UK: Weekly Tax Update - Monday 5 March 2012

Last Updated: 12 March 2012
Article by Richard Mannion

1. PAYE AND EMPLOYMENT MATTERS

1.1. NI for certain lecturers, teachers, instructors and those working in a similar capacity

SI 1978/1689 and the Social Security (Categorisation of Earners) Regulations (Northern Ireland) 1978 (SR 1978 No. 401) automatically categorise certain types of workers as 'employed earners' for National Insurance contribution (NICs) purposes which means payments to them must be subject to Class 1 NICs even though they are considered self-employed for tax and employment purposes. This applies to certain persons working in educational establishments such as teachers, lecturers and instructors as well as those who pay them. The Regulations do not apply to Income Tax and apply primarily for the purpose of protecting contributory benefit entitlement.

HMRC's interpretation of the Regulations as a result of a High Court case 'St John's College School, Cambridge v Secretary of State for Social Security (Unreported) [CO/3246/99]' was that they applied in certain circumstances to some vocational and recreational tuition. Subsequent guidance to that effect has caused considerable confusion.

Following consultation, the regulations will be withdrawn with effect from 6 April 2012 for lecturers, teachers, instructors or those in a similar capacity.

www.hmrc.gov.uk/tiin/tiin-lecturers-teachers.pdf

2. BUSINESS TAX

2.1. Boosting transparency around tax disputes

HMRC has announced new governance arrangements for significant tax disputes, to provide greater transparency, scrutiny and accountability.

The new arrangements address the issues highlighted by the Public Accounts Committee in its report in December 2011, in a way that is workable and cost-effective, without undermining the core tax principles of taxpayer confidentiality and effectiveness of collection.

The new arrangements include:

  • The appointment of a new assurance Commissioner responsible for overseeing all large settlements and protecting the interests of taxpayers at large. This Commissioner will have no role in any taxpayer's individual affairs.
  • New rules which ensure that all cases above £100 million will now be referred, with recommendations from a panel of senior tax professionals, to three tax expert Commissioners, one of whom will be the assurance Commissioner. At present, a Commissioner decision is routinely required for settlements of £250 million or more. This change will almost double the number of cases that will be scrutinised by Commissioners.
  • A systematic review programme, overseen by the new assurance Commissioner, of the processes used in settled cases covering all our tax settlement work.
  • An enhanced role for the department's Audit and Risk Committee in overseeing HMRC's tax settlement work. This committee is chaired by a Non-Executive Director with relevant experience and includes representation from the National Audit Office.
  • Greater transparency including a new code of governance for all tax disputes and an annual report on HMRC tax settlement work.

David Gauke MP, Exchequer Secretary to the Treasury, said:

"I welcome HMRC's new governance arrangements, which will ensure a clearer separation between those who attempt to reach settlements and the Commissioners who consider them. Settlements form an important part of HMRC's large business strategy. This internationally recognised approach has not only led to an increase in tax collected in recent years, it is contributing to the Government's drive to make the UK more competitive in a global market. This will continue to be vitally important as we work to rebuild our economy."

Lin Homer, HMRC Chief Executive said:

"The new Commissioner will be appointed as Second Permanent Secretary and will provide assurance that is entirely separate from HMRC's day-to-day casework and customer engagement. This Commissioner will take the role of challenging whether any proposed settlement secured the correct amount of tax efficiently and that taxpayers had been treated even-handedly. The Commissioner will also make sure that the governance procedures have been followed. If agreement cannot be reached there could be further negotiation or litigation. This deals with one of the Public Account Committee's key concerns – and in a way that is practical, affordable and does not require legislation.

"The governance, auditing and reporting of the settlement process will be much more transparent. A new code of governance – covering the range of tax settlements with HMRC customers – will be published and this will set out the processes for ensuring that appropriate challenge is built into decision-making and that the approach is even-handed."

www.hmrc.gov.uk/about/briefings/managing-tax-disputes.pdf

2.2. OTS - Recommendations to simplify UK's tax system for small businesses

The Office of Tax Simplification (OTS) has published its recommendations to ease the tax system burdens imposed on small businesses.

The recommendations include both technical and administrative simplifications and are made to help the small business sector deal more easily with their tax obligations.

The OTS has focused this review on three key areas: HMRC's administration; disincorporation; and simplified taxation for the very smallest businesses (those with turnover under £30,000). The key recommendations for each area are:

  • Tax Administration - the OTS has found clear scope for changes to be made in the way the tax system is run that will make a genuine difference. There is much that is working well, and HMRC already have a range of initiatives in hand that the OTS endorses, but the OTS has developed a range of practical changes. These will help in areas of raising awareness of the help that is available, improving communication, improving the relationships between HMRC and the small business community and ways to gives businesses more certainty about their tax affairs. Recommendations include the use of two-way email communication, better VAT rulings and information and a dedicated helpline for small businesses.
  • Simplified taxation for the smallest businesses – the OTS established that for the very smallest business – often "one man bands" – cash accounts are widely used, whilst claiming for businesses expenses is disproportionately burdensome given the limited amounts often involved. The OTS therefore recommends that receipts and payments accounting is accepted, instead of full 'GAAP' accounts. The OTS also recommends a wider range of flat rate expense allowances be available. These methods should be the default option for qualifying businesses, with an "opt-out" allowing those to select the system that is most beneficial to them. Furthermore, the OTS recommends a full study is undertaken of a turnover tax as a possible alternative for the smallest businesses.
  • Disincorporation – the OTS identified that a number of the smallest companies would like to 'disincorporate' and move to an unincorporated status. The current tax system works against this, so the OTS has proposed the introduction of a tax relief so that companies can disincorporate without incurring significant tax cost. This would parallel the existing incorporation relief. This would have the dual benefit of reducing admin burdens whist facilitating business reorganisations allowing businesses to trade in their correct form.

John Whiting, Tax Director for the Office of Tax Simplification said:

"We have spent a lot of time gathering the views of businesses and their advisers about the tax system from the sharp end. That has led us to recommend a range of practical changes to the way the system runs that will help businesses with their everyday tax affairs – and will help HMRC as well.

"We have also looked for ways of changing the tax system and that has led us to recommend introducing a disincorporation relief and a wider range of flat rate allowances. There's a strong case for a form of cash accounting and indeed we think that going further into a radically different way of calculating tax for the smallest businesses needs study. Overall, we think that the recommendations put forward today represent a common sense approach that would help to ease the burdens of thousands of the smallest businesses throughout the UK."

www.hm-treasury.gov.uk/ots.htm

2.3. Tax avoidance on debt buybacks and Authorised Investment Funds

HMRC has announced draft legislation to close two tax avoidance arrangements, one involving debt buybacks, the other involving the obtaining of a tax credit on Authorised Investment Fund income where no tax was deducted in the first place.

Debt Buybacks

Prior to the announcement banks were seeking to take advantage of the fact that when intercompany debt is released, neither company is required to bring into account a credit for the release of the debt (CTA09 s358), unless CTA09 s361 or s362 apply. S361 and s362 provide that the creditor company (lender) is required to bring into account a credit when it is connected with the debtor company in certain circumstances, though there are exceptions for certain corporate rescue and debt for debt transactions.

Where the bank's debt was trading at below issue value in the market (say at £80 when it had been issued for £100), if the bank itself bought back the debt directly, it would need to recognise a credit on the release of the debt from its balance sheet. However, if it could buy a company that held the debt in circumstances where neither CTA09 s361 or s362 applied, it could then release the debt and take advantage of the connected company release rule so that no credit need be brought into account.

One strategy that could have been used until 27 February was where a third party owner of the debt (the lender) had written it down in its books and transferred the debt to a new subsidiary company that had not written the debt down itself. Another possible alternative might have been for the third party to sell the debt to an unconnected third party company. The borrowing bank (the debtor) could then acquire the third party's subsidiary (or the new company that had acquired the third party debt asset). As the company that the debtor bank had acquired had not itself written down the debt, and had been acquired for its market value representing the market value of the debt asset, neither CTA09 s361 or s362 would have applied. The bank could then release the debt balances (which as a result of the acquisition were now intercompany debt balances) with CTA09 s358 applying, so that no credit would be brought into account under the loan relationship rules.

The amendment announced on 27 February 2012 to s362 removes the requirement for the creditor company (lender) to have written down the debt in order for s362 to apply. A targeted anti-avoidance provision is also introduced so that if an arrangement gets round CTA09 s361 & s362 and that is their main purpose, then it is ineffective. Generally the amended legislation will apply for arrangements entered into or companies becoming connected on or after 27 February 2012. However in certain circumstances the legislation can apply if arrangements are entered into at any time and the third party creditor became a party to the loan relationship on or after 1 December 2011 and before 27 February 2012.

www.hmrc.gov.uk/drafts/ct-loan-technote.pdf

Authorised Investment Fund (AIF) changes

AIFs are within the charge to corporation tax (CT) and are charged at a rate equal to the basic rate of income tax (which is lower than the standard CT rate). Where a corporate taxpayer holds an interest in an AIF and receives a dividend distribution then any part of that distribution that does not derive from dividends exempt from CT in the AIF is treated by the corporate investor, not as a dividend distribution, but as an annual payment subject to CT. The distribution is treated as having been made under deduction of tax at the basic rate of income tax. There are restrictions which limit the right to repayment of the tax deemed to have been deducted.

Where a corporate taxpayer holds an interest in an AIF which fails the qualifying investments test in section 493 of the Corporation Tax Act 2009 ("CTA 2009"), then section 490 CTA 2009 requires that the holding is treated as a creditor loan relationship of the corporate holder, but excludes dividend distributions of the AIF from being brought into account in relation to that loan relationship. This test is failed when the AIF holds at any time more than 60% of its assets in interest bearing investments.

Following the announcement changes are introduced to:

  • supplement the existing restrictions limiting the right to repayment of tax deemed to have been deducted with a rule which has the effect of removing the deemed tax deduction altogether where the dividend distribution derives from income that has not been charged to CT in the AIF;
  • provide an anti-avoidance rule which will remove any deemed tax deduction where there is an arrangement with a main purpose of obtaining the deduction;
  • remove the exclusion in section 490(4) CTA 2009 so that, when section 490 applies, all credits and debits in relation to the relevant holding fall to be taken into consideration;
  • limit the amount of any interest distribution which can be deducted in the AIF tax computation to that part of the distribution which derives from income charged to CT in the AIF;
  • delete an obsolete transitional provision from the Authorised Investment Funds (Amendment No. 3) Regulations 2008 (S.I. 2008/3159). This transitional provision treats a QIS authorised before 1st January 2009 as meeting the genuine diversity of ownership condition in the first accounting period of the scheme. Omitting this provision will prevent schemes which have been authorised before that date but which have not yet started to operate from relying on that deeming provision.

In general the changes come into force at 1:30pm on 27 February 2012 and have effect for distributions made from that time. However, the change described in the fourth indent above which alters the computation relating to dividend distributions will not have effect for distribution periods already ended at this time. This is to prevent an undue compliance burden arising for AIFs where 'corporate streaming' computations have already been made or are in progress.

www.hmrc.gov.uk/drafts/corp-investors.htm
www.hmrc.gov.uk/tiin/auth-invest-funds.pdf
www.legislation.gov.uk/uksi/2012/519/pdfs/uksi_20120519_en.pdf

The HMT website reference to the above announcements is the top of the list (27 February addition) at: www.hm-treasury.gov.uk/finance_bill_2012_consultation.htm

2.4. Controlled Foreign Company Regime update

Updated legislation for the Finance Bill 2012 CFC provisions has been issued. The draft legislation has been re-ordered from the revision issued on 31 January (see Tax Update of 6 February 2012). The legislation now provides for a gateway, through which profits of the CFC must pass in order to be chargeable under the CFC charging provisions.

In relation to non-financial profits, profits that meet any one of the three conditions listed below will be outside of the CFC charge for general business (non-financial) profits. The three conditions comprise tests of:

  • UK activities – this condition will be met unless the control or management of a foreign subsidiary's assets or risks is carried on to a significant extent in the UK;
  • capability and commercial effectiveness – this condition will be met if a foreign subsidiary has the capability to carry on its business without the UK activities referred to in the first condition. This includes replacing them with services which a third party might reasonably be expected to provide; or
  • tax purpose – developed from the non-tax value condition, this condition considers the arrangements in place from which a foreign subsidiary derives its profits. The condition will be met if these arrangements do not have a main purpose of achieving a UK tax reduction. The condition will also be met where there are commercial purposes for the arrangements, such that it is reasonable to suppose that they would have been entered into in the absence of any UK or foreign tax advantages.

A further condition ensures that neither property business profits nor non-trading finance profits are treated as business profits.

www.hm-treasury.gov.uk/d/condoc_cfc_foreign_permanent_establishments_update_draftlegislation.pdf
www.hm-treasury.gov.uk/d/condoc_cfc_reform_gateway_update.pdf

2.5. HSBC tax dispute

In relation to CFC charges, HSBC Holdings plc has included the following note on page 331 of its annual report for the year ended 31 December 2011 issued on 27 February 2012:

"The Group's legal entities are subject to routine review and audit by tax authorities in the territories in which the Group operates. The Group provides for potential tax liabilities that may arise on the basis of the amounts expected to be paid to the tax authorities. The amounts ultimately paid may differ materially from the amounts provided depending on the ultimate resolution of such matters. A substantial proportion of the material open issues relate to the UK of which the principal matter concerns the application of the UK Controlled Foreign Company ('CFC') rules. Since it moved its holding company to the UK, HSBC has held the shares in its Asian and certain European subsidiaries under Dutch resident and incorporated holding companies. HSBC considers that the holding companies' income (principally dividends received from the subsidiaries) should not be subject to UK tax. Her Majesty's Revenue and Customs ('HMRC') interpret UK CFC and established EU law in a manner which would result in tax being due for the period 2002-2009. In the event of an adverse outcome from our ongoing discussions with HMRC on the CFC and other open UK issues the tax payable and financial impact could be as high as US$4.9bn, plus related interest expense. HSBC continues to discuss these matters with HMRC."

www.hsbc.com/1/content/assets/investor_relations/hsbc2011ara0.pdf

2.6. Enactment of Extra Statutory Concessions, SI 2012/266

This statutory instrument enacts a number of extra statutory concessions, including ESC C16.

ESC C16 is introduced into legislation by amending CTA 2010 to insert new sections 1030A and 1030B. Dissolution of a company under section 1000 or 1003 of the Companies Act 2006 (or corresponding overseas provisions) is not a formal winding up and so a distribution by it of any surplus assets to its shareholders would in strictness be an income distribution for corporation tax purposes. Section 1030A provides that in specified circumstances (including where the amount of distributions does not exceed £25,000) a distribution made prior to the dissolution of a company is not an income distribution for the purposes of corporation tax.

Section 1030A allows a distribution to be treated as the equivalent of a distribution in a formal winding up. The distribution is treated as a capital payment to be taken into account in determining the capital gains tax liability of a shareholder in the company. Section 1030B disapplies section 1030A should the company within two years of a distribution have not been dissolved or secured, as far as was reasonably practicable, payment of all sums due to it or satisfied all of its debts and liabilities.

The order is effective on or after 1 March 2012. In relation to the provisions on dissolutions, distributions made prior to dissolution and made prior to 1 March 2012 are taken into account in calculating the £25,000 limit. Careful consideration may need to be given to the tax implications of dividend treatment for distributions that exceed the £25,000 limit, compared to the costs of a formal liquidation in order to achieve capital gains tax treatment for distributions on winding the company up.

www.legislation.gov.uk/uksi/2012/266/pdfs/uksi_20120266_en.pdf

2.7. EU Consultation on double non-taxation

The European Commission has launched a public consultation on the cross-border double non-taxation of companies. The Commission has said that it will develop the most appropriate policy response before the end of 2012. The consultation covers cases where divergent national rules and/or inadequate national tax measures in two countries lead to non-taxation. The consultation concerns direct taxes such as corporate income taxes, non-resident income taxes, capital gains taxes, withholding taxes, inheritance taxes and gift taxes.

The consultation closes on the 30 May 2012. It covers:

  • Mismatches of entities.
  • Mismatches of financial instruments.
  • Application of Double Tax Conventions leading to double non-taxation.
  • Transfer pricing and unilateral Advance Pricing Arrangements.
  • Transactions with associated enterprises in countries with no or extremely low taxation.
  • Debt financing of tax exempt income.
  • Different treatment of passive and active income.
  • Double Tax Conventions with third countries.
  • Disclosure.
  • Other issues.

http://ec.europa.eu/taxation_customs/resources/documents/common/consultations/tax/double_non_tax/consultation_paper_en.pdf

2.8. Loan relationships and unallowable purpose

The First Tier Tribunal has considered the case of AH Field Holdings Ltd (AHFL). AHFL is a UK resident investment company, holding residential property, largely situated in the Birmingham area. All its shares are owned by A.H Field (Overseas Investments) Ltd ("Overseas") which is in turn owned by A.H. Field (Holdings) Jersey Ltd ("Holdings Jersey"), a Jersey resident company.

In 19 December 2003 the financing of AHFL was re-organised so that it issued a zero coupon bond to Holdings Jersey, that was redeemed on 10 December 2004. The documentation surrounding the issue of the zero coupon consisted in large part of a tax report recommending the insertion of the zero coupon bond so that a tax deduction could be obtained from the interest deduction. The financing was repeated in 2005, 2006 and 2007.

AHFL contended that the loan had a commercial purposes which included:

  • Increasing debt funding and improving "ROCE" (return on capital employed).
  • Conserving working capital for the business.
  • To ensure ROE (return on equity) to shareholders on an assured basis.

However the Tribunal could see no reference to the above purposes in the minutes of directors meetings approving the loans and considered that any reference to these purposes was very small. They considered that the main purpose for entering into the arrangement was to obtain the tax benefit. They also considered whether the fees paid to a third party bank and accountant involved in the financing and the time and planning required of the directors, to ensure the commercial advantage of providing a more secure flow of income to the shareholders and an improved ROE or ROCE, could be justified if the tax impact of the arrangement was neutral and they decided not. They commented:

"Our view is that the tax planning in respect of this ZCN was more than mere icing and that in fact this transaction produced a preponderance of icing and very little cake. The ZCN had as one of its main purposes the obtaining of a tax advantage, namely the tax deductions available in the UK for the discount element of the ZCN."

They thus concluded the loan was for an unallowable purpose and all the debits and related fees were disallowable.

www.bailii.org/uk/cases/UKFTT/TC/2012/TC01800.html

3. VAT

3.1. Brief 03/12: VAT Tribunal decision in Paymex Ltd v HMRC

Revenue & Customs Brief 35/11 published on 20 September 2011, dealt with the insolvency implications of the VAT Tribunal decision in the case of Paymex Limited, as it understood them at that time. It specifically commented in that Brief that

"If IPs consider, on the basis of the Paymex Limited ruling, that they have overpaid VAT arising from their role as supervisors of CVAs or PVAs and seek to reclaim such VAT, these claims will be rejected."

In Brief 03/12, however HMRC has drawn back from that statement and commented as follows:

"HM Revenue & Customs (HMRC) has subsequently undertaken a review of all insolvency processes in light of the Paymex ruling, to provide certainty to the insolvency profession as to where the exemption applies. Following completion of this review, it is HMRC's view that the VAT exemption arising from the Paymex ruling applies to:

  • Individual voluntary arrangements.
  • Company voluntary arrangements [CVA].
  • Partnership voluntary arrangements [PVA].
  • Protected trust deeds (applicable only in Scotland).

Insolvency practitioner services in all other insolvency processes remain liable for VAT at the standard rate."

www.hmrc.gov.uk/briefs/vat/brief0312.htm

4. TAX PUBLICATIONS

Tax Focus Feb 2012

A summary of current tax issues for companies, covering:

  • remuneration planning - approved schemes
  • remuneration planning - alternatives to approved schemes
  • VAT- RBS and transfer of insurance business
  • thinking ahead – capital allowances rates

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

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