seven years.

K: Loan into trust.

L: Insurance Policy trusts.

M: Making a chargeable transfer followed by a potentially exempt transfer.

N: Deferred shares.

O: Items of national importance.

P: Pension death benefits.

Q: Reversionary Interests.

R: Transfers of value.

Examples of arrangements which would not be excluded from disclosure include arrangements where property becomes relevant property and an advantage is obtained in respect of the relevant property entry charge:

  • where the claim that there is no transfer of value relies on a series of transactions where, in the absence of all other intervening steps, there would have been a transfer of value and a relevant property entry charge;
  • where reliefs and exemptions are used in such a way that the arrangements are not covered by the grandfathering rule (Regulation 3);
  • where an individual makes a potentially exempt transfer to another person and the arrangements are such that the subject matter of the transfer becomes relevant property then, unless the arrangements are covered by the grandfathering rule, disclosure will be required.

4. Business tax

4.1. Ending of concessionary treatment

For late filing of corporation tax returns, employer's and contractors end of year returns.

HMRC has issued a reminder in R&C Brief 24/10 that the late filing concession (ESC B46) ends on 31 March 2011. The concession permitted the filing of Company Tax returns or employers' and contractors' (Construction Industry Scheme) end-of-year returns, without a late filing penalty, provided they were received by the last working day within seven days of the filing date.

From 1 April 2011, company tax returns for accounting periods ending after 31 March 2010 must be filed online. All forms P35 and P14 must already be filed online, and HMRC no longer accept paper returns from the majority of customers. Contractors are no longer required to file end-of-year Construction Industry Scheme returns.

4.2. iXBRL and filing of amended returns

The CIOT has discussed online filing of amended corporation tax returns with HMRC.

There is currently no requirement to submit amendments to returns online and this will not change at 1 April 2011. As the iXBRL format for accounts and computations becomes compulsory from 1 April 2011, the format for amendments to CT returns from that date will need to be:

  • paper; or
  • online in full iXBRL, including the accounts and computations plus a CT600 return.

CIOT appreciate that some of their members may prefer to submit amendments online yet not in iXBRL format (e.g. as PDF) where the original accounts and computations were not produced in iXBRL format. CIOT understand that HMRC decided that it was not cost-effective to build in such functionality as demand for such a service is likely to be temporary and the paper option is available.

4.3. Northern Ireland corporation tax

The Government has published a paper on devolving corporation tax rate powers to the Northern Ireland Assembly in order to enable it to compete effectively with the lower rates available in the Republic of Ireland.

Northern Ireland has its own unique set of circumstances, not least a land border with the Republic of Ireland with one of the world's lowest corporation tax regimes, and the implications of a lower Northern Ireland corporation tax rate need to be examined on their own merits. Experience from the implementation of the Calman Commission's recommendations on tax devolution for Scotland suggests the complexities, including legislative implications, associated with devolving a separate rate of corporation tax to the Northern Ireland Assembly mean this would realistically take some years to implement.

In Northern Ireland provision has already been made available to enable the Northern Ireland Executive to introduce new Enterprise Zones with superfast broadband, lower taxes and low levels of regulation and planning controls, to be developed with the new Local Enterprise Partnerships, and with all business rates receipts to be held locally.

Although the Republic of Ireland enjoys a very low rate of corporation tax on trading profits (12.5%), its tax rate on non-trading profits is, at 25%, higher than the rate will be in the UK. The Republic's corporation tax system differs from the UK's in respects other than headline corporation tax rates, which may result in companies paying less tax than the headline rate implies. In addition to an entirely different system of reliefs and allowances, significant differences between the corporation tax systems in the UK and the Republic relate to rules governing Controlled Foreign Companies, transfer pricing, thin capitalisation and the taxation of dividends. Thus a reduction in corporation tax rate for Northern Ireland to match the rate in the Republic of Ireland may still mean Northern Ireland is at a disadvantage. Nevertheless a reduction in corporation tax rate to 12.5% (apparently on both trading and non-trading profits) when the rest of the UK has a main rate of corporation tax of 23% is expected to increase investment in Northern Ireland (both domestic and foreign) by 6% annually (representing an increase of between £150m and £240m in the first year).

EU rules require that the measure must be adopted by the Northern Ireland Assembly without influence from the UK Government, and that Northern Ireland bear the full consequences of the change (which would mean an adjustment to the block grant from the UK Government to Northern Ireland). All impacts resulting from behavioural change, included tax motivated incorporation (unincorporated businesses incorporating to take advantage of the lower rate of corporation tax compared to income tax), would need to be Factored into the Government revenue implications. This is discussed in the document.

Further details of the proposals can be found at:

4.4. Bayfine UK – group relief and UK/US double tax relief

The Court of Appeal has reversed the main decision of the High Court in Bayfine UK (see Informal 29 March 2010).

Morgan Stanley Dean Witter (MSDW) had two UK tax resident companies which entered into equal and opposite interest rate arrangements based on the return of a portfolio of US Treasuries in 2000. The counterparty in both cases was Bank of America located in the US. One of the MSDW companies made a loss of £119,846,300, the other a profit of a similar amount. The profitable company was charged to US tax at rates of 35% and the loss making company was eventually sold at a loss so that the loss was available for group relief against other profits of other MSDW companies. The profit making company claimed double tax relief in the UK for the US tax suffered.

In 2008 the Special Commissioners held (in relation to the profit making company) that no unilateral tax relief was due, the UK had first taxing rights, that tax was due on the profit making company in the UK, and that therefore any applicable double tax relief had to be dealt with by application against US tax liabilities. They held that the source of the profits was the UK.

The Special Commissioners came to the conclusion that the US tax had nothing to do with the income arising in the US because of the situs of the Second Debt Contract; it arose solely because the US disregarded the UK resident company (Bayfine UK Ltd - BUK) for Federal Income Tax purposes. On that basis they concluded that BUK's profit arose in substance in the UK regardless of the situs of the Second Debt Contract and the fact that the charge was under Sch D Case III. Therefore they concluded the requirements of ICTA s790 (4) were not satisfied and unilateral relief was not available to BUK for the US tax paid by its US resident holding company.

The High Court agreed with the company's view that the source of income was the US and that unilateral relief was therefore due in the UK for US tax suffered.

The Court of Appeal considered three issues:

  • Issue 1: Is HMRC bound to give relief to BUK under the provisions of the Treaty? – No.
  • Issue 2: If not, is HMRC bound to allow unilateral relief under ICTA s790? – No.
  • Issue 3: Was relief restricted by ICTA s795A to the extent that Bayfine DE Inc (BDE – BUKs US parent company) could take steps to reclaim UK tax paid in the US? – No.

Concerning issue 1:

The opening words of art 1(4) of the UK/US double tax treaty ("Nothing in paragraph (3) of this article shall affect the application by a Contracting State of.... Article 23 (elimination of double taxation)....") are intended to achieve a particular outcome and are not descriptive of the manner in which that outcome is to be achieved. Under art 1(3), a Contracting State is entitled to depart from the Treaty but only on terms that the specified outcome is attained. That outcome is that there should be no interference with the operation of certain articles, including art 23. Since the focus is on outcome, and not on means of achieving that outcome, the expression must be one which is capable of being achieved by different means according to the outcome: indeed that might have been the reason for specifying the outcome rather than prescribing the means. The Court of Appeal therefore agreed with the Special Commissioner's conclusion on its operation, that HMRC was not bound to give relief under the Treaty in the situation considered.

Concerning issue 2

The Court of Appeal agreed with HMRC that as tax was payable in the US and under the Treaty BUK was permitted to claim relief, relief could not be claimed under the unilateral relief provisions of ICTA s790 (see TIOPA s9 and s11; see also TIOPA s18 and 25). Unilateral relief under that provision would only be available to BUK if BDE was not entitled to treaty relief. However it would not be available if BDE was entitled to treaty relief but treaty relief was denied by a provision of the treaty.

Concerning issue 3:

Even though issue 3 did not arise on the basis of the conclusions in issues 1 & 2, the Court of Appeal agreed with part of the taxpayer's contention that it would be unreasonable for HMRC to expect that a UK subsidiary should be able to ensure that its US parent made a claim in the US for credit for UK tax paid (ICTA s795A, now TIOPA s33).

4.5. Budget 2011 – R&D tax credit repayment rate

Where a SME applies for a tax credit repayment of R&D loss relief, this is calculated at 14% of the surrenderable loss (a maximum of 175% of qualifying expenditure capped by the level of PAYE and NIC paid). This translates into a maximum of 24.5% (175% x 14%).

HMRC has confirmed the limit of repayment under EU state aid rules is 25% of the available relief, so when the new increased rate of 200% becomes effective on 1 April 2011, the rate applied to repayment claims will drop from 14% to 12.5% - thus limiting the repayment to 25% of the loss claim, subject to the PAYE/NIC payment cap.

5. VAT

5.1. VAT and bad debt relief

The Upper Tribunal has considered whether reference to the ECJ should be made in a VAT dispute between GMAC and HMRC concerning bad debt relief.

The issues and parallel questions are these:

  • Were the insolvency condition and the passing of title condition in domestic bad debt relief provisions compatible with the derogation permitted by Article 11C1? ("the Compatibility Issue")? The two limbs of this issue raise distinct, albeit similar, points in relation to the two conditions.
  • To what extent were GMAC's directly enforceable rights under that Article to be reduced by the benefit it received under the Cars Order in relation to a connected transaction? ("the Windfall Issue")?
  • Was GMAC out of time to make the bad debt relief claims? ("the Time Limit Issue")?

GMAC appealed against the referral of questions to the ECJ on the basis that they could be decided on existing case law but the Upper Tribunal rejected the appeal. In the opinion of the Upper Tribunal the first two points should be referred to the ECJ. In their opinion the third issue (the time limit issue) could be decided based on existing case-law, but the Tribunal did not prevent HMRC from making a later appeal to refer this question to the ECJ pending the outcome of the first two points.

5.2. HMRC VAT online services

The VAT online service will be unavailable between 07.00 on 4 April and 06:00 on 6 April 2011. Taxpayers will not be able to submit a VAT Return, set up a Direct Debit or view their account online during this period. HMRC introduces major IT projects in two key delivery cycles each year. Changes for the new tax year are usually made in April, and projects that deliver non-tax year related change are generally delivered in October. Unfortunately, rescheduling these releases is not an option as HMRC has to change products to reflect the new income tax year and legally cannot make those available until the morning of the 6 April.

In their "What's new" announcement, HMRC are therefore recommending that, if an online VAT return has a due date of 7 April, the return should be submitted before 4 April to ensure that the due date is met. If this cannot be done then the return should be submitted as soon as possible after the service resumes on 6 April. If a return is filed a day or two late after 7 April because a taxpayer is unable to access the systems HMRC will adopt a light touch approach.

This approach means that no tax filer will be penalised for a late return or direct debit payment if this is due to HMRC systems being unavailable during the period before the 7 April due date.

5.3. Legislation of Extra Statutory Concession on VAT grouping

The Government intends to legislate to give statutory effect to ESC 3.2.2 and will commence a technical consultation with stakeholders in May 2011.

ESC 3.2.2 was brought in to ensure that the anti-avoidance provision was limited to removing the tax advantage from such structures. The following is an extract from ESC 3.2.2:

'...the amount of the tax calculated with reference to the value of the supply by the overseas member to the UK member. By concession, the value for calculating the tax charge may be reduced to the value of the Schedule 5 services purchased by the overseas group member, provided that the group is in a position to provide evidence in the UK of the value of those services, and that those services have not been undervalued.'

The ESC works by restricting the tax charge to the value of reverse charge services bought in by the overseas member. These services were listed in Schedule 5 VAT Act 1994.

On 1 January 2010 the Place of Supply of Service rules changed. The general rule determining where a supply was made for business to business transactions changed from the place where the supplier belongs to where the customer belongs. As a result of this change, Schedule 5 became redundant and was repealed.

Where a group makes use of this ESC, it should be applied in a way that maintains its intended effect. To achieve this, the reference to Schedule 5 should be read as a reference to the new general rule for supplies to businesses, in VATA 1994 s7A(2)(a). The ESC will continue to allow VAT groups to value the tax charge by reference to the services the overseas member has bought in that would now be treated as subject to UK VAT if the UK group member bought them direct. Evidence of the value of the services bought in, and that they have not been undervalued, will still be needed.

5.4. Bankruptcy orders and VAT

The Court of Appeal has reinstated a bankruptcy order in relation to the non-payment of VAT due on legal work on behalf of asylum and immigration seekers.

As a result of non payment of VAT due on submitted VAT returns HMRC applied for the bankruptcy of a solicitor practising in the field of asylum and immigration law. After not attending the bankruptcy hearing the solicitor attempted to amend the errors in the returns for VAT which was not technically due, however the first amendment was rejected on its merits, and the second was rejected as out of time. The High Court overturned the bankruptcy order on the basis that under the legislation in force at the material times the VAT returns did not give rise to a debt as submitted by HMRC.

The Court of Appeal has reinstated the bankruptcy order for the following reasons:

  • The submission of the VAT returns creates the liability for the amount declared.
  • As the voluntary disclosures seeking to amend the returns were both rejected, it was not open to the High Court to determine that the VAT returns were incorrect in amount.
  • The taxpayer had failed to demonstrate at the time of the bankruptcy order that any grounds existed for the order not to have been made.

6. Tax Publications

NTBN173 - UK Resident Property Companies

This briefing note covers UK tax issues for the UK resident corporate property investor to consider.

NTBN174 - Corporate non-UK Resident Property Investors

This briefing note covers UK tax issues for the non-UK corporate property investor to consider.

NTBN175 - Budget 2011 – UK Tax Changes affecting non-UK domiciliaries

This note provides a summary of the UK tax changes affecting non-UK domiciliaries.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Richard Mannion
In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.