UK: Weekly Tax Update - Monday 6 February 2012

Last Updated: 13 February 2012
Article by Richard Mannion


1.1. Conditions to be satisfied for a discovery assessment to be valid

Anthony While succeeded in overturning a discovery assessment made by HMRC, arising from his receipt of a substantial award for damages from his former employer for an incorrect reference and wrongful dismissal.

When Mr While was a director of an insurance company he ran up debts with HMRC in excess of £150,000, but agreed a repayment plan to settle the liability. This was interrupted in 1992 when he was dismissed. As a result of an Industrial Tribunal hearing and then a High Court claim, Mr While received in excess of £354,000 as compensation and damages. The High Court decision stated that the amount to be received by Mr While was net of all taxes. However the Court (and the advisers to the Court who prepared the schedule of loss) had omitted to take account of the fact that the award in excess of £30,000 should be subject to income tax. The award had not been declared on Mr While's 1998/99 tax return.

Mr While's 1998/99 was enquired into and a written record of an April 2000 meeting between Mr While, his accountants and an HMRC officer was prepared evidencing discussion of the fact that Mr While had received a large award and how those funds had been spent. The enquiry was closed in January 2001, but HMRC issued a discovery assessment in respect of income tax on the damages (exceeding £94,000) in January 2005.

It was accepted that Mr While was held not to be fraudulent. It was also accepted (the case-law background to this issue being set out in Charlton and others v HMRC [2011] UKFTT 467 (TC)), that HMRC could raise a discovery assessment where a new inspector reviewed a case and made a different decision from the earlier inspector, without the need for any new evidence.

Mr While had sent a copy of the newspaper cutting of the outcome of the High Court case to HMRC enforcement office, but there was no evidence that this was passed on to the officer undertaking the enquiry into the 1998/99 return. The note to the April 2000 meeting was held to be evidence of which HMRC was already aware, but the newspaper cutting was not. In Mr While's circumstances the Tribunal noted that the impact of the £30,000 income tax exemption limit had been overlooked by a number of professionals and that it was reasonable for Mr Wild to understand from the High Court's comment that the damages were determined "net of all deductions" that there would be no tax to pay. However the Tribunal concluded that the hypothetical reasonable inspector would have been aware of sufficient information regarding the award and the £30,000 income tax exemption limit, so as to be able to raise an assessment within the normal enquiry window.

Mr While's accountant prepared his tax return and it could therefore have been held that the return was negligently filed for the purposes of TMA s29(4) as a result of someone acting on Mr While's behalf. Although Mr While's accountant was aware of the awarded damages, Mr While had not advised him that any part of those damages represented taxable income. The accountant submitted that if he had been made so aware, then he would have included the income on the tax return. The Tribunal agreed with this view and found that the accountant was not negligent in preparing the return on behalf of Mr While.

The Tribunal therefore concluded that as Mr While had not been fraudulent or negligent in submitting his return, and as the necessary information to raise the assessment was in HMRCs possession within the normal enquiry window, the requirements for making a discovery assessment were not met.

1.2. Amending a tax return

Since April 2010, once the normal period for amending a tax return has passed, HMRC is under no obligation to correct a claim or mistake in a tax return (TMA Sch1AB para2(2) and FA1998 Sch18 para51(A)2). Neither can an application to amend a claim be made once the return is under enquiry.

However when an enquiry is closed, it may be possible to make, revoke or vary a claim, election or notice that could have originally been made, in order to mitigate the amount of any extra tax arising out of the enquiry, if the claim is made within 12 months of the cessation of the enquiry (TMA s42A – s42C) or 12 months of the end of the accounting period in with the closure notice was issued (FA1998 Sch18 paras 61-64).

1.3. Implementation & related work on HMRC powers, deterrents and safeguards

HMRC has updated its table setting out the implementation of legislation and related work on HMRC powers deterrents and safeguards.

1.4. Official rate of interest

The official rate that has applied since 6 April 2010 is 4.00%. HMRC has announced that this rate is unchanged for the 2012-13 tax year, subject to review in the event of significant rate changes.


2.1. CGT Entrepreneurs' Relief

ICAEW Tax Faculty has issued a Taxguide covering a number of technical queries on the operation of ER that were put to HMRC through the Capital Gains Tax Liaison Group. It is understood that the HMRC guidance on ER (which can be found at CG63950 et seq of the HMRC Capital Gains Manual) will be extended to cover most, if not all, of the issues raised in this guidance.

As further queries are raised and clarified, Tax Faculty will issue updates.

2.2. Reminder of time limits for EIS claims

The time limit for an EIS investor to claim relief has not been affected by the reduction to the general time limit for making claims. The time limit therefore remains as five years from the 31 January following the tax year in which either the subscription was made, or the company has traded for four months, whichever is later. This time limit for a claim for EIS relief is specifically prescribed in the legislation (under ITA 2007, s 202), which has not been changed and therefore is not affected by the general time limit for making claims having reduced from five years and 11 months to four years.

In 2010 we queried the position regarding the time limit for a claim for deferring a capital gain on the back of an EIS investment. The then recently issued HMRC helpsheet referred to the latest time for making a deferral relief claim as four years after the tax year in which the shares are issued. The correct time limit is given in the current version of Helpsheet HS297, namely no later than the fifth anniversary of the normal filing date for the tax year in which the shares are issued.

Please note however that for claims in respect of VCT relief the investor must claim relief within four years from the end of the tax year in which the investment was made.


3.1. Kuehne & Nagel Drinks Logistics Ltd and compensation for loss of pension rights

Kuehne & Nagel Drinks Logistics Ltd has lost its appeal against the Upper Tribunal's decision that the £4,800 they gave to each of 2,000 employees as part of TUPE arrangement for them to transfer their employment contracts to the new company. The Court of Appeal held that the Upper Tribunal had correctly determined the payments were remuneration subject to tax (as they related to a payment to compensate for reduced pension rights and were made as part of a bargain for the employees not to take strike action) and not exempt termination payments. The Upper Tribunal case was covered in item 4.6 of Informal of 10 January 2011.

3.2. NIC rates and thresholds for 2012/13

HMRC has published draft regulations and an order setting out the National Insurance contributions rates, thresholds and limits for the 2012/13 tax year. From 2012/13 the basis for indexation of certain national insurance contribution (NICs) rates, limits and thresholds will be in line with the Consumer Price Index (CPI) instead of the Retail Price Index (RPI).

3.3. Integrating the operation of income tax and NICs

HM Treasury has published the minutes of meetings held in December 2011 by the working groups set up to consider various aspects of the planned integration of the operation of income tax and NICs.

Working group 1 is considering options to remove misalignments between the treatment of earnings and in their latest meeting they considered business expenses, benefits in kind, pension contributions, termination payments, pecuniary liabilities, payroll giving, thresholds, salary sacrifice and tips.

Working group 2 is considering options to make the calculation and operation of NICs more like income tax.


4.1. EIS property development and whether funds raised were employed in time

The First Tier Tribunal has rejected a claim from The Benson Partnership Limited against HMRC's withdrawal of EIS relief. The case is of interest for assessing where the boundary lies between what is and is not a property development business excluded from EIS relief, and also on whether the funds have been committed or earmarked and therefore employed in the business within the required timescale.

The company was incorporated on 17 December 2002 to provide consultancy and advisory services to public and private sector organisations in relation to construction estimating, project management, quantity surveying and housing management services. The directors and shareholders were Mr & Mrs Johnson, who in 2004 bought some land for development in Florida. The company had no interest in the land. Payments to contractors during the construction process were routed through the company.

The activity of property development is excluded from the EIS relief scheme where the company has, or at any time has had, an interest in the land with the sole or main object of realising a gain from the disposal of an interest in the land when it is developed. The tribunal concluded that as the company did not have an interest in the land, it was not undertaking the non-qualifying activity of property development.

Under the legislation in force at the time relevant to this case, 80% of EIS funds had to be employed wholly for the purpose of the qualifying activity within 12 months of the later of the issue of the shares and the commencement of the qualifying trade, with the balance of funds being required to be so employed by the end of the following 12 months [the requirement since 22 April 2009 is that the whole of the EIS funds must be used within two years of the later of the share issue or commencement of trade].

It was acknowledged that the Skye Inns case (see informal item 5.8 Informal 18 January 2010 and item 5.3 of Informal 14 November 2011) indicated it was sufficient for the funds to be earmarked for a specific purpose within the relevant period. In the case of the Benson Partnership Limited, while photographic evidence was presented to demonstrate that 85% of the construction of the property had been completed by the required time, there was no payment or accrual for the required payment in the company accounts at the relevant time to demonstrate that at least 80% f the funds were 'used' in the required manner. The company therefore lost in its claim for EIS relief on its shares.

4.2. Corporation Tax in Northern Ireland

On 30 January 2012 the Government published a response to the Northern Ireland Affairs Committee first report.

The Government welcomes the report of the Northern Ireland Affairs Committee published on 24 May 2011 and is grateful for the work of the Committee on this issue. On 20th December the Government published its response to its consultation on Rebalancing the Northern Ireland Economy. As set out in that document the Government has established a joint ministerial working group, comprising ministers of the UK Government and the Northern Ireland Executive, to consider issues raised by the consultation. This group met for the first time on 15 December 2011.

No decision has yet been made on whether to devolve corporation tax. A decision will be taken following the conclusion of work developed by the joint ministerial working group, which is expected in summer next year.

The report also contains the following comment:

The Government is confident that HMRC's handling of business tax settlements means that businesses are paying the right tax. The National Audit Office examined HMRC's approach during the summer and their report endorsed the strong governance arrangements that HMRC has put in place. The wider issue of the nature of the tax regime necessary to support a devolved Northern Ireland rate and how it might be administered will be considered further as part of the workplan overseen by the joint ministerial working group.

4.3. Right to an interim payment order in the FII GLO

HMRC has lost their appeal against the High Court's decision in 2009 to award an interim payment order to GKN for £4.4m plus interest relating to their ACT and FID tax reclaims included in the Franked Investment Income Group Litigation Order (FII GLO). This followed on from an initial decision of Henderson J in the High Court, but which HMRC had appealed. The result of HMRC's appeal of the Henderson J decision (see Informal 1 March 2010 item 4.4) meant that while the Court of Appeal agreed with many of the points, they significantly limited the size of any repayments. As a result of this decision GKN repaid £3m of their interim payment.

The Court of Appeal in this instance has rejected HMRC's appeal against the interim payment, concluding that the decision to make a repayment and the size of it were correctly decided by Park J in the High Court, based on the information available at the time the decision was taken.

4.4. Seed Enterprise Investment Scheme (SEIS) – reinvestment relief

On 31 January HM Treasury published draft legislation for the capital gains tax holiday available for reinvestment in SEIS shares. A summary of the provisions follows.

There will be an exemption from CGT on a £ for £ basis where an individual realises gains in the tax year 2012/13 (6 April 2012 to 5 April 2013), and the amount of the gain or any part of it is used for SEIS investment. The relief will be available only to individuals and not to other persons, such as companies or the trustees of settlements. The relief will have to be claimed.

Outline of qualifying conditions

To be entitled to the exemption the individual will have to make a qualifying disposal and a qualifying investment (or one or more qualifying investments) in the tax year 2012/13.

Qualifying disposal

The individual must dispose of an asset in 2012/13 and the gain must arise on that disposal. There is no limitation on the type of asset that may be disposed of. All types of disposal, including part disposals, will qualify.

Qualifying investment

The individual must invest in shares issued on or after 6 April 2012 and before 6 April 2013 in respect of which they receive income tax relief under SEIS. The time limit for claiming SEIS re-investment relief is the same as for SEIS relief from income tax. Despite there being a requirement that SEIS relief must be obtained in order for a claim to SEIS re-investment relief to be obtained, the claim for SEIS re-investment relief can be made before SEIS relief is obtained. The shares must be subscribed for wholly in cash, fully paid up at the time of issue, and held for 3 years. If income tax relief is not due the CGT exemption will not be available.

To qualify for exemption from CGT on the whole of the gain on the disposal of the asset, the individual will have to invest the full amount of the gain in SEIS shares. It will not be necessary to invest the full proceeds from the disposal of the asset. If only part of the gain is invested partial relief will be available.

Failure to meet qualifying conditions

For complete exemption of a gain, the individual must hold their qualifying investment throughout the three year qualifying period for full SEIS income tax relief. The individual, and the company, must continue to meet the conditions that apply during this period. In particular, neither the individual nor any connected person may receive any value from the company during this period. (This does not include receipt of ordinary commercial payments such as dividends or reimbursement of expenses to a director). There must be no loss of income tax relief in respect of the SEIS shares in that period. Where some or all of the income tax relief is lost a corresponding proportion of the CGT exemption will also be lost.

There will be an exception where an individual transfers the SEIS shares to their spouse or civil partner during the three year qualifying period. Provided all other conditions continue to be met during the remainder of the qualifying period, such transfers will not lead to a failure to meet the qualifying conditions.

Where a gain has initially qualified for exemption and subsequently an event occurs which means that any qualifying conditions for SEIS income tax relief cease to be met, the amount that was previously exempt will be liable to CGT. For example, if, during the period of three years following the issue of the shares, the company comes under the control of another company then, even if the individual has not disposed of any of their shares, the company (or the particular issue of shares) ceases to qualify and any income tax relief given must be repaid. In such a case any CGT relief will also be withdrawn.

In some circumstances income tax may be only partially withdrawn. For example, if the individual receives value from the company, only a proportion of the income tax relief may be withdrawn. Where a partial withdrawal of income tax relief applies there will be a corresponding partial withdrawal of the CGT relief.

4.5. Controlled Foreign Companies (and Foreign Branch exemption) – an update

On 31 January 2012 the Government published an update on CFC reform as well as updated draft legislation (following that issued on 6 December 2011) for consultation. It covers the following points:

  • Commencement and transitional provisions. The latest thoughts are that the new rules will operate for accounting periods beginning on or after 1 January 2013, by reference to the accounting period of the CFC (not its UK parent);
  • A time limited exemption from the application of CFC rules. The maximum three year extension permitted by Finance Act 2011 is to be reduced so that there will be a standard 12 month transitional period exemption (a TPE) from first application of the CFC rules subject to the necessary restructuring being undertaken within that period to achieve no CFC charge. This 12 month period can be extended to 24 months where it can be shown that the initial 12 month period was unreasonable. Those CFC's able to take advantage of the maximum three year extension in Finance Act 2011 will continue to be exempt until that period ends, or until earlier termination of that exemption according to the new TPE rules;
  • Consideration is currently being given to the case for full exemption for intragroup finance income in limited circumstances. The draft legislation will permit exemption in two circumstances:
    • where finance profits are funded from qualifying sources; and
    • where the CFC charge would cause the group's finance income to exceed its UK finance expense.
  • Details (but no draft legislation) of exclusions from the CFC regime applying for banking and insurance activities, depending on capitalisation proposed as:
    • Insurance businesses: between 200% and 250% of minimum regulatory capital.
    • Banking businesses: the greater of 12.5% of the tier 1 capital ratio and the level of tier 1 capital that the FSA would require the bank to hold if were regulated in the UK, plus a 2% buffer.
  • Recognition that the CFC proposals require refinement to cater for offshore funds, including those held by life companies.
  • A possible redrafting of the business and finance gateway to provide for clear entry conditions so that it is easier to assess whether the foreign subsidiary is caught, before having to perform all the detailed calculations.

With respect to the foreign branch exemption, the following points are relevant:

  • The existing anti-diversion rule will be replaced with one that reflects all aspects of the proposed new CFC rules. Where there are finance profits in excess of the allowed incidental amounts, they may qualify for full or partial exemption in the same way as applies to a CFC. This aspect of the rules is not yet reflected in the draft legislation.
  • The current virtual prohibition on exemption for foreign branch investment profits will be lifted in the case where those profits are incidental to a trade or property business in the same way that such amounts are excluded from the CFC charge. There will also be the potential for a full or partial exemption for investment profits not otherwise exempted, if effectively connected with the overseas trade or property business.
  • Existing legislation is to be amended so that profits of the foreign permanent establishment of a company which is a corporate member of Lloyds can be computed on the basis that the Lloyds credit relief regulations do not apply. If the regulations were treated as applying, there would be no entitlement to exemption for foreign branch profits due to their exclusion for the purposes of credit relief.
  • It will become possible to make an election for foreign branch exemption before the company's first accounting period. Currently it must be made in the accounting period before that for which it is to apply.
  • A refinement to the operation of balancing adjustments for capital allowance purposes where the profits from a lease are excluded from exempt profits by CTA09 s18C(3).

4.6. Statements of Practice

HMRC has published an updated list of Statements of Practice which includes

  • New SP1/12 Advance Thin Capitalisation Agreements under the APA Legislation (replaces SP4/07). It updates the legislative references, largely to the Taxation (International & Other Provisions) Act (TIOPA) 2010, and reflects HMRC's current practice. The practice is intended to determine in advance the transfer pricing of financial transactions within Part 4 of TIOPA 2010;
  • New SP2/12 Inward Investment Support (replaces SP2/07), explaining the support that HMRC will give to non resident businesses who are thinking about investing in the UK.

4.7. Fixed-share partners are not employees

The Court of Appeal has published its decision in the case of Tiffin v Lester Aldridge LLP upholding the decisions of the Employment Tribunal and the Employment Appeals Tribunal (reported in Tax Informal on 6 December 2010).

Mr Tiffin was a former fixed share partner who failed to persuade the Employment Appeal Tribunal that he had in fact been an employee. Mr Tiffin had appealed an earlier Employment Tribunal (ET) ruling that found in the firm's favour, arguing that because he was not involved in the firm's management and received only a nominal share of the firm's profits he should be classed as an employee. He also argued that the minimal financial contributions which he made to the partnership pool were too small to mean that he should be considered to be a partner.

The Court of Appeal judgement contains an interesting focus on the importance of the parties' intentions:

21. I introduced Zahid's case by saying that it underlined that critical to the question of whether a partnership is created between A and B is whether or not they intended to create a partnership. In determining whether or not they did so intend, all the features of their agreement must be considered, as Wilson LJ explained:

'[33]. It is idle to deny that, indirectly, an employee has an interest in the profitability of the firm for the continuation of his job may well depend on it. Nevertheless the absence of a direct link between the level of payments and the profits of the firm is in most cases a strongly negative pointer towards the crucial conclusion as to whether the recipient is among those who are carrying on its business. But the conclusion must be informed by reference to all the features of the agreement. Thus, for example, provision or otherwise for a contribution on his part to the working capital of the firm will be relevant. And it will be important to discern whether, expressly or impliedly, the agreement provides not only that acts within his authority should bind the acknowledged partners but also that their acts should bind him; for such is provided by section 5 of the Act to be a necessary incident of partnership but would, of course, be inconsistent with his status as an employee. ...

[35]. In my view, however, the judge's conclusion was correct. There was one feature of the context to the agreement between the two men which was determinative, namely the need for a solicitor's practice to comply with rule 13 of the 1990 Rules. Its effect was that the firm could lawfully practise between March 2002 and November 2002 only if Mr Lees was a partner in it. The evidence of both men was that it was in order to comply with rule 13 that they entered into the agreement and indeed that Mr Lees became associated with the firm at all. ...

[37]. In that the two men intended to comply with rule 13, they must have intended to enter into a contract of partnership. ...'

22. I should refer also to this passage from Hughes LJ's judgment: '[41]. ... the words of section 1 of the 1890 Act seem to me to put the matter beyond doubt. They refer to the making of profit as an aim, but studiously abstain from reference to any necessity that it be shared. On principle it seems to me that if there is an essential element of partnership it is the carrying on of business in common, that is to say in such manner as to make each the agent of the other for all acts done in the course of the business. Having thus constituted themselves, the partners are free under the Act to arrange for the remuneration of themselves in any manner they choose, including by agreement that one or more shall receive specific sums, or that one or more receive nothing, in either case irrespective of profits.'

23. The third authority to which I would refer is Hodson v. Hodson [2009] EWCA Civ (1042); [2010] PNLR 8. Its facts bore a similarity to Zahid's case. It too was a case in which the appellant solicitor had entered into a partnership deed with another solicitor solely because her longer qualification as a solicitor would enable the firm to satisfy the requirements of rule 13 of the Solicitors Practice Rules 1990. She was to enjoy a mere 1% interest in the firm's profits and to bear a like liability for losses. This court,by a judgment that I delivered and with which Arden and Sedley LJJ agreed, upheld the judge's decision that a partnership had been intended to be, and had been, created by the deed into which the two solicitors had entered. The deed purported to create a partnership and it had not been suggested that it was a sham. It was clear from the outset – as reflected in her 1% share – that the appellant was going to be carrying out very little work for the partnership but also that she was going to be playing an important supervisory role in it. The requisites of section 1(1) were satisfied. It would no doubt have followed from Zahid's case that, even if the appellant had not been entitled to any share of the firm's profits, she would still have been held to have been a partner in it.

24. In determining whether a partnership within the meaning of section 1(1) of the 1890 Act is created by an agreement between A, B, C and D in relation to carrying on of a business by them, it is therefore critical to ascertain their intentions as to whether or not such a partnership was to be created.

The Court also considered the drafting of s4(4) of the LLP Act 2000.

30. I return to section 4(4) of the 2000 Act. The question for the ET was whether Mr Tiffin was an employee of the LLP. As he was a member of the LLP, the answer to it required a navigation of section 4(4). That informs us that, as such a member, Mr Tiffin 'shall not be regarded for any purpose as employed by the [LLP] unless, if he and the other members were partners in a partnership, he would be regarded for that purpose as employed by the partnership.' (Emphasis supplied)

31. The drafting of section 4(4) raises problems. Whilst I suspect that the average conscientious self-employed professional or business person commonly regards himself as his hardest master, such perception is inaccurate as a matter of legal principle. That is because in law an individual cannot be an employee of himself. Nor can a partner in a partnership be an employee of the partnership, because it is equally not possible for an individual to be an employee of himself and his co-partners (see Cowell v. Quilter Goodison Co Ltd and Q.G. Management Services Ltd [1989] IRLR 392). Unfortunately, the authors of section 4(4) were apparently unaware of this. The subsection is directed to ascertaining whether a particular member (call him A) of an LLP is or is not for any purpose an employee of it. The statutory hypothesis which the subsection requires in order to answer that question is that A and the other members of the LLP 'were partners in a partnership'. That hypothesis, if it is to be read and applied literally, must in every case produce the same answer, namely that A cannot be an employee of the LLP for any purpose. If that had been Parliament's intention when enacting section 4(4), it might just as well have ended the subsection immediately before the word 'unless'. That, however, was plainly not its intention.

The subsequent words must be contemplating a practical inquiry that, in particular factual circumstances, will yield a yes or no answer to the question whether a particular member of an LLP is an employee of it. The subsection must, therefore, be interpreted in a way that avoids the absurdity inherent in a literal application of its chosen language so that it can be applied in a practical manner that will achieve the result that I consider it obviously intended. The presumption is that Parliament does not intend to enact legislation whose application results in absurdities, and section 4(4) must therefore be interpreted with that in mind.

32. In my judgment the way section 4(4) is intended to work is as follows. Subject to the qualification which I mention below, it requires an assumption that the business of the LLP has been carried on in partnership by two or more of its members as partners; and, upon that assumption, an inquiry as to whether or not the person whose status is in question would have been one of such partners. If the answer to that inquiry is that he would have been a partner, then he could not have been an employee and so he will not be, nor have been, an employee of the LLP. If the answer is that he would not have been a partner, there must then be a further inquiry as to whether his relationship with the notional partnership would have been that of an employee. If it would have been, then he will be, or would have been, an employee of the LLP. I consider that it is implicit that the primary source material for the purpose of answering these questions will be the members' agreement although this will not necessarily represent the totality of what may be looked at. The inquiry thus requires a consideration of the circumstances in which a person may become a partner in a partnership under the Partnership Act 1890, which is why I have summarised such circumstances. The qualification that I have referred to is that, in what are probably likely to be more unusual cases, the relevant issue may perhaps arise in circumstances in which at the material times there were just two members in the LLP, with the issue being whether one of them was an employee of the LLP. The approach that I have suggested does not work in such a case and would need to be adapted for it. For present purposes, however, there is no need to consider such cases further.

33. The only reported authority on section 4(4) to which we were referred was Kovats v. TFO Management LLP and another [2009] ICR 1140, a decision of the EAT. The EAT's judgment was delivered by His Honour Judge Birtles QC. The issue was similar to that in this case: a member of an LLP was required by resolution to retire as a member and there arose in his consequential complaint of unfair dismissal the question of whether or not he was an employee. The ET dismissed his claim, holding that he was not and the EAT dismissed his appeal. In directing itself as to the application of section 4(4), the EAT said this:

'[18]. Parliament has thus expressly provided that the legal test which determines whether a person is a partner or an employee of a partnership also determines whether a member of a limited liability partnership is employed by the limited liability partnership. We agree with the following submissions by Mr Catherwood [who was representing the LLP]:

  1. The partnership test applies for determining whether the person is an employee for any purpose including whether or not for the purposes of the Employment Rights Act 1996.
  2. The question of whether a person can be both a member of a limited liability partnership and its employee is not relevant to the facts of this case. The question for the employment tribunal was whether, having regard to section 4(4) the claimant was an employee. The fact (if it is a fact) that, if he was an employee, he might remain a member of the limited liability partnership does not affect that determination.
  3. The application of this test does not ask the standard common law tests applicable to determine whether the person is an employee or self-employed. In our judgment the test of determining employment status in a limited liability partnership is additional to the standard common law tests. Thus in the context of partnership the tribunal is required to decide into which of two legal categories a person falls: partnership or employment. If the tribunal decides that the person is not a partner, it does not follow that he is necessarily an employee: the usual common law tests will still need to be applied, as the person may in fact be self employed: Lindley & Banks on Partnership, 18th ed (2002), para 5.70.
  4. The tribunal were correct to first consider whether the claimant was a partner in the partnership. Having found that he was a partner in the partnership (in accordance with section 4(4) of the 2000 Act) the tribunal correctly considered the common law tests and decided that they would not have conferred employment status on him.'

34. I would not give my unqualified agreement to the whole of that summary of the operation of section 4(4) although I respectfully agree with most of it. I interpret the opening paragraph, and also [18](1), as being in line with the position as I have sought to explain it. As to [18](2), it is clear that a member of an LLP can be an employee of it: that is what section 4(4) recognises. As to [18](3), I interpret this as saying that there are two tasks. The first requires an assumption that the LLP is in fact being carried on as partnership and then requires an answer to the question whether, on that assumption, the claimant would or would not be a partner. The second requires an answer to the question whether, if the claimant would not be a partner, he would be an employee of the partnership (as opposed, for example, to being retained by it on a self-employed basis). If that is the full sense of [18](3), I agree with it. As for [18](4),

I respectfully disagree with the approach which the EAT thereby approved. If the finding was that the claimant would have been a partner in the partnership, there was no basis upon which he might also be found to be an employee of it and so no scope for the further inquiry that the ET apparently made in the Kovats case.

4.8. Statement of Practice SP2/2012 - Inward Investment Support

HMRC has published Statement of Practice SP2/2012 which explains the support that HMRC will give to non resident businesses who are thinking about investing in the UK.


This Statement of Practice ("SP") replaces an earlier Statement on Inward Investment and Corporate Reconstruction (SP2/07), published in 2007. It explains the support that HMRC will give to non resident businesses who are thinking about investing in the UK.


  1. HMRC can help businesses based outside the UK by providing certainty about the tax implications of a significant investment in the UK. Please note that we will not comment on the structure of the investment.
  2. Inward Investment Support (IIS) is a service offered by HMRC to businesses which are not resident in the UK and have no existing relationship with HMRC. IIS aims to give clarity and certainty by providing written confirmation of how HMRC will apply UK tax law to specific transactions.
  3. HMRC will view an investment as "significant" if the amount to be invested is intended to be £30million or more, but it will also assist on smaller investments which it agrees may be of importance to the national or regional economy.


  1. IIS will provide written confirmation of how HMRC will apply UK tax law to specific transactions or events. Businesses should supply as much information as possible about the proposed investment, including:

    • The name, address and country of residence of the businesses.
    • The nature and size of the projected transaction(s), the tax(es) involved and the chronology or proposed chronology of the transaction(s).
    • The commercial background – describing the reasons why the business is considering the transaction.
    • Any specific legal points which are known or believed to arise. The points at issue should be outlined. If written legal advice is available, supplying a copy of it may enable HMRC to respond sooner.
    • The reasons why the investment is believed to be of importance to the national or regional economy.

  2. Any information provided to HMRC will be treated in the strictest confidence. HMRC officers are bound by a statutory duty of confidentiality.
  3. IIS will respond within 28 days, drawing on HMRC's network of technical tax specialists. If a full response cannot be provided within that time, an explanation will be supplied. There is more detail about HMRC's service standards in the guidance document "When you can rely on information or advice provided by HM Revenue & Customs" which is available on the HMRC website.


  1. The HMRC contact point is:

    Colin Miller
    Inward Investment Support
    HM Revenue & Customs
    CTIAA Business International, 100 Parliament Street London SW1A 2BQ
    Telephone: 020 7147 2634

4.9. Business records checks

HMRC has announced a fresh approach to its business records checks programme in 2012, following a review.

The review, which included discussions of the pilot programme with trade and professional bodies' representatives, found clear evidence that it is effective in improving record-keeping practices in smaller businesses. However, it recommended that the checks are more targeted in future, linking to available education and support.

The pilot programme of business records checks (BRCs) began in April last year and involved checks by HMRC on the standard of small and medium-sized enterprises' statutory business records. Up until 4 January 2012, 2,437 business records checks had been carried out. These found that 28 per cent of those businesses visited had some issue with their record keeping, and an additional 11 per cent had issues serious enough to warrant a follow-up visit.

HMRC will now postpone making any new business records check appointments until the revamped approach outlined in the report is launched early in the 2012/13 financial year. This will allow further consultation with representative bodies on the implementation of the recommendations in the review and on some details of the new approach. In the interim, HMRC will only undertake visits already booked, as well as follow-up visits to businesses that have already been identified as having seriously inadequate statutory records.

HMRC's Director of Local Compliance, Richard Summersgill, said:

"Four out of ten businesses had an issue with their business records, and of those that required a follow-up visit, we found that some 90 per cent subsequently improved their record-keeping.

"However, after reviewing the pilot programme and listening to the views of businesses and representative bodies, we acknowledge the need for a fresh approach to business records checks.

"The BRC visits provide benefits for the business and HMRC. We want businesses to pay the right amount of tax at the right time, avoiding potential interest and penalties. The checks also give greater assurance to HMRC when the business submits its tax returns."

5. VAT

5.1. Draft legislation regarding online registration

Draft legislation for to VAT online registration has been published on 31 January. It amends the VATA so that the form and manner in which persons are required to make certain communications to HMRC (and, in some cases, the particulars or information and documents to be provided) can be specified in regulations or in accordance with regulations. The communications are: applications to register for VAT, make returns or statements; submit claims or request refunds; keep accounts; notify certain transactions and events; and request certification. The draft legislation also makes consequential amendments to the Finance Acts 1996 and 2009 and updates a reference to EU law.


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