UK: Weekly Tax Update - Monday 26 September 2011

Last Updated: 7 October 2011
Article by Richard Mannion

1. General

1.1. Measuring the Tax Gaps

HMRC has published the estimates of the tax gaps for 2009-10. Overall the total tax gap is estimated to be £35 billion in 2009/10. This equates to around 8 per cent of the estimated total tax liability for 2009/10.

The estimates show a decrease in the tax gap of £4 billion from 2008/09 to 2009/10. This decrease is mainly due to reduction in the VAT gap since 2008/09 following the reduction in the standard rate of VAT from 17.5 per cent to 15 per cent between 1st December 2008 and 31st December 2009.

2. Business tax

2.1. The validity of SDLT information notices

The case of Katherine and Ralph Weber ([2011] UKFTT 437 TC01290) considered whether an information notice issued by HMRC in February 2009 (the information notice legislation at the time was FA03 Sch10 paras 12 & 14) was properly given where the taxpayer asserted that they never physically received the original notice of enquiry.

HMRC had issued the notice of enquiry to the taxpayers and their solicitor in June 2007 (within the nine month enquiry period) and received an initial response to that notice from the solicitor in December 2007. The Tribunal concluded that as the solicitor's response had indicated the solicitor had been in contact with the client about obtaining the relevant information, it was clear the taxpayer had been notified of the enquiry.

  • HMRC's information and inspection powers for SDLT have been governed by FA08 Sch36 since 1 April 2010 (e.g. see FA08 Sch36 para 21A). Where a taxpayer has submitted a land transaction return under FA03 s76, information notices can be issued in any of the following instances:
  • a notice of enquiry has been given and the enquiry has not been closed; or
  • an office of HMRC has reason to suspect that an amount of SDLT has not been assessed, or has been insufficiently assessed, or a relief from SDLT may be or has become excessive; or
  • the notice is given for the purpose of obtaining information or documentation that is required for the purpose of checking a taxpayer's position regarding a tax other than SDLT.

2.2. The UK's position in the G20 corporate tax ranking for 2011

The Oxford University Centre for Business Taxation (OUCBT) has produced a report evaluating how close the Government is to meeting its aim of creating the most competitive tax system in the G20 (which has 19 constituents excluding the EU). The report assesses the UK's position in the 2011 G20 corporate tax ranking, by considering the effect of corporate taxes on the incentive to invest. In terms of desirability of location the report ranks the UK at ninth out of nineteen, and in terms of desirability for increased investment ignoring country location, the UK ranks fifteenth out of nineteen.

The OUCBT report comments that the current UK position in the G20 represents a significant deterioration from the position in 2002 when the UK ranked fourth and eighth respectively. The report's results suggest that the reforms to cut tax rate but also to cut allowances are not enough to maintain, let alone improve the competiveness of the UK corporate tax system. Assuming the other countries' systems do not change and the UK tax reforms scheduled for the period 2011 to 2014 are implemented, it is projected the UK's ranking would improve to fifth for location and fourteenth for increased investment ignoring country location. The report concludes that the UK corporate tax system has lost competiveness in the last decade and that attaining a position of the most competitive corporate tax system is a very ambitious objective.

Two forms of investment decision are considered:

  • The locational decision (whether to chose the UK or another country), where the greatest post tax profit in present value terms will be important and is measured using the effective average tax rate (EATR);
  • The size of investment, assessed according to cost of capital, or the rate of return an investment project must achieve if it is to break even in present value terms taking account of all expenditures and receipts. It is assumed the investment project would only be undertaken up to the point where the marginal gain from additional investment is at least equal to the cost of capital. Corporation taxes increase the cost of capital and therefore reduce the quantity of investment undertaken. This is assessed by measuring the proportional increase in cost of capital due to taxation – the effective marginal tax rate (EMTR).

The report also discusses the corporate tax base, and assessing the allowances on capital expenditure for plant and machinery, industrial buildings and patents. For 2011 the UK ranks nineteenth (last), and in particular the UK has the least generous allowances for industrial buildings (which might be considered at odds with the Government's intention to stimulate manufacturing activity). However the report does not separately consider the comparison in relation to other items making corporate tax base, for example the deductibility of interest, and there will inevitably be variations when one considers individual parts of the corporate tax base in isolation.

In assessing corporate taxes, the report does not consider taxes relating to cross border flows, ignoring the effects of tax on foreign source income, withholding taxes, CFC regimes and other anti-avoidance. The system of direct corporate taxes might be considered as only one of the tax costs of doing business in the UK, and when considering an investment decision a multinational might also consider transactional indirect taxes, personal taxes, environmental taxes and other tax costs related to doing business such as rates. However in the context of the corporate tax reform consultation document issued in November 2010, while the influence of these other tax factors is recognised as an area to work on with business, that document does focus on corporation tax rates, corporation tax base, tax policy making, and corporation tax administration (see 1.5 – 1.11 of that consultation document).

Thus the OUCBT report on corporation tax rates (using EATR and EMTR) in the G20 is useful in assessing the Government's aims as set out in the corporate tax reform consultation. One of the principles adopted by the Government for corporate tax reform (see box 2A of the consultation document) is that "in general a low corporate tax rate with fewer reliefs and allowances will provide the best incentive for business investment with the fewest distortions".

However the report calls into question the effectiveness of that principle in achieving the aim of the most competitive G20 corporate tax system. In the context of rates and reliefs it might also be relevant to mention that part of the cost of the current lowering of corporation tax rates has been borne by businesses operating in non-corporate form, who do not benefit from that lower rate, but have had to contend with the adverse impact of lower capital allowance rates. In the context of corporation tax for the banking sector, the benefit of the reduced rate is being eroded by the imposition of a banking levy. It would seem an appropriate time for the Government to review with business the impact of particularly low overall rates of allowances on capital expenditure such as property, infrastructure and plant, in view of the consideration being given to stimulating capital expenditure in the UK as a means of stimulating economic activity.

3. VAT

3.1. VAT and Insolvency practitioners

Following the Paymex case and the issue of Brief 27/11 (see Tax Update 15 August 2011) HMRC has issued a further brief clarifying their views. They comment that although the Paymex decision referred only to consumer insolvency voluntary arrangements, the important point for insolvency practitioners to consider in assessing whether they have overpaid VAT is the nature of the services they provided and whether these are covered by the Paymex decision. This may therefore have implications for those insolvency practitioners involved in providing services for Company Voluntary Arrangements (CVAs) or Partnership Voluntary Arrangements (PVAs).

3.2. VAT and receipts from bingo session fees

Carlton Club plc has won at the First Tier Tribunal concerning a refund of VAT arising from an over declaration of output VAT due to being advised of an incorrect calculation method (through VAT notices) by HMRC.

On 1 February 2007 HMRC issued a Business Brief (7/07) stating that VAT should be calculated on bingo fees on a session by session basis, which was contrary to their previous practice of a game by game basis. A calculation of VAT on a session by session basis (sessions consist of around 10 games) enabled prize money made up by the bingo organiser to be deducted from the total turnover for VAT, whereas on the game by game basis, this was not possible. Calculation on a game by game basis had been made in accordance with HMRC's previously published guidance. The claimant had successfully made a claim to recover VAT for the period before 4 December 1996, but the case concerned the claim for the period 5 December 1996 to quarter 4 2003, where the VAT at stake was £718,732. This was processed by using an internal credit note and claimed on the December 2009 VAT return.

HMRC objected as they felt the issue of Brief 7/07 was a clarification of policy, not a change of policy on calculating VAT on bingo fees and that the taxpayer should have submitted a repayment claim under VATA s80 (due to their error in calculations) rather than making an adjustment under SI1995/2518 reg 38 (which is applied where there has been no mistake).

The Tribunal agreed with the taxpayer that Brief 7/07 did represent a change of policy and that as there was a change in policy which reduced the turnover subject to VAT, regulation 38 was the correct means of adjustment.

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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