UK: Weekly Tax Update - Monday 7 November 2011

Last Updated: 15 November 2011
Article by Richard Mannion

1. General news

1.1. HMRC Update regarding Sunday Times article

HMRC has written to the professional bodies as follows:

"Some of you may have seen the article in the Sunday Times yesterday which alleged that fraudsters had found a way to hack into HMRC systems. We categorically refute this but thought it would be helpful to send you an updated security message in case your members should raise any queries with you.

Criminals will look to exploit any weaknesses in customers' online security to commit fraud, whether against them, financial institutions or Government. In common with all online providers HMRC takes customer security seriously and constantly reviews and updates its security messages via the HMRC website, with dedicated security pages informing Tax Agents what they need to do to protect both themselves and their client details. See . (Our current guidance was developed in the light of advice from senior representatives within the tax agent community).

It goes without saying that anyone carrying out transactions over the internet needs to make sure that their security software is up to date or they will run the risk that their credentials will be compromised. This is simply the reality of transacting online. We know that most agents are aware of this but we would urge them to continue to be vigilant since we know that some agents have had their online passwords stolen and then used by criminals to try and steal money.

HMRC monitors all online traffic and has a range of checks and measures in place to identify fraudulent online activity and has been successful in identifying and stopping fraudulent repayments reaching criminals' bank accounts. There is no evidence to suggest that HMRC's own systems have been compromised or hacked in to.

HMRC does not provide information on individual cases but we do work with those agents who have had their online passwords stolen and we regularly engage with the agent community providing security advice on safeguarding their online credentials.

HMRC is also working with partners across Government and the private sector to review the range of authentication capabilities that could enhance our defences against emerging cyber threats."

2. IHT & Trusts

2.1. HMRC's IHT Toolkit updated

HMRC has published an updated Inheritance Tax Toolkit, effective for deaths occurring from 6 April 2010. The update includes emphasising the importance of providing HMRC with a copy of the will and any codicils when submitting the form IHT400.

3. PAYE and Employment matters

3.1. Employment income provided through third parties

HMRC has amended its Employment Income Manual for guidance on the disguised remuneration rules:

4. Business tax

4.1. Research & Development (R&D) advance assurance pilot for small companies

HMRC is offering an 'R&D voluntary advance assurance' pilot for small companies (those with fewer than 50 employees - including start-up companies) which are about to make their first R&D relief claim.

Companies which volunteer to take part will have the support of a designated R&D relief expert, who can offer one-to-one support and advice on putting a claim together.

The aim is for the company and HMRC to agree a basis for the first R&D claim and claims for the two subsequent accounting periods. Provided that the taxpayer company uses the agreed basis, their R&D relief claims for this period will normally be accepted as accurate without query from HMRC, unless a significant issue arises.

Throughout the period the taxpayer company will have a designated 'assurance contact', who will be available to discuss any matters related to the claims for R&D tax reliefs.

4.2. Portfolio investors in German companies eligible for tax refunds following ECJ decision

The Court of Justice of the EU has found against Germany in respect of its treatment of dividends for nonresident holding companies that have interests in German companies that are below the minimum holding levels required for the parent/subsidiary directive (exempting dividends from withholding tax) – case C- 284/09. Germany has applied the parent subsidiary directive as follows:

1 January 1992 – 25% minimum holding

1 January 2005 – 20% minimum holding

1 January 2007 – 15% minimum holding

1 January 2007 – 10% minimum holding

However withholding tax on dividends (equal to a regular rate of 20% plus a 5.5% solidarity tax) applies differently to German resident holding companies (and foreign entities with a German permanent establishment) compared to non- German resident holding companies.

The German corporation tax rules mean that 95% of dividend income from German companies is exempt from corporation tax (before 2000 an imputation system applied, so dividend income was taxed differently). German resident companies are able to take advantage of a method of consolidation so that if there are intragroup dividends, the whole intragroup dividend is treated as exempt. Dividend income from certain foreign companies is fully exempt. Withholding taxes on dividends can be credited against the German holding company's tax liability, and if there remains no income, the withholding tax can be repaid.

The position for foreign holding companies which are not able to make use of the parent subsidiary directive is that the withholding tax is not recoverable. The level of withholding tax can be reduced by a double tax treaty. For example it is reduced to 15% for dividends paid to UK holding companies with 'portfolio holdings' – i.e. holding a less than 10% interest in the German company, unless the relationship is regarded as being effectively connected with a German permanent establishment of the UK holding company.

The ECJ held that this difference in treatment between German and non-German holding companies was contrary to the freedom of movement of capital in the EC treaty (article 56) and the EA treaty (article 40). Therefore foreign companies of the EEA who have suffered German withholding tax on portfolio investments have an opportunity to submit reclaims for this tax withheld, which should be submitted immediately in order to maximise claims within the statute of limitation period.

4.3. Consultation on comprehensive review of feed-in tariffs

The government has issued a consultation (for the period 31 October to 23 December 2011) proposing that the generation tariff for PV (photo voltaic) installations with a total installed capacity of 4kW or less will be reduced to 21p/kWh, which their modelling indicates should deliver around a 4.5% rate of return. Also proposed are reductions to the generation tariffs for PV installations above that level and up to 250kW.

It is proposed that the new generation tariffs should apply from 1 April 2012 to all new solar PV installations which become eligible for feed in tariffs (FITs) on or after an earlier 'reference date' which the government propose should be 12 December 2011. Installations which become eligible for FITs before the reference date will not be affected and will continue to be eligible for the current generation tariffs.

The consultation also seeks views on two other changes to the feed in tariffs (FITs) scheme for solar PV. Firstly, the introduction from 1 April 2012 of new multi-installation tariff rates for aggregated solar PV schemes. These are schemes where a single individual or organisation owns or receives FIT payments from more than one PV installation, located on different sites.

The other proposal is to strengthen the link between FITs and energy efficiency by introducing a new energy efficiency requirement for FITs for solar PV. The new requirement would apply to all new solar PV installations which become eligible for FITs on or after 1 April 2012 which are attached or wired to provide electricity to a building. If the building does not meet the energy efficiency requirement the installation would receive a lower FITs rate of 9p/kWh.

This consultation is the first of two on the comprehensive review of FITs that was announced at the start of the year. The government will be publishing a separate consultation around the end of 2011 which will consider other aspects of the scheme including the tariffs for other FIT technologies. It will also consider proposals to make the FITs scheme more intelligent and responsive to change.

4.4. Deductions from trading profits for donations to local charities

The extra statutory concession B7 was withdrawn with effect from 9 December 2010. HMRC guidance at BIM45072 explains how deductions can still be available through the re-written legislation. The relevant extract is:

The Extra-statutory concession at ESC/B7 is to be withdrawn with effect from 9 December 2010. Under this concession, when computing their taxable profits traders are allowed to deduct the cost of gifts to local bodies or associations established for educational, cultural, religious, recreational or benevolent purposes, as long as the expenditure was incurred for the purposes of the trade and was reasonably small in relation to the scale of the donor's business.

The tax legislation (section 47(5) of the Income Tax (Trading and Other Income) Act 2005 and section 1300(5) of the Corporation Tax Act 2009) now allows a deduction for gifts to charity when computing the taxable profits of a trade. The term charity is defined for this purpose by section 989 of the Income Tax Act 2007 as a body of persons or trust established for charitable purposes, it does not require the charity to be a registered charity. The Charities Act 2006 introduced an extended definition of a charitable purpose. The definition extends the categories of charitable purposes so that it would cover (amongst other things) educational, cultural, religious, recreational or benevolent purposes. As a result we consider any deduction that could have been claimed by concession would now be allowed under the current tax legislation..

The definition of a charity for corporation taxes is found in CTA10 s1119 and is the same as ITA s989.

5. VAT

5.1. Intrastat declarations

Businesses that are required to submit declarations of their trade with other EU Member States using an Intrastat declaration are limited to those with intra-EU trade in excess of £600,000 per annum for Arrivals (EU imports) and/or £250,000 per annum for Dispatches (EU exports).

As part of a programme of work to modernise the Intrastat system, HM Revenue & Customs (HMRC) will amend the UK Intrastat legislation to bring forward the monthly deadline for the submission of Intrastat declarations. This deadline (often referred to as the 'due date') will change from the last day to the 21st day of the month following the reference period to which the reported trade relates.

This measure will take effect on 1 April 2012. Intrastat declarations for the period 1 to 31 March will be due on 21 April; all subsequent declarations will be due on the 21st of the month. HMRC has therefore issued an update and a draft statutory instrument.

5.2. VAT and food

An updated version of VAT Notice 701/14 has been issued. It contains a large number of amendments to the 2002 version at sections 3 (general food products) and 4 (specialised products).

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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