UK: Weekly Tax Update - Monday 25 July 2011

Last Updated: 28 July 2011
Article by Richard Mannion


1.1. The Finance Act 2011

The Finance Act 2011 received Royal Assent on Tuesday, 19 July 2011

1.2. Civil Investigation of Fraud - Contractual Disclosure Facility

HMRC has issued a discussion document dated 20 July, requiring comments by 20 September 2011, "Civil Investigation of Fraud (CIF) - Contractual Disclosure Facility".

The document sets out HMRC's current CIF procedures and says the Department's aim is to improve future processes for tacking suspected fraud via the civil regime but it will also tighten its procedures in cases where taxpayers do not cooperate or make full disclosure so that HMRC can switch to its prosecution procedures in respect of defaulters. Under the current regime once HMRC has issued a civil regime notice ( COP9) a taxpayer is protected from prosecution before HMRC knows whether or not that person will work with them to achieve settlement.

HMRC's objectives are three-fold.

  1. To change its operational approach in cases of suspected fraud to a civil rather than a criminal regime.
  2. To encourage taxpayers to disclose irregularities with absolute immunity from prosecution as long as full disclosure is made.
  3. Deter partial or non disclosures by improving HMRC's prosecution ability in cases of less than full disclosure.

HMRC does not intend to change its current policy of considering all suspected fraud cases for criminal investigation before the civil regime is considered. However, under the proposed regime HMRC would write to taxpayers telling them that they are suspected of tax fraud and offering them a contract to disclose that fraud in exchange for certainty of no criminal investigation.

The contract would require a description of the fraud, amounts, time span etc, and a taxpayer would be allowed sixty days to accept the contract and provide a summary disclosure. If the contract was ignored HMRC might at that stage invoke its criminal powers.

The above is just an outline of the proposed regime. The measures do, however, appear a positive step. A taxpayer will have certainty against prosecution, and the proposed regime looks rather less cumbersome than the current COP9 process. The contract acceptance time span might also offer time for a dialogue with HMRC in cases where taxpayers genuinely do not consider they have committed a fraud and offer to explain their position and possibly not sign the contract. Under the current regime once a COP9 notice is served, one has no choice other than to progress through the process.

Whilst the proposed regime looks positive, one wonders whether the real driver is the lack of successful prosecutions, costs and the lack of skilled investigators. Prosecution cases continue to decline. SI Inspectors are snowed under. Should a taxpayer refuse to cooperate under the COP9 regime, the Inspector has no choice other than to investigate the whole, often 20 year, period himself which takes a huge amount of time and cost, but his hands are tied as HMRC is currently unable to switch taxpayers back into the prosecution arena.


2.1. HMRC Manual Update: Trusts, Settlements and Estates Manual

HMRC has added a new section, TSEM9000 'Ownership and income tax', to the manual.

New Guidance at TSEM9000 has been added to the main table of contents

A new contents page for guidance on ownership and income tax has been added

New guidance on property held jointly by married couples or civil partners has been published

Generally income from property held jointly by married couples and civil partners is treated as beneficially owned by the individuals in equal shares under ITA 2007 s836. Consequently they are taxable on the income on a 50/50 basis. This rule applies even if the individuals own the property in unequal shares, but it can be disapplied by a declaration on form 17 under ITA 2007 s837 so that the income is assessed based on their actual beneficial interests.

There are some exceptions to this general rule, one of which is partnership income:

"TSEM9818 - The 50/50 rule - partnership income

Trading or professional income

The 50/50 rule does not apply to partnership income. If a spouse or civil partner is in partnership, the allocation of the partnership trading or professional income is decided in the normal way by the partnership agreement. This applies to partnerships between husband and wife and between civil partners as well as partnerships where others are involved.

Note that in certain circumstance we may consider applying the Settlements legislation to income from partnerships involving married couples or civil partners (see TSEM4215).

Sleeping partners

The 50/50 rule does not apply to trading or professional income of a sleeping partner - see the guidance in the Business Income Manual on the HMRC Website.

Partnership investment income

Note that the 50/50 rule does apply to partnership investment income (that is where a husband and wife or civil partners of each other are both members of the same partnership)."

There is a query as to whether the final paragraph relates to all such partnership investment income or only income taxed/treated as taxed partnership income.

This is because the exclusion to the 50/50 basis is for all partnership income to which Part 9 of ITTOIA applies:

TA 2007 s836 Jointly held property

3) But this treatment does not apply in relation to any income within any of the following exceptions. Exception C Income to which Part 9 of ITTOIA 2005 applies (partnerships).

Section 854 in that part of the Act includes 'untaxed income' of the partnership.

2.2. Pension savings changes

Following the Finance Act 2011 receiving Royal Assent a number of Statutory Instruments have been laid in connection with the pensions tax regime:

Annual allowance charge: Settled by pension scheme

SI 2011/1791

This instrument provides that where a scheme administrator of a registered pension scheme satisfies an annual allowance charge on behalf of a member of the pension scheme from the member's pension benefits, any rules of the pension scheme which prevent such an adjustment to the member's pension benefits are modified to allow for such adjustments.

The instrument also sets out that any consequential adjustment to a member's pension benefits cannot apply to the member's guaranteed minimum pension or protected rights.

SI 2011/1793

This instrument provides details of the information an individual must give in a notice to their pension scheme administrator if they wish the pension scheme administrator to meet their annual allowance charge in return for a consequential adjustment to their pension benefits.

Lifetime allowance: Fixed protection

SI 2011/1752

This instrument provides that an individual may give notice to HMRC that they intend to rely on a new form of transitional protection to reduce or eliminate any potential lifetime allowance charge from April 2012.

It also sets out the steps the individual and HMRC have to take to enable an individual to rely on the transitional protection and what happens if the notice is refused or if the individual no longer meets the conditions for the transitional protection.

Removal of requirement to take an annuity at 75

SI 2011/1751

These regulations make a number of consequential amendments to various existing regulations to reflect changes made by FA 2011 to the pensions tax regime which remove the effective need to take an annuity by age 75 and reduce the amount of tax relief an individual can receive on their pension savings.

SI 2011/1782

This instrument makes a number of consequential amendments to The Taxation of Pension Schemes (Transitional Provisions) Order 2006 (SI2006/572), to reflect changes made by FA 2011 to the pensions tax regime which remove the effective need to take an annuity by age 75 and reduce the amount of tax relief an individual can receive on their pension savings.

SI 2011/1790

These regulations make consequential and other minor amendments to existing regulations in respect of transfers from one pension arrangement to another to reflect changes made by FA 2011 to the pensions tax regime which remove the effective need to take an annuity by age 75.

SI 2011/1792

These Regulations set out the conditions which a scheme member, or their dependant, needs to meet for a declaration to be valid for the purposes of taking flexible drawdown.

SI 2011/1783

These Regulations set out payments which do not count as relevant income for the purposes of meeting the minimum income requirement under the flexible drawdown rules.

2.3. Offshore reporting funds: anti-avoidance

The amended offshore fund regulations, which came into force on 27 May 2011, included a measure to stop investors achieving an income tax advantage in not holding units for a short period covering the reporting period end date.

Generally, it is the investors holding units on the last day of a reporting period that are taxable on the reported income. To prevent investors avoiding a liability arising by not holding units at that critical date, an anti-avoidance provision links in with the capital gains tax "anti-bed & breakfasting" 30 day matching rule.

Where a disposal of units, in one reporting period, is matched under the CGT rules to the purchase of units in the next reporting period then, for the purposes of the offshore fund regulations, the disposal of such matched units is ignored. The investor is treated as continuing to hold those units at the end of the earlier reporting period and therefore liable to the associated reported income.

The fund manager has no responsibility to trace and notify those potentially affected. It will be down to the investor and/or their advisers to recognise such an event and track down the necessary detail. Such an investor not holding any funds at the end of the reporting period will be unlikely to receive a report from the fund managers.

Amendment to regulation 94 (reported income: general provisions):

40.—(1) Amend regulation 94 (reported income: general provisions) as follows.

(4) After paragraph (3) insert—

"(3A) If—

(a)a participant disposes of an interest in a reporting fund in a reporting period ("the earlier period"), and

(b)section 106A of TCGA 1992 (identification of securities: capital gains tax) applies to identify the whole or any part of that interest with an interest acquired in the next reporting period,

then, for the purposes of paragraph (3), the disposal of the interest so identified shall be ignored and the participant shall be treated as holding that interest at the end of the earlier period.".


3.1. Whether a payment for a dealership business represented goodwill or compensation

In the recent case of Mertrux Limited v HMRC the First Tier Tribunal considered whether a payment for a motor dealership was wholly goodwill or partly compensation.

The distribution of Mercedes-Benz vehicles in the UK is organised through a UK subsidiary of the Daimler-Chrysler group, Daimler-Chrysler (UK) Ltd ("DCUK"). In 2000 DCUK resolved to reorganise its dealership network and by notices issued to each of its dealers it purported to terminate their dealership agreements on 31 December 2001.

Group litigation proceedings were commenced on behalf of a number of the dealers including the Appellant who sought to challenge the purported termination. In July 2001 the proceedings were compromised. As a result of the compromise each dealer's agreement was amended by a Deed of Variation and Termination ("DoVT").

Metrux Ltd (ML) entered into the DoVT in 2001 which included a compensation payment calculated on the basis of a formula. By agreement the cessation date of ML's Mercedes dealership was postponed for a minimum of a further nine months to 31 March 2003 with termination on three months' notice period expiring on or after 31 March 2003. This postponement did not alter the calculation of the Territory Release Payment (TRP). A cessation on 30 June 2003 would otherwise have resulted in a 12 month TRP.

Eventually the transfer occurred on 31 July 2003 without prejudice to the 24 month TRP. A transfer agreement between ML and Leadley Limited was entered into on 31 July 2003.

The amount paid by Leadleys was Ł1,752,698. This amount was fixed by the expert panel after a reference by Leadleys. ML sought to treat this as a payment for goodwill when claiming roll over relief. HMRC considered that the amount paid to the Appellant comprised two elements, namely a 'basic' TRP equating to goodwill and secondly an 'enhanced' TRP reflecting compensation paid for the early termination of its dealership. HMRC proposed an apportionment of the TRPas to 50% goodwill and 50% compensation.

The Tribunal agreed with ML and commented:

"We found that HMRC were unable to show that the transfer agreement between Leadleys and the Appellant referred to an apportionment of the payment between the payment for the business and compensation for the loss of the dealership.

78. We found that Leadleys were solely concerned with acquiring the business at the agreed price and that price was paid for the business and nothing else. Leadleys had no reason to pay compensation for the loss of the dealership.

79. We found that the whole of the goodwill was founded on the dealer agreement. A Mercedes dealer has goodwill with its customers because it has the Mercedes franchise.

80. Over time the Appellant had built up a volume of goodwill with its customers, all of whom had Mercedes cars. We found that the Appellant did have goodwill but could only exploit it through someone who held the Mercedes franchise.

81. We found that the basic flaw with HMRC's submissions was that it could not accept that as a result of the goodwill in the Appellant's business being dependent upon its dealer agreement, on the sale of its business to Leadleys its goodwill was acquired by Leadleys along with the Mercedes dealership."

3.2. Capital/revenue divide and resurfacing of farm track

The First Tier Tribunal has agreed with the G Pratt & Sons farming partnership that the resurfacing of a farm track was a repair and not (as contended by HMRC) the renewal of an entirety. The farm track had a stone base which had been tarmacked about 30 years ago. The resurfacing work was to remove that tarmac and replace it with a new surface (concrete), as the track was in a poor condition. The work did not improve the nature of the track so that it was capable of carrying different traffic. The Tribunal commented:

"..the work on the farm drive consisted of a new concrete surface being placed over the existing tarmac which had been broken up to form a hard-core base. There was not, in our judgment, a renewal of the entirety of the drive, or the part of the yard in which the concrete was replaced, but a repair to an existing asset. We may have taken a different view if the drive had been altered to accommodate larger milk tankers or to allow access for larger lorries bringing farm supplies but it was not. Before the work on the drive the dairy sent 20,000 litre tankers for milk collections and they continued to do so following its completion, the same applies to deliveries by suppliers to the farm."

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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