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:

www.smith.williamson.co.uk/budget

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.

www.bailii.org/uk/cases/UKUT/TCC/2011/113.html

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.

www.hmrc.gov.uk/aiu/disclosure-avoidance.htm

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.

www.hmrc.gov.uk/briefs/company-tax/brief2410.htm

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.

www.tax.org.uk/media_centre/LatestNews-migrated/FormatofamendediXBRLonlineCTreturnsfrom1April2011

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:

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

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.

www.bailii.org/uk/cases/UKSPC/2008/SPC00719.html

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.

www.bailii.org/ew/cases/EWHC/Ch/2010/609.html

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).

www.bailii.org/ew/cases/EWCA/Civ/2011/304.html

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.

www.bailii.org/uk/cases/UKUT/TCC/2011/112.html

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.

www.hmrc.gov.uk/news/vat-downtime.htm

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 charge...is 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.

www.hmrc.gov.uk/briefs/vat/brief1611.htm

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.

http://www.bailii.org/ew/cases/EWCA/Civ/2011/271.html

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 Mondaq.com.

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

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