UK: Weekly Tax Update – Monday 4th April 2011

Last Updated: 7 April 2011
Article by Richard Mannion

1. General News

1.1 New regime for penalties for late filing and late payment of tax

HMRC has issued a reminder about the new penalty regime for late filed tax returns and late payment of tax as follows:

"The penalties for filing your tax return late are:

  • Day one: you will be charged an initial penalty of £100, even if you have no tax to pay or you have already paid all the tax you owe
  • Three months late: you will be charged an automatic daily penalty of £10 per day, up to a maximum of £900
  • Six months late: you will be charged further penalties, which are the greater of 5 per cent of tax due or £300
  • Twelve months late: you will be charged yet more penalties, which are the greatest of 5 per cent of tax due or £300. In serious cases you face a higher penalty of up to 100 per cent of the tax due.

Penalties for paying your tax late are:

  • Thirty days late: you will be charged an initial penalty of 5 per cent of the tax unpaid at that date
  • Six months late: you will be charged a further penalty of 5 per cent of the tax that is still unpaid
  • Twelve months late: you will be charged a further penalty of 5 per cent of the tax that is still unpaid

These penalties are on top of the interest that HMRC will charge on all outstanding amounts, including unpaid penalties, until your payment is received.

Penalties will be automatically sent to all Self Assessment taxpayers who do not file and pay on time. Taxpayers will be able to appeal against any penalty on the grounds that they have a reasonable excuse for not complying on time. All penalty notices will include an appeal form and details on how to appeal."

This means that a taxpayer who was one year late in filing his return but who had paid all the tax on time would face penalties as follows:

  • Day one: an initial penalty of £100
  • Three months late: an automatic daily penalty of £10 per day, up to a maximum of £900
  • Six months late: an additional £300 or 5% of any tax liability which would have been shown on the tax return, whichever is higher
  • Twelve months late: a further £300 or 5% of any tax liability which would have been shown on the tax return, whichever is higher.

1.2 Finance Bill 2011

The Government published the updated Finance Bill and explanatory notes on Thursday 31 March 2011.

1.3 Working Together Bulletin 42

HMRC has issued the latest Working Together bulletin which includes the top five open issues (delays in dealing with correspondences, time taken for HMRC correspondence to reach taxpayers, call backs, debt management issues and coding of underpayments).

1.4 Tax Consultation Framework

The Government has issued the responses to its consultation together with an updated framework for future consultations.

1.5 Tax Consultation Tracker

An updated consultation tracker has been published following publication of Finance Bill 2011. The consultation on mandatory pooling of fixtures (listed under the corporation tax heading) is scheduled for 31 May 2011, as is a consultation on clarifying capital allowances for feed-in tariff businesses. June 14 will see the consultation on debt cap rules. In June there will be a consultation on a tax transparent fund vehicle and summer 2011 will see consultation on giving further support to seed investment through EIS. The full list can be found at:

1.6 MRC toolkits

Two further toolkits have been added: CGT for shares and Income Tax Losses. The full list of toolkits can be found at:

1.7 HMRC Brief 17/11 - guidance on Special Relief

From 1 April 2011, equitable liability will be replaced by a new statutory "special relief".

Previously, where taxpayers had no statutory remedy to adjust an excessive assessment or displace a determination because the time limit for submitting a return had passed, HMRC would in some cases be prepared not to pursue their legal right to recover the full amount due. This practice was known as 'equitable liability'. The purpose of the equitable liability concession was to provide a 'relief of last resort' for certain taxpayers, particularly those vulnerable taxpayers who are unable to fully engage with the tax system for a number of different reasons.

From 1 April 2011, 'equitable liability' will be replaced by a new statutory 'special relief'. HMRC has now published its guidance to officers regarding the new relief.

HMRC will no longer accept new requests for equitable liability but will still continue to consider those claims for equitable liability received before that date.

2. Private Clients

2.1 EIS and VCT - Frequently asked questions

HMRC has issued a series of questions and answers on the EIS and VCT reforms announced in the Budget.

2.2 Husband and wife transfers and share identification - Tax year planning after the year end?

A transfer between husband and wife (or civil partners) is treated as nil gain/nil loss under s58 TCGA 1992. The acquisition of the shares by the acquiring spouse and the disposal by the disposing spouse is subject to the normal share identification rules in s106A TCGA 1992. In other words a disposal of shares is matched first to acquisitions on the same day, then in the next 30 days on a FIFO basis and then finally to the historic pool of shares acquired on an average cost basis. IR Int. 224 confirms that there are no funny rules regarding inter-spousal transfers and that the date of transfer will be treated as the date of disposal/acquisition for each respective spouse for matching purposes.

We had a scenario where a client had realised a gain in the year on shares in company A and his wife was sitting on unrealised losses in shares in company B. His plan was for his wife to transfer shares in company B to him and then for him to sell them and realise the loss. The difficulty was that he already owned shares at a low base cost in company B and so the new shares would merely be added to the pool. The solution is for him to sell shares now and then for his wife to transfer more shares to him within 30 days of the sale in order for him to match his disposal to the level of her higher base cost.

The CGT TAAR also needs to be considered in these circumstances, but HMRC has agreed that a spouse can transfer assets sitting at a loss and the transferee can crystalise the loss in their own name.

2.3 Claim to principal private residence relief (Malcolm Springthorpe:TC00832)

Mr Springthorpe acquired a property in a poor state of repair in November 1999. He commenced to let the property in July 2000 and the property was sold in September 2005 producing a capital gain.

Mr Springthorpe said he lived in the property whilst refurbishments took place between the time of acquisition and July 2000, and he claimed principal private residence relief. However it transpired that he had applied for an exemption from council tax on the basis that the property was uninhabitable and initially there were no kitchen facilities or working bathroom. The electricity bills for the period under review were minimal.

The Tribunal concluded that it was likely that Mr Springthorpe had spent some time in occupation, but in their view he did not occupy the property as his home. They were satisfied that his occupation of the property was for the purpose of renovating the property in order to let it.

This case reinforces the fact that the quality of occupation is fundamental to a claim to principal private residence relief. In the event of a dispute the tribunal will look at the evidence available to support the claim that the taxpayer lived in the property as their main residence. The Tribunal summed up as follows:

"The minimal electricity bills, the fact that there were no cooking facilities and that the gas had been switched off until March 2000 with the result that there was no hot water available for washing indicates to us that the Appellant was unlikely to have lived at the Property for the whole of the relevant period, including, as it did, the winter months. It seemed to us more likely that he stayed there occasionally but that he also stayed elsewhere."

3. IHT & Trusts

3.3 Availability of IHT business property relief for group structures

CIOT has published correspondence with HMRC on the subject of IHT business property relief for group structures.

4. Business tax

4.1 Business Record Checks: Consultation document

HMRC is planning a programme of Business Record Checks that will review both the adequacy and accuracy of business records within the 'small and medium enterprise' (SME) sector. No new legislation is proposed in this regard; the programme will use existing law regarding both record keeping requirements and penalties for failure to comply with those requirements.

HMRC published a consultation document on 17 December 2010 and the Chartered Institute of Taxation have published their response in which they question whether there is any legal basis for HMRC's intention to levy penalties for failure to keep contemporaneous records.

4.2 OECD Discussion on valuation of intangibles for transfer pricing

The OECD has published notes of a working group (WP6, held on 23-25 March 2011) to consider valuation of intangible assets for transfer pricing purposes.

Ms. Michelle Levac, the Chair of the WP6 TPI, concluded that the discussions at this meeting had been very productive and helpful to move the OECD project forward. She highlighted the importance of determining whether financial valuation methods should be given greater recognition in the TPG (transfer pricing group) and, if so, to provide guidance for taxpayers and tax administrators on how to assess the reasonableness of the assumptions and inputs used in valuation models. She acknowledged the message from the business representatives that the guidance in that respect should not be too prescriptive as valuation involves professional judgement and depends on the circumstances of each case, as well as the concerns expressed by commentators with respect to the compliance burden. She noted that valuation was only one of the topics to be covered by the OECD in its examination of the transfer pricing aspects of intangibles.,3746,en_2649_45675105_47445940_1_1_1_1,00.html

4.3 Disguised remuneration – updated FAQ

HMRC has issued revised FAQs on the new disguised remuneration rules which expand some of the answers provided in the first version issued in February and also refer to some additional changes to reflect the "Employment income provided through third parties" legislation in Finance Bill 2011 (Clause 26 and Schedule 2).


5.1 Amendment to PAYE regulations (2003/2682) effective 6 April 2011

SI 2011/729 amends the Income Tax (PAYE) Regulations 2003 to define the additional rate of income tax as well as the 0T and additional rate income tax codes and also require employers to deduct income tax using the 0T rate code instead of the basic rate tax code in specified circumstances. The Regulations also clarify the meaning of "a specified date" for the purpose of regulation 198A of the PAYE Regulations.

The amendment also introduces the 50% rate, where appropriate, into PSA settlement calculations for 2010/11 and later.

6. VAT

6.1 VAT on development activity – tax points and planning consent

Abbey Trust Homes Limited (ATHL) contended that payments made to them during the course of construction were loans, and under the terms of the contract, did not create a tax point. However the First Tier Tax Tribunal agreed with HMRC that in the particular circumstances the payments created a tax point and VAT was due, notwithstanding the fact that what was ultimately supplied was a zero rated dwelling. The case illustrates the need to carefully consider the VAT consequences of financing of construction work and to be clear on planning consent issues when determining from what point residential construction work qualifies for zero rating.

ATHL (registered for VAT in August 2006 and submitting a repayment claim in May 2008) was engaged to construct a dwelling for the son and daughter-in-law of one of the directors. Planning permission was obtained in 2005 for the building of an extension and the addition of a first floor. ATHL had noted that the planning consent should have been for demolition and reconstruction and informed HMRC in July 2008 that a letter had been sent to West Berkshire Council's Planning office asking for the necessary changes to be made. An updated planning consent notice was obtained dated 29 May 2009 which allowed "demolition of original house, erection of new dwelling" following an application for retrospective planning permission dated 2 April 2009 and included revised drawings to accompany the planning permission. However the consent notice did not specify a backdated date from which the retrospective planning permission was effective.

In order to qualify for zero rating, the construction of a building designed as a dwelling must meet certain conditions, one of which is that statutory planning consent has been granted (i.e. before work has begun) and that construction has been carried out in accordance with that consent.

In the period May 2007 to July 2008 payments of £240,000 were made by the son and daughter in law to ATHL, which HMRC contended led to output VAT being due of £34,255. ATHL contended that as the building contract did not provide for stage payments, completion of the building would create the taxpoint unless an earlier invoice was issued. ATHL also contended that as planning consent was obtained in May 2009 and the building was not completed nor invoiced until after this date, it met the conditions for zero rating of the full cost.

The Tribunal noted that ATHL had asserted to an HMRC officer that the payments made were to fund building materials and to further the building work, to be repaid on completion pending drawing up of a final account. They agreed with HMRC's contention that such payments brought forward the taxpoint date using the decision in The Commissioners v Faith Construction Ltd and Others ([1990] 1 QB 905) as authority for the fact that loans for building work did create a tax point according to VATA s6(3) and s6(4). ATHL sought to rely on the wording of terms in SI1995/2518 Reg 93 (referring to construction contracts providing for stage payments, where interim payments of financing of the work could create earlier taxpoints) and argued that as theirs was not a contract providing for stage payments, the taxpoint must be on the earlier of the supply of services (completion of the contract) or issue of invoice or payment in respect of that invoice. The Tribunal agreed with HMRC that VATA s6 provided that payment at a point before the services were supplied could create a taxpoint.

The Tribunal also held that as the planning consent did not specify a retrospective date from which planning consent was to be dated, it could only be treated as dated 29 May 2009. The result of this was that construction services provided prior to that date did not meet the requirements for zero rating, but those provided afterwards did. The case of Watson v Commissioners demonstrated that in order for an earlier date of consent to apply, the council would have needed to use its powers under Section 73A of the Town and Country Planning Act 1990 at the time it issued the retrospective planning consent to backdate the consent to a time before the work began.

6.2 HMRC VAT online services

Further to last week's note about HMRC online services not being available for VAT filing between 07.00 on 4 April and 06:00 on 6 April 2011 there has been further clarification of HMRC's approach to late filing following questions raised by CIOT and other professional bodies.

'HMRC will not automatically penalise persons who are one or two days late after 7 April in submitting their VAT returns because of unavailability of the system. The meaning of 'one or two days late' for a reasonable excuse will depend on each taxpayer's particular circumstances.

However taxable persons must still retain evidence to show that they at least tried to submit their returns on time.

Whether or not they manage to submit their returns on time, they must use alternative means to ensure that payments are made on time.'

The professional bodies have tried to get HMRC to confirm whether the 'two days' is two working days or two calendar days; as the latter covers part of the weekend it makes a difference. However they are not prepared to do this, which is unhelpful.

7. Tax Publications

NTBN176 - Budget 2011 – Employment Tax Issues

Extracts of the commentary on various budget announcements concerning employment tax matters.

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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Richard Mannion
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