UK: Weekly Tax Update - Monday 20 February 2012

Last Updated: 23 February 2012
Article by Richard Mannion

1. GENERAL NEWS

1.1. Updated HMRC DOTAS guidance

HMRC has updated its DOTAS guidance to incorporate supplementary guidance published between November 2010 and April 2011 and to clarify areas where previous advice may have been unclear.

The main changes are detailed below:

Paragraphs 12.7 and 19.3 amend HMRC's definition of reasonable excuse to provide greater clarity following a number of tribunal judgements criticising HMRC's use of the word 'exceptional'.

Paragraph 15.7 correction to bring it into line with the requirements in regulation 8(15) of SI 2004/1864. This refers to time limits by which an employer of a PAYE scheme involving the employer and a director or employee or a person connected with them must provide a scheme reference number and the time the resulting expected tax advantage is expected to be obtained. The time limit is revised to no later than 19 May following the end of the tax year.

The amended section 19.3 now reads as follows:

"Section 118(2) TMA 1970 provides that:

'For the purposes of this Act, a person shall be deemed not to have failed to do anything required to be done within a limited time if he did it within such further time, if any, as the Board or the tribunal or officer concerned may have allowed; and where a person had a reasonable excuse for not doing anything required to be done he shall be deemed not to have failed to do it unless the excuse ceased and, after the excuse ceased, he shall be deemed not to have failed to do it if he did it without unreasonable delay after the excuse had ceased.'

This means that in the event of a reasonable excuse the legislation deems that no failure occurred.

The law does not define 'reasonable excuse', and it is left it to the judgment of the tax authorities and the tribunals as to whether a reasonable excuse exists in any particular case. This recognises that there probably cannot be a single absolute standard by which the words 'reasonable excuse' can be defined.

What constitutes a reasonable excuse will vary according to the nature of the failure and the type and circumstances of the person concerned. But generally, reasonable excuse is seen by HMRC, as developed by case law, as being an unusual event that is either unforeseeable or beyond the person's control (for example, serious illness) that formed an insurmountable obstacle to timely compliance.

Example

Promoter P has put a reasonable and proportionate system in place to ensure that schemes are captured and disclosed on time. Something occurs, so unusual that it cannot be captured by the system and reported on time. P discovers the error and then discloses the scheme promptly with an explanation of what has happened. We would consider P to have a reasonable excuse."

www.hmrc.gov.uk/aiu/dotas.pdf

1.2. SDLT avoidance schemes

For information the Solicitors Regulation Authority has issued a warning to solicitors about the use of SDLT schemes. This includes the following:

"Factors to consider to help you decide if a SDLT scheme is in the interests of your clients

Below is a list of some of the factors which may be relevant in deciding if a SDLT scheme is in the interests of your client(s).

  • SDLT schemes are constantly changing and are usually very complex, bearing in mind what purchasers want to achieve. HMRC publish information on schemes which have been discredited;
  • Be wary of claims by promoters of SDLT schemes that the scheme is backed by a "robust counsel's opinion". Based on what we have seen, we warn that you must check that the opinion
    • is genuine,
    • has not been tampered with,
    • is up to date, and
    • specifically covers the scheme which is being promoted.
  • Bear in mind that reliance on counsel's opinion is not necessarily a defence to allegations of breaches of the Principles, and such a position is substantially weaker if the opinion has not been obtained by you for the particular client and the transaction in which you are acting;
  • Be wary of claims that the SDLT scheme is approved by HMRC. Be aware that disclosure of the scheme to HMRC, and the issue of a scheme reference number by HMRC, is not confirmation the scheme is backed by HMRC;
  • Be aware that HMRC can currently challenge SDLT schemes up to four years after the effective date of the transaction and this can be extended if there has been a careless or deliberate error in the submission of the SDLT return;
  • Consider carrying out due diligence on the promoter of the SDLT scheme. If the promoter claims they will repay the fee charged for implementing the scheme, robustly check how realistic this is, bearing in mind that HMRC has four years to challenge the scheme. If the promoter is unable to repay the fee, the buyer may look to you to reimburse them;
  • If the SDLT scheme is based on a supposed "no win no fee" basis said to be backed by insurance, robustly check that the policy is suitable and relevant to the purchasers circumstances.

The links to the news release and warning are below: www.sra.org.uk/sra/news/press/sdlt-schemes-warning-profession.page

www.sra.org.uk/solicitors/code-of-conduct/guidance/warning-notices/stamp-duty-land-tax-schemes--warning-notice.page

2. PRIVATE CLIENTS

2.1. Entrepreneurs' relief – practical issues

ICAEW Tax Faculty issued a Taxguide in February 2012 covering a number of technical queries on the operation of Entrepreneurs' Relief (ER) that were put to HMRC through the Capital Gains Tax Liaison Group. This note reflects the queries in sections B (ordinary share capital), C (associated disposals) and D (the remittance basis) together with HMRC's responses.

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.

All references are to TCGA 1992 unless otherwise noted.

SECTION B – ORDINARY SHARE CAPITAL AND THE 5% TEST

EXAMPLE B1 – The meaning of ordinary share capital

In relation to ER, s 169S(5) states:

"ordinary share capital" has the same meaning as in the Income Tax Acts [see s 989, ITA 2007]." Section 989, Income Tax Act 2007 (ITA 2007) defines "ordinary share capital":

"ordinary share capital", in relation to a company, means all the company's issued share capital (however described), other than capital the holders of which have a right to a dividend at a fixed rate but have no other right to share in the company's profits."

HMRC response to Example B1

The meaning of "issued share capital" was considered by Megarry J in Canada Safeway Ltd v IRC [1973] 1 CH 374 and is authority that it is nominal value that is adopted. Megarry J's analysis was extensively considered and applied in the more recent Upper Tribunal case of HMRC Commissioners v 1) Taylor and 2) Haimendorf [2010] 417 (TCC) at paras 14–18. In particular at para 17, The Hon Mr Justice Roth considers the meaning of the phrase in the context of the legislation:

"Although the Canada Safeway case was therefore not addressing directly the issue of subscribed value, its reasoning appears to me to apply equally in the present case. Moreover, the expression "issued share capital" is used frequently throughout the ICTA. As the Respondents were constrained to recognise, it would be a striking result if the same form of words were to receive a very different interpretation within the same statute. In my judgement, if that result was intended, the draftsman would have made express provision for this by including a distinct definition of issued share capital specifically for the purpose of this part of the legislation in s 312. In the absence of such special definition, I consider that the phrase must receive the same meaning throughout ICTA. That meaning has been well-established since the Canada Safeway judgement that has been applied for almost 40 years. Accordingly, I consider that it is clear that issued share capital in paragraph (b) refers to the nominal value of the shares. Once that is determined as the correct interpretation, the potential practical difficulty of aggregating the two elements in paragraph (b) falls away; the actual calculation is straightforward."

Author's note

To conclude, when considering whether the 5% test is met HMRC's settled view is that one must look to the nominal value of the ordinary shares not to the number of ordinary shares that have been issued.

SECTION C – ASSOCIATED DISPOSALS

EXAMPLE C1 – What constitutes a 'withdrawal from the business'?

CG63995 of the Capital Gains Manual states that a withdrawal from participation in the business relates to a "material disposal of business assets".

Section 169K, TCGA 1992 provides that three conditions (conditions A, B and C with condition C relating to the necessary qualifying period) must be met for there to be an associated disposal. A "material disposal of business assets" is condition A and it is only in condition B where the disposal is connected with a withdrawal from the business. Section 169K(5) makes it clear that the disposal referred to in condition B is the associated disposal not the relevant material disposal.

We would welcome HMRC's views on the following two points:

  • How can the withdrawal from the business relate to both disposals and be caused by the same event?; and
  • HMRC guidance says for a withdrawal from the business to occur it is not necessary to reduce the hours worked. So if the hours worked remain the same what exactly is a withdrawal from the business?

HMRC response to Example C1

It is a question of fact in each case whether there has been a "withdrawal from the business". The issue is not linked to the amount of work done or time spent working in the business, but the material disposal and the associated disposal must together constitute a withdrawal from the business, ie being made as "part and parcel" of the same event, even if the associated disposal is made sometime after the material disposal (see HMRC guidance at CG63995 and example 2 in CG64000). This view carries over from retirement relief and was confirmed in the case of Clarke v Mayo (66 TC 728).

EXAMPLE C2 – How many shares must be disposed of to constitute 'a material disposal'?

The legislation does not specify the percentage of shares which must be disposed of to make the disposal of shares a material disposal, so does HMRC accept that any drop in shareholding would be a material disposal?

HMRC response to Example C2

There is no de minimis limit for the reduction in shareholding that constitutes a material disposal under s 169I(2)(c).

EXAMPLE C3 – The time between the material disposal and the associated disposal

The legislation does not give a time limit during which the associated disposal must be made. As such the HMRC guidance at CG63995 of the Capital Gains Manual seems to go further than the legislation. It would be helpful to clarify this.

HMRC response to Example C3

Clearly the question of whether the material disposal and the associated disposal together form part of a wider "withdrawal from business" depends on the particular facts of each case.

HMRC's guidance at CG63995 relates to cases where the "associated" asset has not been used for other purposes and is intended to allow a reasonable application of s 169K in line with the time limit used elsewhere in ER.

Author's note

Readers will be aware that s 169P restricts the amount of ER available on an associated disposal in certain conditions. One of these conditions, s 169P(4)(d), is where during some part of the period when the assets are used for the purposes of the business their availability is dependent on the payment of rent. We understand that HMRC's view is that the condition at s 169P(4)(d) is only met where actual rental income is received by the partner. It is understood that HMRC does not feel that ER should be restricted where there is an arrangement under which a partner receives a higher profit share as a result of letting the partnership use their personal property.

In connection with associated disposals, HMRC has been asked to confirm that the continuous 12-month holding period only has to be met with respect to the material disposal. The following example has been put to HMRC and we await its response:

TradeCo Ltd is a trading company owned by Mr W and his wife Mrs W. Each spouse has since incorporation owned 50% of the company and been a director of the company. The property used by the business was acquired solely by Mrs W in 2008. The company has used the property since then and no rent has been paid. In December 2010 half of the property was transferred to Mr W. All the shares in the company and the property were sold to BigTrade Co Plc in June 2011.

The asset has been used in the business for the qualifying 12- month period as set down in condition C of s 169K. Mr W has not, however, owned the entire property for 12 months.

Can Mr W claim ER on both his shares and the property?

SECTION D – THE REMITTANCE BASIS AND ER

EXAMPLE D1 – Foreign chargeable gains qualifying for ER fall within s 12, TCGA 1992

Section 169N(9), TCGA 1992 states that "any gain or loss taken into account under section(1) is not to be taken account under this Act as a chargeable gain or an allowable loss."

The Explanatory Notes published with the Finance Bill 2008 indicate that the purpose of s 169N(9) is merely to ensure that where there is one ER disposal, and gains and losses are aggregated to determine the qualifying net ER gain, this cannot be segregated as gains and losses separately for CGT purposes. There have, however, been concerns about the interpretation of s 169N(9) and how it interacts with other provisions within TCGA 1992.

As can be seen from the responses to the following queries, HMRC considers that foreign chargeable gains qualifying for ER fall within s 12, TCGA 1992 where such gains are realised by remittance basis users. The delay between the time the gains arises and when the remittance is made is no bar on the claiming of ER provided a valid ER claim is made within the specified time period (see Example D2).

EXAMPLE D2 – The deadline for making an ER claim

The deadline for making an ER claim is linked to the tax year in which the qualifying business disposal is made, not to the tax year that the gain accrues to a taxpayer. Thus if a UK-resident foreign domiciliary wishes to make the claim for a qualifying business disposal of foreign property, it would seem that the following deadlines apply for disposals in the specified tax years, regardless of whether the chargeable gain has been remitted.

Tax Year

Claim deadline

2008/09

31 January 2011

2009/10

31 January 2012

2010/11

31 January 2013

2011/12

31 January 2014

Does HMRC agree? How would it recommend that such a claim be made if it does not impact on the tax liability as there has been no remittance of the disposal proceeds?

HMRC response to Example D2

ER is only available on the making of a claim and such claim must be made within the statutory time limit which is set by reference to the date of the qualifying disposal (see s 169M(3), TCGA 1992). It is for the taxpayer to consider whether to submit a protective claim for ER within this time period.

Author's note

This means that where a remittance basis user makes a qualifying gain in a tax year he or she has until 31 January following the end of the tax year to decide whether or not to make the ER claim. The date that the proceeds are remitted is irrelevant.

For example: AB is a remittance basis user. He makes a £10m gain on a qualifying disposal in 2011/12 of shares in a foreign company (total proceeds £15m). He has not made any previous ER claims and so has the entire £10m ER allowance available. He does not expect to remit the proceeds from the gain for at least three years (having sufficient clean capital to supplement his UK income). If he wants to be able to benefit from ER on any eventual remittance of the proceeds he has until 31 January 2014 to make the ER claim. The fact that he will not have remitted the proceeds at that date is irrelevant to the claim deadline.

Where an ER claim is required prior to the gains being remitted there will be no gain shown on the tax return. The claim should be made by way of a note to the tax return, with the ER computation included.

EXAMPLE D3 – The raised ER limit

It is understood that HMRC's settled view is that the ER limit to apply in respect of remittance basis gains is that which is in force when the gains arise.

For example, assuming there have been no other qualifying ER gains, where the disposal date for a qualifying ER gain of £5m (paid into a separate offshore bank account with interest being paid into a separate account) is 19 August 2008 and the proceeds are remitted on 25 October 2010, it is understood that HMRC believes that the £1m lifetime limit in force in 2008/09 applies, such that ER can only be claimed on £1m of the disposal. It would seem to follow from this that HMRC's view must be that the 4/9ths deduction applies to the gain rather than the special 10% tax rate. For a higher rate taxpayer this would mean that even the gain benefiting from ER will be subject to tax at 28% (meaning an effective 15.6% tax rate on the £1m gain benefiting from ER relief) with the £4m excess being taxed at 28%.

Can HMRC confirm that the above summarises its thoughts on the issue?

HMRC response to Example D3

HMRC agree with the analysis. The ER limit to apply with respect to remittance basis gains is that which is in force when the qualifying disposal is made, not when any proceeds are remitted.

EXAMPLE D4 – The ER provisions prior to 23 June 2010 and the mixed fund rules

The ER legislation at s 169N(4), TCGA 1992 states:

"The amount arrived at under subsections (1) to (3) is to be treated for the purposes of this Act as a chargeable gain accruing at the time of the disposal to the individual or trustees by whom the claim is made."

Does HMRC agree that this means that for the purposes of the mixed fund rules (s 809Q, ITA 2007) the amount that will go into the foreign chargeable gains category is the amount of the gain after ER (ie after the 4/9ths reduction)?

HMRC response to Example D4

The amount to be included in a mixed fund under s 809Q(4), ITA 2007 is the gain as restricted by s 169N.

EXAMPLE D5 – How does ER relief work for remittance basis users given it is now a tax rate?

It is clear that without the 4/9ths discount provisions, which reduced the gain itself, the mixed fund rules work somewhat differently. It is unclear whether, in situations where the gain is in excess of the unused ER lifetime allowance, this means that:

ER can be applied such that 10% tax is paid on the amount on which ER can be claimed (either the £10m lifetime limit or that limit less the aggregate of prior ER claims made) with future remittances being taxed at the full rates.

Or, that a blended rate has to be used.

As an example: the capital gain on a disposal of shares by a UK-resident foreign domiciliary is, say, £13m. The individual has not made a prior ER claim and the first £10m is remitted over a number of years. Can you apply ER to this first £10m or do you have to use a blended rate because the actual gain exceeds £10m?

HMRC response to Example D5

Wherever there is a qualifying disposal and a chargeable gain that attracts the tax rate of 10% and there is a balance of that gain that is taxable at either 18% or 28% (and indeed where the individual may have other gains that do not qualify for ER), then the question arises of how these elements are identified for the purposes of s 12, TCGA 1992.

HMRC considers that the mixed fund rules in ITA 2007 may be used to identify and quantify the remittance of the foreign chargeable gain. In the absence of a statutory rule for determining whether or not the gains brought into charge under s 12 are liable at the 10% rate, the onus is on the individual to nominate the 10% rate to apply to the maximum extent (by reference to the computational rules in ss (4)–(4B) of s 169N) in priority to other rates and the individual can do so as part of the normal self assessment process.

Author's note

We have confirmed with HMRC that the above response means that in the example given the taxpayer would be able to claim on his or her self assessment return that the first £10m remitted is taxed at the special 10% rate.

For example: the disposal occurred in 2011/12 and pattern of remittance was as follows:

£5m in 2011/12;

£5m in 2012/13; and

£3m in 2013/14.

Provided an ER claim is made the taxpayer can claim that the remittances in 2011/12 and 2012/13 are taxed at the 10% ER rate.

2.2. Rollover relief under s 152 and 153 TCGA

A recent First Tier Tribunal case (Pems Butler Ltd v HMRC TC01769) explored the meanings of use and occupation of premises in relation to a trade and the scope of just and reasonable allocations with regards to roll-over relief.

The appellant company, involved in the trade of selling kits for model buildings, claimed rollover relief under s153 TCGA 1992 in respect of roll-over relief for assets only partially replaced. In this case the claim had been made following the purchase price of Red House, comprising of a house, farm buildings and 16 acres of fields. On the conclusion of an enquiry HMRC adjusted this so as to only allow 5% of the acquisition consideration as reinvestment of the gain on the sale of the previous property.

Roll-over relief applies to the relevant classes of asset set out in s155. Head A of Class 1 includes building or land "occupied (as well as used) only for the purposes of the trade".

The property was occupied by the company's directors who drew very little money with the benefit of use of the property being in recognition for their time and effort.

Although the FTT found that the house was used for the purposes of the trade, as it was used by the company to provide the directors with consideration for their work, it was being occupied by the directors rather than the company. Their occupation was neither essential to the performance of their duties or to better perform their duties. Roll-over relief was only available to those parts of the Red House and outbuildings used and occupied for the purposes of the trade, which was selling kits.

The FTT then considered the apportionment and 'just and reasonable'. The apportionment required the identification of parts of the asset based on their use. It did not extend to splitting an asset, or part thereof, with mixed use into two assets according to that use. Those parts were identified and the amounts apportioned at the time of acquisition.

The appeal was allowed in part with a greater proportion of the consideration paid for Red House to qualify.

The parties were instructed to recompute and agree the figures.

www.financeandtaxtribunals.gov.uk/Aspx/view.aspx?id=6140

2.3. Electricians' Tax Safe Plan campaign

HMRC has launched a disclosure opportunity, giving electricians a chance to pay their back taxes.

Anyone working in the electrical industry, who has not told HMRC about all their income and now wants to get their tax affairs back on track, can use the Electricians' Tax Safe Plan (ETSP). HMRC defines an electrician as anyone who installs, maintains and tests electrical systems, equipment and appliances under stringent safety regulations.

To take advantage of this campaign:

  • HMRC must be notified of the intention to take part in the campaign by 15 May 2012.
  • Disclosure and payment of the tax, NIC, interest and penalties is to be arranged by 14 August 2012.

www.hmrc.gov.uk/campaigns/etsp.htm

2.4. Penalties for late tax returns and payments

HMRC has published a further note of the implications of missing the 31 January online filing deadline. The note covers:

  • penalties for a late tax return;
  • interest and penalties for a late payment;
  • reasonable excuse for being late;
  • checking if you should have sent a tax return; and
  • how and when to pay the penalty.

The note reinforces the point that all tax returns received on 1 and 2 February 2012 will be treated by HMRC as though they were received by 31 January. It also includes a reminder that paper tax returns were due on or before 31 October 2011.

It usefully highlights that, where the return has not yet been submitted, sending in a paper tax return, rather than filing it online, could lead to higher penalties. In both cases there will be the automatic £100 penalty but there are additional penalties based on the length of the delay. These will start to apply for paper submissions before they will for online ones.

These additional late filing penalties are £10 for each additional day it is late after three months (up to £900) with tax geared penalties once it is six months and then again when 12 months late. Where the tax return was issued before 31 October, the clock for these penalties commences earlier for paper returns (31 January 2012) than they will for online submissions.

The section on whether a return should have been submitted at first sight appears to confusingly start from the position that there is a requirement to submit a tax return based on sources and levels of income. There is only a requirement to file a return if one has been issued and, where one has not, the obligation to notify HMRC of a liability so as to prompt one to be issued. The late return filing penalties will only apply where a return has been issued. Different penalties apply where there has been a failure to notify chargeability.

It may be that in HMRC using the table headed "Common types of income where you must always send a 2010-11 tax return" is working on the premise that the readership only comprises of those issued with a tax return. If this is the case, the offer to discuss whether the [issued] return needs to be completed and cancel any penalties is most welcome. To date the stance of HMRC has been if a return has been issued it has to be filed irrespective of the circumstances.

www.hmrc.gov.uk/sa/deadline-news.htm

2.5. Transfer of assets abroad

The income tax anti-avoidance provisions concerning transfer of assets abroad (ITA s714 – 751) has a motive defence (s737 and s739, depending on whether the transactions are post 4 December 2005 or before 5 December 2005). The legislation and the defence to its application is drafted in such a way that if the legislation is relevant it applies unless the individual satisfies an officer of HMRC that the motive exemption applies. Thus where the anti-avoidance could be relevant but is not due to the motive defence, it is not possible to complete a self assessment return without making some disclosure about the applicability of the motive defence.

HMRC guidance at INTM600040 includes the following comment:

There is no provision for a "clearance" or other advance ruling on the application of the exemption provisions. Details of the amount considered to be exempt from charge should be entered on the Foreign Pages of the Self Assessment tax return. In the "white spaces" of the return, the individual should enter particulars of transfers and associated operations that would result in a charge absent an exemption, and provide factual details about the transaction explaining the basis for considering a condition for exemption to be met.

Where an application for exemption is included in a Self Assessment tax return consideration should be given to a referral under INTM600050 and normally before opening any enquiry into the return.

2.6. Whether furnished holiday letting qualified for business property relief

The First Tier Tribunal has ruled that a furnished holiday letting property qualified for IHT business property relief in the case of Nicolette Vivian Pawson (deceased) v Revenue & Customs [2012] UKFTT 51 (TC).

The main findings of the Tribunal were:

  • The exploitation of the property in question as a holiday cottage amounted to the operation of business. The Tribunal judge said that the letting to holidaymakers was 'a serious undertaking earnestly pursued'.
  • The business was conducted with a view to gain even though it was not always profitable.
  • An intelligent businessman would not regard the ownership of a holiday letting property as an investment due to the need to constantly find new occupants and to provide services unconnected with and over above those needed for the bare upkeep of the property.

HMRC had previously stated that in their view business property relief was not available for furnished holiday lettings and it is understood that this was effectively a test case for a large number of claims. Consequently it will be interesting to see whether HMRC appeal.

HMRC accepted that if the use of the property did amount to a business it would be a relevant business property, in principle, under section 105 of the Act and that it would fall within section 105(1)(a) as "a property consisting of a business or interest in a business" but only if it was carried on for gain. They contended that the use of the property did not constitute a business or interest in a business and that it was not carried on for gain.

The second issue was whether, even if the use to which the property had been put amounted to the operation of a business or an interest in a business in principle and for gain, it was to be excluded from the term "relevant business property" by reason of section 105(3) of the Act on the basis that the business consisted wholly or mainly of "holding investments".

The Tribunal adopted the badges of business summarised by the Special Commissioner in the McCall case as follows:

"The six indicia were these:

  1. whether the activity is a serious undertaking earnestly pursued, or a serious occupation, not necessarily confined to commercial or profit making undertakings;
  2. whether the activity is an occupation or function actively pursued with reasonable or recognisable continuity;
  3. whether the activity has a measure of substance as measured by the quarterly or annual value of its outputs (the original words are "taxable supplies" but they derived from a VAT case);
  4. whether the activity is conducted in a regular manner and on sound and recognised business principles;
  5. whether the activity is predominantly concerned with making supplies (again the original words were "taxable supplies" but that was in a VAT context) to consumers for consideration; and
  6. whether the supplies are of a kind which are commonly made by those who seek to profit from them.

Of these (b) to (f) derive from the judgments of the Court of Session in Morrison's Academy Boarding Houses Association [1978] STC 1, and I note that the reasoning of their Lordships in that case derives indicia (b), (c) (e) and (f) specifically from a consideration of the VAT legislation. Nevertheless they seem to me to be helpful criteria in the context of IHTA against which to examine an activity even if they are not conclusive".

The property in question (Fairhaven) was a large bungalow overlooking the sea and with direct access onto the beach. Typically the lettings were for two weeks at most and many were for less than a week, for example long weekends.

Mrs Pawson died on 20 June 2006 at the age of 81 and she had been in ill health for about 18 months before her death, suffering from cancer.

The income from the property in the last three financial years before Mrs Pawson's death had been 2003/04 £4,342.99, 2004/05 £6,072.51 and 2005/06 £8,120.00 with profits of £680.27 in the year 2003/04, £802.32 in 2004/05 and a loss of £2,071.61 in 2005/06. The income in 2006/07 (the year Mrs Pawson in which died) was £16,589.67 with a profit of £4,449.66.

Evidence was given that the loss in 2005/06 was caused by a large expenditure on re-decorating and improving the property to improve the attractiveness of the property and therefore to increase the income.

The following services were noted:

  • Television and telephone had been provided.
  • Until June 2005 Mrs Pawson had done most of the running of the holiday letting and had not kept up with modern developments such as advertising on the internet.
  • At about that time the family had discussed how things could be improved and that led to the re-decorating.
  • The property was cleaned between each letting and the garden was maintained.
  • The property was fully furnished, heated by night storage heaters, hot water was supplied and the kitchen was fully equipped.

Extracts from the Tribunal's summary are set out below:

"36. We find that the exploitation of Fairhaven has amounted to the operation of a business during the years we have examined and therefore for more than two years before Mrs Pawson's death. We have taken into account all the evidence given by the witnesses and we have had regard to the documents in making that finding.

37. The operation of the property as a holiday cottage for letting to holidaymakers was a serious undertaking earnestly pursued.

38. Clearly there is and has been reasonable continuity in the operation. There has been no year in recent years when it was not used for letting and although inevitably the main period of occupation is during the summer months that is only to be expected given the location.

39. The annual outputs are certainly not de minimis and are an activity having a measure of substance.

40. Some criticisms of the effectiveness of the operation are no doubt possible, albeit understandable given Mrs Pawson's age at the time she was running the operation, but the basic principles on which the activity is run are regular and sound. The property is not being allowed to go to ruin, there are no debts and the owners are intending to achieve what they can by advertising and by keeping the property clean and up to a reasonable standard. Clearly the use of the property by family members for three weeks a year reduces the level of activity and the profit but in our view that is not enough to prevent the property being run on sound principles.

41. The activity is clearly intended to amount to making supplies to consumers. That is all it does except for the three weeks a year use by family members.

42. The supplies are clearly of a type that are commonly made by those seeking to profit. In fact the operation had made a profit in two of the three years before Mrs Pawson's death and was apparently running profitably in the part-year in which she died.

43. The business was being conducted with a view to gain and we hold that that satisfies the "for gain" requirement in section 103(3) of the Act. In the year when the loss was made it was only made because the owners wanted to ensure the continued profitability of the business.

44. On those findings, the question whether the business consisted of one which consisted wholly or mainly of the holding of an investment does require to be examined.

45. On the facts of this case there are clearly significant services provided to the occupiers of the property. Those services are a significant part of the reason why the occupiers are prepared to pay what they do pay for the package of benefits they receive when they book to use the property as a holiday destination.

46. We note again the passages quoted from the George case. At paragraph 17 above we cite the passage from Carnwath LJ's judgment in which he cites with approval from the decision in the Martin case referring to the three types of activities.

47. The first is the activities a landlord carries out because he is obliged to do so under the lease. We note the phraseology and ask ourselves whether a holiday let is really to be equated with a landlord's obligations under a lease at all. Certainly, the right the holidaymaker has to occupy the premises is under the same contract as the provision of the services that are promised (such as cleaning, heating etc.) but it is unrealistic to equate that with a formal lease typically of much longer duration and under which the services are very much secondary to the right of occupation.

48. The second type of activity is the separate provision of services carried out for gain and that is clearly not part of the holding of an investment on any view.

49. The third category is services which are not required to be carried out under the lease but which are provided without separate consideration. These only fall within the holding of investments heading if they are connected with and are incidental to the holding of the property as an investment. No doubt some of the services provided in this case are not specifically required to be carried out under the holiday letting contract but such services can hardly be said to be incidental to the holding of the property as an investment.

50. We have no doubt that an intelligent businessman would not regard the ownership of a holiday letting property as an investment as such and would regard it as involving far too active an operation for it to come under that heading. The need constantly to find new occupants and to provide services unconnected with and over and above those needed for the bare upkeep of the property as a property lead us to conclude that no postulated intelligent businessman would consider such a property as Fairhaven to be correctly characterised as an investment. He would consider it to be a business asset to be exploited as part of the provision of services going well beyond an investment as such."

www.bailii.org/uk/cases/UKFTT/TC/2012/TC01748.html

3. BUSINESS TAX

3.1. Extension of alternative dispute resolution (ADR) trial

HMRC is extending its ADR trial for SMEs to two new areas: London and South Wales/South West England. In this stage of the trial, ADR will be available to SME customers, where a tax issue is in dispute, but before an appealable tax decision or assessment has been made by HMRC.

www.hmrc.gov.uk/adr/index.htm

3.2. New HMRC Large Business webpage

HMRC has set up a new Large Business webpage covering the following topics:

  • The Large Business strategy.
  • Customer Relationship Management model.
  • Contact and other information.

www.hmrc.gov.uk/large-businesses/index.htm

3.3. Amendment to Companies Act 2006

Draft amendments to the Companies Act 2006 distribution section (part 23) have been proposed, to cater for Finance Act 2011 s49 changes for investment trusts.

These Regulations amend provisions in Part 23 of the Companies Act 2006 (c. 46) ("the Act") which deal with distributions by investment companies out of revenue profits. Those provisions take partial advantage of an option in Article 15(4) of Council Directive 77/91/EEC (OJ L26, 31.1.1977, p.1) ("the Directive"). Among other things, the Directive prohibits a public company from making a distribution to its shareholders if the company's net assets are (or following the distribution would become) lower than the aggregate amount of its called-up share capital and undistributable reserves. But Article 15(4) allows Member States not to apply this rule to certain investment companies, so long as particular conditions are met. Sections 832 to 835 of the Act take partial advantage of this option to derogate. They impose conditions and requirements which must be met by investment companies wishing to take advantage of the modified distributions regime.

The Regulations amend sections 832 to 835 of Companies Act 2006 to take further advantage of the option to derogate under the Directive and to make changes to the conditions and requirements in those sections.

www.legislation.gov.uk/ukdsi/2012/9780111519981/pdfs/ukdsi_9780111519981_en.pdf

3.4. New protocol to the UK/Singapore double tax treaty

A second Protocol to the Double Taxation Agreement between the UK and Singapore was signed in Singapore on 15 February 2012. This Protocol updates the existing Double Taxation Agreement of 1997 and follows on from the previous Protocol inserting the latest exchange of information article signed in 2009. The Protocol enters into force once both countries have completed their legislative procedures.

www.hmrc.gov.uk/taxtreaties/news/singapore-uk-protocol.htm

www.hmrc.gov.uk/taxtreaties/signed/uk-singapore-protocol.pdf

4. VAT

4.1. Commissions on insurance business and whether part of the consideration for a disposal

In the financial sector where there are likely to be a mixture of exempt and taxable supplies and whether consideration is classified as taxable for VAT, exempt or outside the scope of VAT can have a significant impact on VAT recovery. In the High Court case of RBS (formerly Winterthur) v HMRC , it was held that commission payments required as part of the consideration for the transfer of a business were taxable as they were not within the definition of exempt insurance intermediation, nor were they part of the consideration for the business (which would have been outside the scope of VAT as consideration for the transfer of a going concern).

The agreement for the transfer of insurance business from Prudential, was for an initial payment of £350m and a further payment of £350m accumulated dependent on 'commissions' for referring on repeat customers. According to HMRC and the VAT Tribunal this meant that the £350m commission element was subject to VAT. There were some unusual characteristics to the transactions in that the original signatories to the deal were subsequently replaced by a Bermuda entity for regulatory reasons, but this was not done as a replacement of the original signatories to the deal. The conclusion of the High Court was to agree with the earlier VAT Tribunal that the commission element was not in respect of insurance brokerage or intermediation in the accepted sense of that word, but was for the mechanical transfer of data and some other services not classed as insurance brokerage. It was also held that the commission element was not part of the original consideration for the business, and those who incurred the cost of the commissions were not part of the original agreement for the transfer.

www.bailii.org/ew/cases/EWHC/Ch/2012/9.html

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