UK: Weekly Tax Update - Monday 21 November 2011

Last Updated: 24 November 2011
Article by Richard Mannion

1. General news

1.1. Modernising the administration of the personal tax system: Tax Transparency for Individuals

The Government has issued a discussion document which suggests how increased transparency and accessibility to tax information can build greater awareness and understanding of how the system works and how individuals can take a more active role in ensuring they pay the right tax. This consultation seeks feedback and ideas for how the administration of the personal tax system could be improved to achieve better understanding and make it easier for customers to deal with it.

The paper includes the interesting possibility of pre-populating tax returns with information already held by HMRC:

"Pre-filling of information in returns is widely used by tax authorities in other countries to reduce the burden on individuals. The tax authorities do not require individuals to fill in information about income that the authority is able to obtain directly from the source, for example, details of salary and tax deducted by employers or details of investment income from a bank.

The Danish authorities believe that pre-filling tax returns with information already held by the tax authority gives its taxpayers greater assurance about the accuracy of their return and saves them time as they only have to provide information that the authority is not able to receive directly from the payer of the income. The Danish also think that pre-filling tax returns has helped improve tax compliance by its citizens through greater engagement and that it provides a clear route to challenge data that the citizen believes to be inaccurate. This has helped greatly in improving the quality of the data used to calculate Danish tax liabilities." pageLibrary_ConsultationDocuments&propertyType=document&columns=1&id=HMCE_PROD1_031736

1.2. Integrating the operation of income tax and National Insurance contributions

The Office of Tax Simplification recommended that the Government set out a timetable for reform of income tax and NICs and commence work by the end of 2011. The Government has issued a 'Next steps' document responding to that recommendation. It summarises the results of the call for evidence, sets out some objectives and principles for reform and an indicative timetable for consultation and implementation. It also explains some of the challenges that must be overcome if reform is to succeed:

  • Chapter 2 provides a brief overview of the way income tax and NICs currently work.
  • Chapter 3 summarises the results of the call for evidence, and the conclusions. Overall, there is a strong case for developing proposals for reform, focused on the areas identified in the call for evidence. However, the evidence suggests it would not be appropriate to rush this reform and that instead the Government should embark on extensive consultation, in recognition of the scale of this reform and its potential impacts.
  • Chapter 4 describes the Government's parameters, objectives and principles for reform. It also describes the challenges that must be overcome for reform to succeed. The Government intends to work with stakeholders to explore how reform could be delivered and satisfy itself that its benefits sufficiently outweigh the transitional costs of putting it in place.
  • Chapter 5 sets out a programme of engagement and consultation and an indicative timetable for reform.

1.3. Beneficial interest in a jointly owned property

The Supreme Court has considered beneficial interest in a house acquired in joint names by an unmarried couple who intended it to be their main home. The case involved two parties Ms Jones and Mr Kernott. In 1983 Mr Kernott moved into Ms Jones's mobile home and they had a child in 1984. In 1985 Ms Jones sold the mobile home and the couple (remaining unmarried) bought a house (for £30,000) in joint names using the proceeds from the mobile home as deposit (£6,000), with the balance of the purchase price raised from an endowment mortgage in their own names. A £2,000 loan was taken out to build an extension and Mr Kernott did some of the labouring work on the extension and paid for other parts of the required work. A second child was born in 1986. In 1993 Mr Kernott moved out, but paid no further contribution to the house, or family maintenance. A joint life policy was cashed in 1996 to enable Mr Kernott to put a deposit down on another house for himself (in his own name). At the time of the dispute (April 2008) the property occupied by Ms Jones was worth £245,000, while Mr Kernott's property was worth £205,000.

The County Court judge concluded that a fair allocation of the value of the property occupied by Ms Jones was 90% to Ms Jones and 10% to Mr Kernott. This was upheld at the High Court, but the Court of Appeal concluded by a majority that the interest should be divided equally.

The Supreme Court clarified the approach taken in the previous case of Stack v Dowden [2007] UKHL 17, [2007] 2 AC 432 and in the leading judgement by Lord Walker and Lady Hale set out the principles applicable in a case such as this, where a family home is bought in the joint names of a cohabiting couple who are both responsible for any mortgage, but without any express declaration of their beneficial interests:

  1. The starting point is that equity follows the law and they are joint tenants both in law and in equity.
  2. That presumption can be displaced by showing (a) that the parties had a different common intention at the time when they acquired the home, or (b) that they later formed the common intention that their respective shares would change.
  3. Their common intention is to be deduced objectively from their conduct: "the relevant intention of each party is the intention which was reasonably understood by the other party to be manifested by that party's words and conduct notwithstanding that he did not consciously formulate that intention in his own mind or even acted with some different intention which he did not communicate to the other party" (Lord Diplock in Gissing v Gissing [1971] AC 886, 906). Examples of the sort of evidence which might be relevant to drawing such inferences are given in Stack v Dowden, at para 69.
  4. In those cases where it is clear either (a) that the parties did not intend joint tenancy at the outset, or (b) had changed their original intention, but it is not possible to ascertain by direct evidence or by inference what their actual intention was as to the shares in which they would own the property, "the answer is that each is entitled to that share which the court considers fair having regard to the whole course of dealing between them in relation to the property": Chadwick LJ in Oxley v Hiscock [2005] FAm 211, para 69. In our judgment, "the whole course of dealing ... in relation to the property" should be given a broad meaning, enabling a similar range of factors to be taken into account as may be relevant to ascertaining the parties' actual intentions.
  5. Each case will turn on its own facts. Financial contributions are relevant but there are many other factors which may enable the court to decide what shares were either intended (as in case (3)) or fair (as in case (4)).

Thus the decision of the County Court judge was restored. There was some further discussion on whether there was a difference between inferring an interest and imputing an interest, with the general conclusion that it could be important as to how an interest was derived by the court, as different methods of analysis will be required.

2. Private Clients

2.1. Individual moving into care – implications for private residence relief

Where someone becomes so infirm that they are unable to look after themselves and moves into residential accommodation, the circumstances may be such, either immediately or later, that it is unlikely that they will ever be able to return home. This could entail a loss of some Private Resident Relief (PRR) because, at the point when it becomes clear that there is no realistic possibility that they will ever return, the former home will have ceased being the person's residence.

Typically, also, if the new residential accommodation is in a care home, it will probably be occupied under licence, meaning that no PRR election will be possible.

Clearly if the former residence is retained until death there will be no CGT payable. However where the property is sold in the owner's lifetime, but more than three years after the owner has permanently left (perhaps to pay for the care fees), then there would be a potential CGT liability. If a sale in the owner's lifetime cannot be avoided, it should if possible be arranged within three years of their permanent departure.

3. IHT & Trusts

3.1. Disclosure of Tax Avoidance Schemes (DOTAS) and IHT


With effect from 6 April 2011 the disclosure regime was extended to require the disclosure of Inheritance Tax arrangements that seek to avoid IHT charges associated with transfers of property into trust.

DOTAS requirements

The legislation is contained in The Inheritance Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) Regulations 2011. The disclosure scheme for IHT differs from existing schemes as there are no "hallmarks" indicating unacceptable tax avoidance to trigger a disclosure. In order to be disclosable, the arrangements must result in property becoming 'relevant property' as defined in IHTA (ie settled property held in trust).

Regulation 2 (2) says:

(2) Arrangements are prescribed if —

(a) as a result of any element of the arrangements property becomes relevant property; and

(b) a main benefit of the arrangements is that an advantage is obtained in relation to a relevant property entry charge.

The HMRC guidance reads as follows:

"Property becoming relevant property

In order for an Inheritance Tax scheme to be disclosable the arrangements must result in property becoming relevant property. Relevant property is defined under s.58 (1) and does not include, for example, property held on charitable trusts, a qualifying interest in possession (s.59) or a disabled person's interest (s.89B).

Where, arrangements do not, at any stage, lead to property becoming relevant property then the scheme will not require disclosure under the Regulations.

It is important to remember that the requirement of the Regulations is merely that property becomes relevant property. It does not matter whether or not property becomes relevant property straight away or whether it remains relevant property; a scheme will require disclosure if at any point in the arrangements or proposed arrangements property becomes relevant property."

Section 58 IHTA 1984 defines relevant property as follows:

1) In this Chapter "relevant property" means settled property in which no qualifying interest in possession subsists, other than—

a) property held for charitable purposes only, whether for a limited time or otherwise;

b) property to which section 71, 73, 74 or 86 below applies (but see subsection (1A) below) ;

c) property held on trusts which comply with the requirements mentioned in paragraph 3(1) of Schedule 4 to this Act, and in respect of which a direction given under paragraph 1 of that Schedule has effect;

d) property which is held for the purposes of a registered pension scheme or section 615(3) scheme;

e) property comprised in a trade or professional compensation fund; and

f) excluded property.

Whether DOTAS applies

There are various pointers set out in the guidance:

1) Where business assets are purchased:

"The purchase of business assets (whether or not they are insurance backed) with a view to holding them for two years prior to transferring them into a trust (and therefore qualifying for relief under s.105) is not disclosable provided that there are no further steps in the arrangements as the grandfathering rules will apply".

2) Where there is no transfer of value

The guidance states:

"Where there are:

  • arrangements which result in property becoming relevant property;
  • there is no transfer of value; but, in the absence of other intervening steps in the arrangements there would have been a transfer of value;

disclosure may be required. This is because the arrangements have, by definition, resulted in an advantage in respect of the relevant property entry charge. Whether disclosure is required will depend on the grandfathering rules (see 9B.6 below)."

3) Claiming reliefs

"The claiming of a relief or increased relief is included within the definition of advantage. This means that where the relevant property entry charge is relieved then disclosure may be required. However, where there are no wider arrangements other than a single step claim to relief/exemption or use of the Inheritance Tax nil rate band then arrangements would not be disclosable. "

4) Grandfathering rules

Section 9B.6 sets out the grandfathering rules including:

"Regulation 3 provides for the exempting from disclosure of arrangements which are the same or substantially the same description as arrangements which were first made available for implementation before 6 April 2011;

It is a matter of fact whether an arrangement is grandfathered. The guidance includes a number of examples of grandfathering. Evidence of grandfathering would include:

  • "the existence and substance of the arrangement being clearly described in tax manuals or publications;
  • the production of an affidavit where evidence that the grandfathering rule applies is subject to legal professional privilege;
  • a·practitioner's own record as to when they made, or learnt that competitors were making, an arrangement available."

4. PAYE and Employment matters

4.1. Draft legislation for the introduction of 'Real Time Information'

HMRC has issued a technical note on draft legislation for introducing 'real time information' (RTI) in the form of draft amendments to regulations relating to PAYE, National Insurance contributions (NICs) and the Construction Industry Scheme (CIS). These are:

  • the Income Tax (Pay As You Earn) Regulations 2003 (SI 2003/2682) ("the PAYE Regulations");
  • the Social Security (Contributions) Regulations 2001 (SI 2001/1004) ("the NICs Regulations"); and
  • the Income Tax (Construction Industry Scheme) Regulations 2005 (SI 2005/2045) ("the CIS Regulations").

RTI changes will also extend to the collection of income contingent student loan repayments, where employers make deductions from the earnings of employed borrowers. HMRC collects repayments through the UK tax system on behalf of the Department for Business, Innovation and Skills (BIS), and is working closely with BIS on amendments that will be required to The Education (Student Loans) (Repayment) Regulations 2009 (SI 2009/470).

Most aspects of the way employers operate PAYE will remain unchanged. For example no changes are proposed to:

  • deductions from payments to employees;
  • the frequency of payments to HMRC of PAYE income tax, NICs, student loan repayments deducted by employers and CIS deductions; or
  • completion and maintenance of deductions working sheets or their equivalents.

Phased introduction of RTI will begin in April 2012 with a small group of employers who have agreed to take part in an initial pilot. Subject to the success of this pilot, HMRC will seek to increase the number of employers joining RTI during 2012-13.

All employers will be required to submit information using RTI from 6 October 2013. In addition, HMRC will have the option to require employers to submit RTI returns before that date, by issuing a direction. HMRC envisages that employers who are not in RTI during 2012-13 will be required to join RTI from April 2013. There are some exemptions, for example for those whose religious beliefs prohibit them from using electronic communication.

Under RTI, employers will be required to submit an RTI return to HMRC each time an employee is paid. It is proposed that returns will be required on or before the date of payment, with a single return covering all employees paid at the same time, provided the employees are all on a single payroll. If, for example, an employer pays two groups of employees on different payrolls but at the same time, two returns would be required.

At the end of the tax year, employers in RTI will no longer be required to submit P14 or P35 returns as a matter of course. HMRC will retain the option to require these returns if necessary, however this would only be used as a contingency during the pilot period. RTI employers will still need to provide their employees with P60 end of year certificates.

The policy intention in setting the penalty regime for late filing in the year 2012-13 is to strike the correct balance between the need to effectively enforce the reporting of information and the collection of tax, against the recognition that employers will be entering into agreements with HMRC to submit RTI during the pilot.

For 2012-13, the final RTI submission of the tax year will be treated as equivalent to the P14/P35 end of year return, and penalties for late filing will apply as currently. Interest will also continue to apply to any late payment following the end of the tax year. The existing penalties for incorrect returns will also apply.

However from 2013-14 it is intended that penalties will also apply for late filing of RTI data during the year, and further legislation will be published for comment in due course.

There are in addition some changes not related to RTI, including:

  • Closure of the Simplified PAYE Deductions Scheme for personal employees
  • Clarifying reporting requirements relating to End of Year certificates pageLibrary_ConsultationDocuments&propertyType=document&columns=1&id=HMCE_PROD1_031738

The draft amendments to the regulations can be found at:

5. Business tax

5.1. Tax credits on foreign income dividends and time limits for tax claims

The Trustees of the BT Pension scheme (BTPS) succeeded at the First Tier Tribunal in establishing that the restriction on the right to recover tax in relation to tax credits on foreign income dividends (FIDs) was a restriction on the EU treaty article on the freedom of movement of capital. They also succeeded in establishing that the right to recover tax in relation to tax credits on dividends paid to UK investors from portfolio holdings (less than 10%) in non-UK resident companies was a restriction on the EU capital directive. In the case of pension funds that are not taxable on their investment income, had they been permitted to reclaim the tax suffered this would have been a net receipt to the pension funds.

The case was heard at the First Tier Tribunal after claims brought by BTPS at the High Court in January 2003 concerning FIDs and April 2005 concerning tax credits on dividends from non-UK companies (tax credits) and a 2004 group litigation order at the High Court concerning FIDs, of which BTPS was the test claimant. After a 2007 case management hearing it was agreed the High Court cases be stayed pending consideration by the Special Commissioners (now the First Tier Tribunal) of entitlement to tax refunds in respect of FIDs and tax credits, and whether the claims should be rejected as being out of time. The amounts at stake were:



Tax Credits

1990/91 – 1995/96












1996/97 – 1997/98






The FID claims were made in January 2003, which for 1994/95 – 1996/97 was more than six years after the end of the tax year to which the claim related. However the 1996/97 tax year was under enquiry until a closure notice was issued in 2008. The tax credit claims were filed in April 2005 and were made more than six years after all the tax years concerned.

However the First Tier Tribunal concluded that no new principle was established that permitted a new claim to be made in any of the cases, and that the fact that the 1996/97 tax year was under enquiry until 2008 did not extend the time limit in which a claim in respect of FIDs or tax credits could be made. Thus the only claim that was within the time limit was the 1997/98 FID claim.

5.2. ECJ decision on the reform of Gibraltar's corporation tax

The European Court of Justice has dismissed a previous EU General Court ruling, which had annulled a 2004 Commission decision finding that a proposed Gibraltar corporate tax reform amounted to incompatible aid in favour of offshore companies.

At issue was whether the regime notified by the UK government to the Commission for clearance in 2002 was selective or not, in other words whether it afforded lower rates of taxation to certain companies compared to others.

In 2004, the Commission took a decision concluding that the regime would give former offshore companies domiciled in Gibraltar an unfair tax advantage. The European Union's General Court annulled the Commission's decision in 2008 arguing that the Commission had failed to identify what was the system of reference for its assessment.

The EU's top court (the Court of Justice) confirmed on 15 November 2011 that the fact that offshore companies would not be taxed in Gibraltar "is not a random consequence of the tax at issue but the inevitable consequence of the fact that both corporate taxes are specifically designed so that offshore companies avoid taxation".


The Gibraltar tax reform foresaw the abolition of the classical corporate tax system (where a percentage of benefits is taxed), and its replacement by a hybrid system. Under this hybrid system, companies domiciled in Gibraltar would be subject to a yearly payroll tax of £3,000 per employee and to a business property occupation tax (BPOT).

Total tax liability (payroll + BPOT) would be capped at 15% of profit. If a company makes no profit, there would be no tax liability.

In addition to the payroll and property taxes, financial services companies would be charged a top-up tax fixed at a rate between 4% and 6% of profits from their financial service activities. The total taxation of financial services companies (payroll + BPOT + top-up) would also be capped at 15% of profit.

The Commission considered that the measure was designed to allow in particular former offshore companies to continue enjoying a very low level of taxation.

Gibraltar has in the meantime introduced a different tax regime that has been in place since the 1 January 2011. =EN&guiLanguage=en 106/09&nomusuel=&docnodecision=docnodecision&allcommjo=allcommjo&affint=affint&affclose=affclose &alldocrec=alldocrec&docdecision=docdecision&docor=docor&docav=docav&docsom=docsom&docinf=do cinf&alldocnorec=alldocnorec&docnoor=docnoor&docppoag=docppoag&radtypeord=on&newform=newfor m&docj=docj&docop=docop&docnoj=docnoj&typeord=ALL&domaine=&mots=&resmax=100&Submit=Re chercher

5.3. Chancellor's statement on the Economic and Financial Affairs Council discussions

Extracts from George Osborne's ministerial statement of 15 November on the 8 November 2011 ECOFIN discussions in Brussels include:

Financial Transaction Tax

I made it clear that the Government do not support the Commission's proposal. As stated in the Commission's own assessment, it would reduce growth and cut jobs. Other member states, including Bulgaria, the Czech Republic, Italy, Luxembourg, Latvia, the Netherlands, Romania and Sweden also voiced concerns with the current proposal.

Banking package

I made it clear that the Government would support co-ordinated national guarantee schemes, where appropriate, to support banks accessing term funding. However, the Government could not support a scheme which placed euro area bank liabilities on the UK. I underlined the importance of the bank recapitalisation aspect of the package. This should be undertaken while mitigating the risk of deleveraging. I also emphasised that the state aid rules should continue to apply fully.

5.4. Stamp Taxes Bulletin

HMRC has published its second Stamp Taxes Bulletin of 2011, which covers:


  • Exchanges.
  • Exchanges and VAT.
  • Multiple purchases of residential properties published guidance clarification of status of student accommodation.
  • Relief for overpaid tax - revision of FA03/SCH10/PARA34.
  • Further guidance on Schedule 15 Finance Act 2003.
  • Amending SDLT returns.
  • Incorrect information on SDLT returns.
  • Recent changes to SDLTM.
  • Annex – Completing questions 49 – 51 SDLT1.

Land and Shares.

  • HMRC Bank of England accounts.
  • Same day stamping.

In relation to further guidance on FA03 Schedule 15 (SDLT and partnerships) the comment is: "We are currently working towards finalising the guidance on Partnership transactions that has already been published. Additional guidance will be published when each segment is complete."

Some other points worth noting include:

Exchanges – HMRC does not indicate under what authority there is justification for a just and reasonable apportionment in its example. Example three does not appear to take account of the fact that valuable consideration has been given for a purchase by way of exchange, so it appears that HMRC are applying the principle of 'taxed by law and untaxed by concession'.

The examples on relief for overpaid tax include an example on claiming disadvantaged areas relief. Some claims for relief must be included in a land transaction return (e.g. transfers involving multiple dwellings FA03 s58D and Sch 6B), however disadvantaged areas relief (FA03 s57 and schedule 6) does not specify the relief must be claimed in a land transaction return. HMRC guidance at SDLTM20100 indicates that the land transaction return makes provision to claim the relief, when in fact there is no specific provision, and the bulletin refers to the claim for DAR being subject to FA03 Sch11A (claims not included in returns) and examples 1 and 2 illustrate this point.

5.5. Minutes of the business tax forum

Minutes of the Business Tax Forum meeting of 19 September are now available. They cover:

CFC consultation: business was supportive of the consultation process, though it had been long. They hoped for a gateway test that would provide automatic exemption for around 90% of cases.

Dispute resolution and alternative dispute resolution (ADR). HMRC had found mediation to be helpful in cases where:

  • parties were unclear or unable to articulate points in dispute;
  • there were multiple parties involved;
  • there was no dispute over technical analysis but parties need to agree methodology to quantify liability;
  • there were disputes over facts;
  • there were entrenched views and strained relationships.

HMRC also believe that cases where mediation is less suitable are where:

  • HMRC needed judicial precedent to apply to other cases;
  • there was doubt over the strength of evidence and HMRC wanted to test it at a Tribunal;
  • it was premature - either because there had been little or no engagement between the parties or because productive discussions were ongoing;
  • the request for ADR appeared to be an afterthought;
  • there was a fundamental difference in legal interpretation and HMRC wanted to maintain its existing policy.
  • One of the points highlighted by the work of the Dispute Resolution Unit was that fewer direct tax cases get referred for ADR, while indirect tax cases were much more quickly escalated.

Real Time Information: - There was general concern from business as to whether RTI would take into account work taking place on National Insurance contributions. The point was also made that data requirements should be set as soon as possible as shifting requirements made it difficult for business to plan to implement the changes. HMRC acknowledged that there were challenges.

Sub-CRM large business service: Business commented that there was anecdotal evidence sub-CRM business were not receiving the same level of service as businesses with a CRM. HMRC responded by explaining that approximately 1,300 groups within Large and Complex had CRMs whilst the rest of the population had customer coordinators (CCs). The CC service had just been relaunched. If a specific business felt that there was a reason that they required the level of contact provided by a CRM then HMRC would be open to reviewing the case. HMRC agreed to look at how it could consult with sub-CRM businesses to establish if there was a gap. It also highlighted that this group was more dependent on their agents for receiving messages from HMRC and a forum to interact with the agents of the sub-CRM population was already in existence.

Cross learning workshops.

HMRC organisational change: HMRC explained that they had been undergoing a reorganisation and that all the directors had now been confirmed in post. The changes should mean that there is a geographically coherent structure going forward making it easier for the Large Business Service and Local Compliance Large and Complex to communicate with their customers. Some of the CRM posts would be competed for but the process would be completed by the end of September and any handovers would be properly managed. Business was assured that the overall number of CRM's would not be reduced.

6. VAT

6.1. VAT and business entertainment

HMRC has updated its notice 700/65 regarding VAT on business entertainment. It includes updated guidance on entertaining overseas customers following the Astra Zeneca ECJ case (see item 4.2 Informal 8 November 2010). pageLibrary_PublicNoticesAndInfoSheets&propertyType=document&columns=1&id=HMCE_CL_000092

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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Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.