UK: Weekly Tax Update - Monday 20 June 2011

1. GENERAL NEWS

1.1. HMRC Compliance Centres

HMRC has issued the following press release:

"Part of the Local Compliance directorate within HM Revenue & Customs (HMRC), Compliance Centres were formed early in 2010 and currently employ around 550 people. They operate from three main sites in Newcastle, Bournemouth and Swansea with a smaller presence in Carmarthen.

They handle work drawn from across the UK covering a wide range of duties including Income Tax, Pay As You Earn (PAYE), Value Added Tax (VAT) and National Insurance contributions (NICs).

Generally, the work is additional to and/or supports (rather than replaces) activity carried out in HMRC's existing network of local and national offices. The Centres aim to handle high volumes of work accurately and efficiently by telephone and/or letter, whilst keeping the impact on the customer's time to a minimum. They deal with focused, single issue, non-complex intervention work based on third party information that indicates potential omissions from tax returns.

Third party information is received by HMRC from a wide variety of sources. The information is compared to the details disclosed on the customer's return, a risk assessment is undertaken and where it appears income has been omitted or understated the case is subject to a formal compliance intervention.

The work is governed by the legal framework and guidance which applies to the rest of HMRC. Where formal authorisation is held, a customer's tax adviser or accountant can expect to be contacted.

The Centres strive to carry out compliance interventions within the statutory enquiry window. However the legal discovery powers are used in some restricted circumstances – for example, when third party information does not reach HMRC before the statutory enquiry window closes. All intervention work is carried out using the same statutory powers which facilitate HMRC's compliance activity generally.

An officer of HMRC can request information in respect of historic, closed years if the officer has reason to suspect that an amount of tax which ought to have been assessed may not have been assessed, that an assessment has, or may have, become insufficient or that a relief from tax may be or has become excessive (Finance Act 2008, Schedule 36, paragraph 21(6)). It is not necessary for an officer to make a discovery assessment in order to obtain information in respect of a closed period.

In the past year Compliance Centres have also:

• provided educational support of businesses which were newly registered for VAT
• assisted businesses formerly in the hidden economy to help them comply with their tax/National Insurance obligations
• collected tax liabilities.

The role of Compliance Centres will continue to develop. HMRC expect the range of work undertaken will expand in support of HMRC's business objectives."

www.hmrc.gov.uk/news/compliance-centres.htm

2. PRIVATE CLIENTS

2.1. Statutory definition of tax residence

In his March 2011 Budget statement the Chancellor of the Exchequer announced consultation on the introduction of a statutory definition of tax residence, and the Government has now published this consultation detailing its plans for a statutory residence test (SRT). Comments are required by 9 September with draft legislation to be published later in the year with a view to becoming effective from 6 April 2012.

Residence is a fundamental concept as it defines the scope of an individual's UK tax liability. There is currently no full legal definition of tax residence, meaning that the rules are unclear, complicated and seen as subjective. This creates uncertainty for individuals regarding their residence status and is a deterrent to businesses and individuals considering investing in the UK. The consultation proposes a framework for the SRT and seeks views on its design and implementation, in order to address these issues.

This is extremely welcome as there are very few existing legislative rules regarding UK residence. Case law on residence dates back to the 1920s and there have been a number of high profile court cases in recent years on the subject which have only proved to highlight how complex the current position is. In addition taxpayers who sought to rely on the guidance given on the subject by HMRC in the booklet IR 20 (now replaced by HMRC6) have found that this did not give them any protection when their case came to court. This has created a great deal of uncertainty.

As part of the consultation, the Government is also seeking views on options to reform the concept of ordinary residence.

Proposed Statutory Residence Test (SRT)

The SRT is designed to provide a fair and clear way of determining residence, taking into account both the amount of time the individual spends in the UK and the connections that they have with the UK. There is a distinction between leavers (those who were resident in one or more of the previous three tax years) and arrivers (those who were not UK resident in all of the previous three tax years)

The test has been designed such that it is harder for leavers to relinquish residence than it is for new arrivers to acquire it, following the principle that residence should have an adhesive nature.

The proposed test consists of three parts.

Part A – If any of the conditions in Part A are met, the individual is non-resident for the year and there is no need to refer to the further tests. If Part A does not apply, you move on to Part B.

Part B – If any of the conditions in Part B are met, the individual is resident for the year and there is no need to refer to the further tests. If no conditions are met, you move on to Part C.

Part C – Day counts and various connection factors are considered to determine residency status.

Part A: conclusive non-residence

This test aims to provide certainty to taxpayers as to their non-residence status without the need to take into account any connections they have with the UK. This conclusively determines that an individual is non-resident in the UK for a tax year if they meet any of the following conditions, namely they:

• were not resident in the UK in all of the previous three tax years and they are present in the UK for fewer than 45 days in the current tax year; or
• were resident in the UK in one or more of the previous three tax years and they are present in the UK for fewer than 10 days in the current tax year: or
• leave the UK to carry out full-time work abroad (employment or self-employment), provided they are present in the UK for fewer than 90 days in the tax year and no more than 20 days are spent working in the UK in the tax year.

Part B: conclusive residence

Many individuals spend the majority of their time in the UK or have their home and family life here. This test conclusively determines residence if the individual meets any of the following conditions, namely they:

• are present in the UK for 183 days or more in a tax year; or
• have only one home and that home is in the UK (or have two or more homes and all of these are in the UK); or
• carry out full-time work in the UK.

Part C: other connection factors and day counting

Part C will generally apply to individuals whose circumstances are more complex. Its aim is to reflect the position that the more time an individual spends in the UK, the less UK connections they can have to remain non-resident. The following connections are taken into account:

• UK resident family;
• accessible accommodation in the UK;
• substantive work in the UK (employment or self-employment);
• UK presence in the previous tax years (spending 90 days or more in the UK in either of the previous two tax years);
• more time in the UK than in any other single country (this connection is not applicable to arrivers).

The connections are linked with the day count.

Arrivers

Leavers

Whilst these tests do appear to provide far more clarity as to an individual's residence position, there remain numerous factors to consider and it appears that further terms would need to be defined to clarify the position. It is still unclear exactly how these tests would work in the year of arrival or when leaving the UK and some further uncertainties remain. By way of an example, a working day is defined as any day in which three hours or more work are carried out but it would appear to be the individual's responsibility to keep sufficient records to demonstrate this fact.

The Government believes that the clarity of the SRT rules will encourage abuse. It therefore proposes to introduce anti-avoidance legislation to counteract the risk of individuals creating artificial short periods of non-residence, during which they receive a large amount of income.

Link to Smith & Williamson's Briefing Note

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

2.2. Reform of the taxation of non-domiciled individuals

In his March 2011 Budget statement the Chancellor of the Exchequer announced consultations on reforms to the taxation of non-UK domiciled individuals (non-doms). The proposals have now been published and comments are required by 9 September. Draft legislation will be published later in the year with a view to the legislation becoming effective from 6 April 2012.

The Government has stated it does not intend to change the broad principles behind the existing tax system for non-doms.

Increase in the Remittance Basis Charge (RBC) to £50,000

As from 6 April 2012 the RBC will be increased to £50,000 for those non-dom taxpayers who have been in the UK for 12 out of the previous 14 years. This will first apply to any non-dom who came to the UK before 6 April 2001 and has remained here since then.

The existing £30,000 charge will apply to non-doms who have been in the UK for 7 out of the previous 9 tax years until such time as the £50,000 charge becomes relevant. All other aspects in relation to the RBC will remain the same.

Investing in "UK businesses"

In order to encourage investment in the UK it is proposed that no tax will be charged on any untaxed foreign income and gains that are remitted to the UK to invest in a qualifying business. The Government is inviting comments on their current proposals which are outlined below.

Whilst we welcome these proposals they are restrictive in that only investment in companies is permitted. Investment in unincorporated businesses and partnerships will not qualify under the proposals. In addition the requirement to remove the remitted funds or reinvest them within 2 weeks is somewhat unrealistic.

Simplifications to the non-dom rules

Some helpful simplifications are proposed.

• All foreign currency bank accounts will be exempt from capital gains tax. This will apply to all taxpayers and is most welcome. However it is unlikely to apply to foreign currency money market funds or similar.
• The nominated income procedure will be simplified.
• There will not be a remittance if specified assets brought to the UK are sold, provided all the proceeds are exported within 2 weeks. However a gain on sale could then be liable to UK tax.
• The existing concession relating to employees who are not ordinarily resident is to be legislated.

Link to Smith & Williamson's Briefing Note

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

2.3. Executors of the will of Dennis Golding Deceased: TC01211

The First Tier Tribunal considered whether agricultural property relief was available for a farmhouse owned by the late Mr. Dennis Golding, who farmed a smallholding of 16 acres in Staffordshire. Mr Golding's son gave evidence that his father had actively farmed the land, and continued to do so up to the time of death albeit that the level of activities had substantially reduced, bearing in mind Mr Golding senior was 81 when he died. He said that his father "lived in the farmhouse on his own and no longer required the same level of income that he had done previously. He was content to maintain a straightforward rural life and to do what he enjoyed most- farming. Mr Golding said that his father still kept hens and sold the eggs from the farm gate. He had several regular customers. His father had inherited money from his grandfather, which together with his savings amounted to £90,000. He had received a further inheritance from his cousin in December 2004 which amounted to £52,000. ........His father had purchased a new tractor and bailer two years before he died. He had been bailing hay just before he died aged 81 years."

HMRC accepted the claim for APR on the land and buildings but they did not accept that the 3 bedroom farmhouse, which was in a poor state of repair, was eligible for the relief.

Prior to the Tribunal hearing, HMRC had agreed in correspondence that the only basis for their refusal of APR was that the farmhouse was not 'character appropriate'. However, immediately before the hearing HMRC sought to argue that the house itself did not qualify as a farmhouse for APR. The Tribunal ruled that it had been agreed by both parties in correspondence that the house was a "farmhouse" and so it was not open to HMRC to reopen that point.

HMRC argued that there was a single objective test for APR based upon whether the farming operation was sufficiently financially viable to sustain the farmhouse:

"the farming activity was minimal and not commercial. The question is whether the farming business requires the house? The farm had been a working farm up to 1970. Thereafter the farming activity had declined and by 1996 Mr Golding was living alone in the house. There was no farm shop. Over a 3 to 4 week period there were approximately15 customers, served at the farm gate. The farm was making little money and he was living off his inheritances and savings. There was, in fact, no evidence of a farming business at the date of Mr Golding's death. Mr Beer has suggested that a purchaser would see the potential of buying the farm to use it for egg production. He submitted that the proposal was not realistic. Mr Beer's budget had not included for the substantial capital costs of constructing the sheds and repairing the house. Nor had he factored in any labour costs. Mr Coster had advised that it was unlikely that planning permission would be granted for the activity given the unlikelihood of it being commercially viable. Even if the suggestion for poultry farming was viable there would have been no need for the house as the egg production could function from the land and the existing farm buildings."

The Executors argued that "HMRC have accepted that the 16.29 acres of land are agricultural and that farming buildings are 'character appropriate' to the land. It appears to have been accepted that the deceased was a farmer, that he lived in the farmhouse and that he was farming on a day to day basis, for agricultural purposes. The issue is whether the farmhouse is 'character appropriate' with the land farmed with it."

The Tribunal found in favour of the executors and made it clear that they would have won on the farmhouse point, had that been considered:

"We have considered the law and the evidence and have decided that the farmhouse is 'character appropriate' to the 16.29 acres of land farmed with it. We were not required to decide whether the house was a 'farmhouse' for the purposes of the legislation as the parties had conceded that point in correspondence. If, however, we had been asked to do so, we would have so decided. From the photographs provided by the experts, it seems to us that the state and condition of the farm is such that it would only be acceptable as a farm house. The kitchen is spartan at best; we have been told that apples were stored in one of the bedrooms; there was no electricity in any of the bedrooms upstairs so that they could only have been functional for sleeping and, it appears, storage of farm produce; the bathroom was downstairs, which would have been very convenient for Mr Golding, when coming in having worked on the farm. We are satisfied that the educated rural layman would also agree that the house was a farmhouse."

www.bailii.org/uk/cases/UKFTT/TC/2011/TC01211.html

3. IHT & TRUSTS

3.1. The new incentive for charitable legacies

The consultation document issued on 10 June has been reissued with a revised example 7 to correct an error in the calculation.

We had contacted HMRC on the day the document was issued to highlight that the calculations in example 7 did not deduct the agricultural property relief from the value of the net estate in the setting the 10% threshold.

The methodology has been corrected but the revised document contains an error in that the figure of £200,000 appearing in the final paragraph should read £150,000.

http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageLibrary_ConsultationDocuments&propertyType=document&columns=1&id=HMCE_PROD1_031346

4. BUSINESS TAX

4.1. IR35 and the case of ECR Consulting Limited

National Insurance - earnings of worker supplied by service company - provision of services through intermediary – Company contracting to provide computer services – whether, if arrangements had taken the form of a contract between the worker and the client, the worker would have been employed by the client under a contract of service – No – Appeal allowed

Miss Richardson provided her IT services to Vertex Data Systems (Vertex) through her personal company ECR Consulting Ltd (ECR) through an intermediary agency 'Best People Ltd' (subsequently Spring Technology) (Best) and was assessed under the IR35 legislation for the years 2002/03 to 2004/05. Miss Richardson generally worked on contracts lasting between 6 months and a year and had worked through her company for a number of clients. The Vertex work consisted of an initial contract that was subsequently renewed.

The Tribunal examined the contracts between Best and Vertex and between Best and ECR. Both provided for indemnity insurance in respect of work done. The contract between Best and Vertex provided for Best to replace a chosen worker within 28 days if that worker was unsatisfactory. The contract between Best and ECR provided for Miss Richardson to be the worker but contained a substitution clause. Miss Richardson knew of at least six others on whom she could call to replace her.

The Tribunal considered the characteristics of the work relationship between Vertex and Miss Richardson according to the conditions required for a contract of service (employment) to exist as set out in the High Court case of Ready Mixed Concrete South East) Ltd v Minister of Pensions and National Insurance [1968] 2 QB 433. These were that:

• the person agrees to provide their services for a salary;
• agree to be under control of the employer;
• the provisions of the contract be consistent with that of a contract of service.

On the point of substitution the Tribunal found both contracts (Best/Vertex and Best/ECR) provided for substitution and were satisfied that substitution would have occurred if required.

On control the Tribunal found that Miss Richardson worked between 31 and 45 hours per week, but was paid based on a 37.5 hour week. She was supervised by a Vertex employee paid at a rate amounting to one third or less than that paid to Miss Richardson. The Tribunal concluded that Miss Richardson was not under the control of Vertex in the sense of being an employee.

It was concluded the contracts had financial risk as evidenced by the liability clauses. Miss Richardson did in fact work for two other clients during the time she worked for Vertex (so that she was permitted to profit from her own skill). It became apparent that Vertex were not concerned with who did the work; they used contracts to manage cost and ensure the work was done.

The contracts contained rights of dismissal, but not the rights of termination expected with an employment contract. Miss Richardson paid for a hotel to stay in Bolton to carry out the work, and there was no clause to say that the company would pay committed hotel costs in a case of early termination. The contracts provided no evidence of mutual obligation to provide further work, nor was there any provision for holiday pay or sick pay.

The Tribunal therefore concluded the contract with ECR Ltd was a contract for service and not a contract of service.

www.bailii.org/uk/cases/UKFTT/TC/2011/TC01174.html

4.2. TC01200: Mark Higgins Rallying

Partnership - place of control and management - whether non-UK domiciled partner entitled to remittance basis for his share of firm's non-UK source income - s 112(1A) ICTA 1988.

Mr Higgins is a successful motor rally driver whose driving skills are exploited through a partnership between himself and Mr Dixon ("the Partnership"). Mr Higgins is domiciled outside the UK and the Partnership's income is from a mix of UK and non-UK sources. HMRC contended that Mr Higgins' share of the non-UK source profits of the Partnership should be taxed on him as they arise, on the basis that the Partnership is controlled and managed at least partly inside the UK. The Partnership contended that it is managed and controlled wholly outside the UK, and thus the remittance basis applies to Mr Higgins' share of the firm's non-UK source income.

It was common ground that the combined effect of the relevant provisions was that Mr Higgins' share of the non-UK source profits of the Partnership in the relevant years should be taxed on him as they arose if the Partnership was controlled and managed at least partly inside the UK. If instead the Partnership was managed and controlled wholly outside the UK in that period, then the remittance basis applied to Mr Higgins' share of the firm's non-UK source income.

The Judges considered the appropriate test for the location of control and management of the business of a partnership is that adopted by the courts in relation to residence of companies. They noted the same conclusion was reached by HMRC and stated in their Manual; also that it was the one argued for before them by the Partnership.

The judgement sets out the previous case law considered on the question on corporate residence: Padmore v IRC, Newstead v Frost [1978] STC 23, De Beers Consolidated Mines Ltd v Howe (Surveyor of Taxes) 5 TC 198, Untelrab and Laerstate.

The Judges found there was no support for the suggestion that the Partnership is an artificial structure motivated by tax planning concerns. When it was formed the Partnership was two Manx people doing business from the Isle of Man. When Mr Higgins relocated to the UK in 1993 the Partnership was retained and Mr Dixon took careful note of how its future operation should be carried out, in view of the possible UK tax implications if the Partnership should become profitable. He prepared his "Aide Memoir to Partnership Tax" to guide himself in these matters, and he imposed a veto on any important Partnership matters being discussed or decided except at meetings in the Isle of Man.

The place where certain contracts – even important ones such as the manufacturers' works team agreements – were signed was not in itself a determining factor. It was evidence towards where decisions were being made but it was the location of the decision-making, rather than where the contracts were signed, which was important.

The basis of the formation of the Partnership was to combine Mr Higgins' driving skills with Mr Dixon's business acumen and experience and even after many years that continued to be the position of the Partnership. Mr Higgins relied on Mr Dixon's commercial expertise, and would not enter into any significant commercial commitments without referring them to Mr Dixon for a decision. It is clear that Mr Higgins relied on Mr Dixon extensively if not completely in relation to the business side of his rally driving.

The high level decisions of the Partnership were made outside the UK, because those were determined by the views of Mr Dixon, as the commercial brains of the Partnership, with Mr Higgins being only too happy to defer to Mr Dixon in all business matters, so that he could concentrate on driving rally cars in competition and for training and testing purposes.

From these findings of fact, taking the picture as a whole, Mr Dixon was managing the Partnership by making high level decisions and that took place in the Isle of Man. Accordingly, the control and management of the Partnership in the relevant years was situated wholly outside the UK.

www.financeandtaxtribunals.gov.uk/Aspx/view.aspx?id=5568

4.3. Technical note on potential changes to Debt Cap rules for Finance Bill 2012

HMRC has issued a technical note discussing possible refinements to the debt cap rules that might be introduced in Finance Bill 2012. The areas covered include:

• Deminimis limit – whether to introduce an irrevocable election to disapply the deminimis limits on a group wide basis.
• Discussion of the issue of interest charged by a partnership to a subsidiary where the partnership is held to the extent of 80% (thus creating a problem for the available amount by the elimination of any group figure for interest charged due to consolidation of the partnership).
• Dealing with functional currency issues for amounts not disclosed in financial statements.
• Further clarification of how the rules apply on members joining and leaving a group and how the rules apply in mergers and takeovers.
• Measures to deal with the problem created by the removal of a financial liability and finance charge on consolidation where certain pension contribution arrangements are entered into.
• Refinements to the definition of available amount to ease the compliance burden.
• Preparation for prospective changes to IFRS10, 11 and 12 concerning the point at which control requires consolidation and how joint ventures are dealt with.

http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageLibrary_ConsultationDocuments&propertyType=document&columns=1&id=HMCE_PROD1_031365

4.4. Guidance for online filing requirements for certain companies

HMRC has issued guidance on the practicalities of meeting online filing requirements for companies moving to informal striking off or those undergoing a solvent members' voluntary liquidation.

In summary:

• Insolvent companies do not have to deliver their Company Tax Returns online if they are subject to a winding up order or are in formal administration or administrative receivership. This legal exemption also extends to creditors' voluntary liquidations, company voluntary arrangements and provisional arrangements under a court order. Companies in these situations can therefore decide whether they submit tax returns on-line or in paper form.
• The normal filing requirements for a solvent company apply to the return for any period for which HMRC issue a 'notice to deliver a Company Tax Return' even in an Members Voluntary Liquidation where an Insolvency Practitioner has been appointed. By law, HMRC require a full Company Tax Return online in accordance with the requirements of the notice for that period.
• However in practice for the winding up of solvent companies, where HMRC are asked to agree figures before the striking off or liquidation, they will only insist on a full online Company Tax Return - and object to the striking off until they receive it - where there are reasonable grounds for considering that there is a risk of tax loss, if they do not have the opportunity to review a full Company Tax Return. Where HMRC doesn't think there is a material risk of loss of tax, they will seek to agree the tax liability of the company for the last outstanding accounting period, as well as for the stub period, on the basis of management accounts or similar financial statements and tax calculations based on them, if the company asks HMRC to do so. This type of filing may be possible on-line and can be in paper form, though if done in this way, the company will not be treated as having formally filed a Corporation Tax Return
• If a liquidation commences and final accounts are not prepared for the period up to the date of liquidation, the Insolvency Practitioner will still be required to submit a return on-line. The relevant boxes of the CT600 return form element will need to be completed, but instead of using the accounts and computations templates in the product, the box saying there are no accounts and computations attached should be ticked. One or more PDF documents providing the relevant draft accounts or financial reports and a calculation of any Corporation Tax payable, should then be attached.
• Where there are outstanding returns for earlier periods (prior to the liquidation), HMRC will still make the appropriate tax determinations for such periods and apply the relevant penalties for non-filing. HMRC will review any management accounts and tax computations supplied to help determine these assessments, though if not satisfied, will make their own determinations.

www.hmrc.gov.uk/ct/mvl-guidance.pdf

5. TAX PUBLICATIONS

Briefing Note - Reform of the Taxation of non-doms

Outline of the consultation on the proposed changes to the taxation of non-UK domiciliaries from 6 April 2012.

Briefing Note - Statutory Residence Test

Outline on the consultation on the proposed statutory residence test to apply from 6 April 2012

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.