UK: Weekly Tax Update – Monday 9 January 2012

Last Updated: 13 January 2012
Article by Richard Mannion


1.1. Cost of tax reliefs

HMRC has recently published updated statistics showing the estimated costs to the Exchequer of the main tax reliefs for 2010/11. At a time when the Government is looking to boost its tax take while the country is still teetering on the edge of a recession, the statistics may give some clues as to where the Chancellor will look next for some easy pickings:

Relief for registered pension schemes (front end relief on contributions plus exemption of investment income) £20.8bn.

NIC lost on employer contributions to pension scheme £8.3bn.

The sheer size of these numbers does mean that the existing (rather liberal) regime for pension contributions and tax-free lump sums will always be under some threat. However in reality if pension funds are attacked this will reduce the incentive for individuals to save for their retirement and thus increase their dependency on the state.

VAT zero-rating on food £13.45bn.

Again another big number which must be a tempting target for any Chancellor. But removing zero-rating on food would be seen as 'regressive' as it would impact more harshly on the less well-off.

Zero-rating also applies to books and magazines and it would perhaps be easier for the Chancellor to remove that relief. However doing that would produce only £1.45bn extra (assuming everyone continued to buy at the same rate as before) and so that would not solve the problem on its own.

Personal allowance £51.8bn.

The Coalition has pledged to increase the personal allowance over the lifetime of this Government and so the current relief looks bomb-proof so far as most taxpayers are concerned. However it is important to note that personal allowances have already been taken away from individuals with taxable income of more than £100,000 and that threshold could easily be moved downwards.

CGT private residence exemption £13.3bn.

This relief was looked at carefully by the Office of Tax Simplification. The OTS concluded that the relief was still necessary, but it did recommend some tidying up. Nothing further has been heard, but it may be a subject to which the Chancellor returns.

NIC primary threshold £13.8bn.

NIC secondary threshold £16.6bn.

NIC is an easy one for any Chancellor to manipulate as so many taxpayers don't recognise that this is really just another tax.

Capital allowances £17bn.

Both Alistair Darling and George Osborne have attempted to reduce the cost of capital allowances. This is a difficult one to balance however as the country needs businesses to invest in new plant, and reducing the tax reliefs further could therefore be counter-productive.

IHT nil-rate band £11bn.

This sounds like a lot of money and therefore an attractive target. However IHT is probably the most hated of the taxes and any Chancellor seeking to reduce the NRB would be in danger of upsetting voters. Indeed the Conservatives have said that they would like to increase the NRB substantially rather than reduce it.


2.1. Newsletter for Trusts and Estates practitioners

HMRC has published the latest newsletter for trusts and estates practitioners which includes articles on: Pre-owned assets; Employee Benefit Trusts; Amending an IHT account; A reminder of when to apply for an IHT reference number; IHT payments - Issue of receipts; National Heritage Property; Paying IHT by National Savings Investments; Penalties for late filing and late payment; IHT forms; Amendments to HMRC Trusts & Estates Manuals.


3.1. Disguised remuneration – FAQs on NIC

HMRC has published 13 frequently asked questions regarding the NIC provisions that apply to disguised remuneration. Included in the FAQs are the following points:

FAQ9 When do the new rules begin to apply?

The NIC rules come into force on 6 December 2011. They are not retrospective.

The income tax rules have effect in relation to relevant steps taken on or after 6 April 2011. And, for income tax purposes, anti-forestalling rules cover relevant steps taken in the period from 9 December 2010 to 5 April 2011. To the extent that a relevant step taken in that period has not been taken back before 6 April 2012, it will give rise to Part 7A income for 2012-13.

Relevant steps taken before 6 December 2011 (including relevant steps taken before 6 April 2011) will not give rise to NIC liability. But it must not be forgotten that normal NIC liability rules must still be considered in respect of these payments.

FAQ4 When are the earnings paid?

For Class 1 NIC purposes, the earnings are paid in the earnings period in which the relevant third person takes the relevant step giving rise to the [ITEPA] Part 7A income under review.

FAQ10 EIM11813 explains that, if the relevant step is not the payment of a sum of money, the employer does not apply PAYE to employment income to which the remittance basis applies. In such a case, should the employer apply NIC and PAYE to the same amount?

No. There is no remittance basis in NIC. In such a case, the employer must apply NIC to the full amount counting as employment income, without any reduction for the remittance basis.

FAQ13 Section 554Z14 of ITEPA permits an application for income tax relief to be made where earmarking is not followed by a further relevant step. And sections 554Z14 and 554Z21 of ITEPA permit an application for income tax relief to be made where earmarking or provision of security is not followed by payment of a contribution or provision of a benefit. See EIM45875 and EIM45880. If income tax relief is given under these rules, will NIC relief be given too?

No. It is a long-standing principle of the NIC system that Class 1 NIC is not refunded unless the NIC has been paid in error. Where earmarking gives rise to a relevant step under section 554B of ITEPA with resulting income tax and NIC charges, the NIC payable will have been properly due at the time.

3.2. Update to HMRC Employment Income Manual

HMRC has recently updated its employment income manual. The updates include changes to the guidance on:

  • Employer-financed retirement benefits schemes.
  • The benefits code.
  • The year that earnings are "for".
  • Employment income provided through third parties.
  • Seafarers' Earnings Deduction.
  • Tax treatment of doctors.

3.3. PAYE penalties

Accounting Web has reported that HMRC is preparing an appeal against the First Tier Tribunal decision in Hok Ltd v HMRC. This was a decision by Geraint Jones QC who has been consistently critical of the fact that HMRC has acted unfairly in delaying the issue of penalty notices, thereby increasing the number of automatic monthly penalties being charged in each case.

An exchange of views on this subject was published in Working Together 46 between Derek Allen of ICAS and Sue Walton of HMRC, from which it was clear that HMRC does not accept that it has any responsibility to help its "customers" who have attempted to comply with the PAYE filing deadline, and who only realised they had failed to do so when the penalty notice was received.

There has been a succession of FTT cases over recent months where the employer set out to file form P35 on time, and for some reason it was not captured on the HMRC system. These were people who were willing and able to pay their tax, and indeed had probably paid all the PAYE for the year in question. However HMRC delayed telling them that the return had not been captured until a hefty fine had built up and in WT46 Sue Walton made it clear that so far as HMRC was concerned it made no difference whether or not there had been 'a genuine mistake'.

It is disappointing that despite the number of cases where the tribunal has criticised HMRC for its intransigence on this point and on its interpretation of the definition of 'reasonable excuse', HMRC is determined to press on regardless.


4.1. Updates to HMRC Enquiry Manual

The HMRC Enquiry Manual has been amended to include new pages on whether a company is a member of a group that is not small for the purpose of the time limits for opening enquiries and related information and examples, and new paragraphs on reasonable excuse and discovery.

4.2. Business records checks

HMRC has issued the following statement:

"HMRC recognise that the launch of the BRC pilots has caused considerable concern to the tax profession and that the project would have benefited from more detailed consultation with tax professionals at an earlier stage. In the light of these concerns, HMRC will undertake a strategic review of the project in consultation with the professional and representative bodies. The purpose of the review is to consider the overall aims of BRCs, examine whether the current approach is the best way of achieving the policy objectives and identify what changes are needed to ensure that the objectives are achieved.

In the meantime HMRC will continue with a limited number of BRC pilots and the results of them will be evaluated as part of the review. Richard Summersgill (HMRC's Director, Local Compliance) and Naomi Ferguson (Director, Business Customer & Strategy) are jointly sponsoring the review and it will be led by Tracy Kirkham. HMRC will also consult with the professional bodies and other representatives through the Compliance Reform Forum and also with ABAB (the Administrative Burdens Advisory Board). HMRC expect to report initial findings in early 2012.

Given the concerns over possible penalties, HMRC would like to take this opportunity to reassure taxpayers and agents that HMRC will not (except in extreme cases such as where a taxpayer has no records or has destroyed them) be seeking to use the record-keeping penalty provision during the pilots. No such cases have been identified so far.

HMRC and the tax profession share the overriding policy objective, namely to ensure that businesses' recordkeeping meets the necessary statutory requirements and that their records are sufficient to enable a correct and complete tax return to be submitted within the time limits. HMRC are grateful to the representatives of business and the agent bodies for agreeing to work with them on the review and look forward to developing a shared understanding of how the overriding policy objective can be implemented with representatives' full support."

5. VAT

5.1. Revenue & Customs Brief 47/11 – VAT treatment of extra care accommodation

HMRC has issued a Brief clarifying their view of the VAT treatment of 'extra care accommodation' (residential property available for sale or to let to individuals who have the option of purchasing varying levels of care). They comment:

Some planning authorities in England have classified extra care accommodation under Use Class C2 of the Town and Country Planning (Use Classes) Order 1987, rather than Use Class C3, which is the class that ordinarily applies to flats, houses, bungalows and maisonettes. While developments reviewed to date have all been in England, it is likely that similar issues may have arisen in developments in other parts of the UK where equivalent but not identical Use Classes apply.

However, HMRC is satisfied that the classification for planning purposes is not of itself determinative as to the nature of the building and so does not establish whether the building is 'designed as dwellings' for the purpose of the VAT zero rate.

HMRC accepts, regardless of the Use Class, that extra care accommodation is 'designed as a dwelling', and therefore its construction and first sale or long lease will be zero rated, if it meets all of the standard conditions, which are as follows;

  • the dwelling consists of self-contained living accommodation;
  • there is no provision for direct internal access from the dwelling to any other dwelling or part of a dwelling;
  • the separate use of the dwelling is not prohibited by the terms of any covenant, statutory planning consent or similar provision;
  • the separate disposal of the dwelling is not prohibited by the terms of any covenant, statutory planning consent or similar provision;
  • statutory planning consent has been granted in respect of that dwelling and its construction or conversion has been carried out in accordance with that consent;

HMRC also indicates it will issue further guidance on its interpretation of other types of accommodation, and whether or not they too can be considered for VAT to be 'designed as a dwelling', early in 2012.

5.2. Updates to HMRC VAT manual - Food

HMRC has updated its VAT manual in respect of decisions on food made in the following cases:

  • The Upper Tier Tribunal decision relating to Deliverance Ltd.
  • The First Tier Tribunal decisions in the cases of European Independent Purchasing Company and Sub One Limited.
  • The First Tier Tribunal decision in Made to Order Ltd.
  • The Astra Zeneca Tribunal decision.
  • The First Tier Tribunal decision in the case of West Country Vending Services Ltd.
  • The First Tier Tribunal decisions relating to Innocent Smoothies and Lucozade Sports drinks.
  • The Court of Appeal decision relating to Regular Pringles.
  • The First Tier Tribunal case of Supreme Petfoods Ltd.

5.3. Court of Appeal decision in Axa Denplan

HMRC issued a Brief in January 2011 following the October 2010 decision of the ECJ decision in Axa Denplan (2010] EUECJ C-175/09) concerning the VAT treatment of payment handling services (see item 5.1 Informal 17 January 2011).

Following the ECJ's decision the Court of Appeal has now considered the case and decided in favour of HMRC's and the ECJ's interpretation – i.e. that on the facts of this case the correct VAT interpretation of Axa Denplan's payment handling service was 'debt collection' and therefore not eligible for VAT exemption.

Lady Justice Arden gave the main judgment and concluded as follows:

It is apparent that the precise scope of the exemption and carve out is unclear, and will require further definition in the future. However, the authoritative determination of what falls within the exemption and the carve out is within the jurisdiction of the Court of Justice. If there is any ambiguity, therefore, it can be cured by a further reference to the Court of Justice in a future case. Therefore, this lack of clarity is not a reason for not giving the finance exemption a conforming interpretation in the present case.

As to the effect of the ruling in the present case, in my judgment, it is clear that the Court of Justice concluded that the words "debt collection" in the carve out have a meaning capable of being applied to "transactions concerning payments" within the exemption in article 13B(d)(3) (judgment, paragraph 28, last sentence). It then has to be decided whether the actual transaction in question falls within the exemption or the carve out, and this will depend on its precise facts. If it falls within the exemption it will fall outside the carve out, and vice-versa (see final sentence of paragraph 28). The Court of Justice does not define the purpose of the exemption. It is unnecessary to decide on this appeal what the full scope of the exemption might be. However, for the purposes of this judgment it may hypothetically be taken to be normal retail banking activities (and indeed that is one way of reading paragraphs 24 to 27 of the judgment of the Court of Justice in Nordea). On that hypothesis, the carve out takes out of the scope of the exemption any separate supply of services which is more properly regarded as a service of debt collection.

In my judgment, it is also evident that the Court of Justice understood that the service in the present case was purely Payment Handling and not debt collection in the usual sense of the word: see for example paragraphs 28 and 33 to 35 of the judgment of the Court of Justice. It concluded that the supply in this case, therefore, fell outside the exemption: see paragraphs 32 and 36. On the conclusions drawn by the Court of Justice as to the true interpretation of the carve out, there was no other conclusion which it, or this court, could draw. All the facts had been found by the Tribunal, and the material facts were summarised both in the agreed reference from this court and in the judgment of the Court of Justice. Accordingly, I do not consider that there is any case here for further adjudication by this court, nor for a further reference to the Court of Justice.

Lord Justice Rimmer reached the same conclusion by a different route, commenting in particular:

I do, however, reach that conclusion by a route that may in part differ slightly from Arden LJ's. Whilst I agree that Group 5, item 1 effectively implemented article 13B(d)(3), I regard it as having done so by the technique of simply transposing the exemptions, which was all that it needed to do. Transactions within the 'carve out' of article 13B(d)(3) do not enjoy an exemption and so there was no need for Group 5, item 1 to refer to them. The exemptions transposed by Group 5, item 1 must, however, be interpreted in conformity with the exemptions in article 13B(d)(3) and as not, therefore, including transactions in the nature of 'debt collection and factoring'.

I regard the theory of the operation of article 13B(d)(3) as clear although how it applies to any particular transaction may in practice raise questions of some difficulty. The theory must be that any particular transaction will either be within or outside the exemptions; and that will depend upon its correct characterisation. The sense of the 'carve out' cannot be other than that, whatever the width of the exemptions, they do not include transactions in the nature of 'debt collection and factoring'.

In my view, the substance of what the Court of Justice was saying in the last sentence of paragraph 28 of its judgment was simply that, if the Denplan service was not debt collection or factoring, it would be within the article 13B(d)(3) exemptions. What the court then proceeded to do was to apply its case law to the facts relating to that service as found by the VAT & Duties Tribunal. The outcome was that it held that their correct characterisation was that of 'debt collection', a concept that, for the purposes of article 13B(d)(3), is an autonomous one for the purposes of European Union law. The making of that characterisation was properly a matter for the Court of Justice.

Justice Ryder agreed with the conclusions of Justice Arden and Justice Rimmer.

VATA Sch9 Group 5 item 1 is the UK legislation implementing the EU law on exemption for such transactions, but despite not mentioning the exclusion for debt collection services, the Court of Appeal held it had to be interpreted as conforming with EU law and so should be read as taking that exclusion into account. It seems that the Court of Appeal decision is clear that the Axa Denplan arrangements were not VAT exempt, but that the application of the EU exemption for financial transactions that include payments but do not include debt collection is not clear.


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