UK: Weekly Tax Update - Monday 12 March 2012

Last Updated: 15 March 2012
Article by Richard Mannion

1. General news

1.1. Relevant data regulations for data gathering powers

Following FA11 schedule 23, draft regulations have been issued, coming into force on 1 April 2012, specifying the type of data that can be requested by HMRC for risk assessment purposes or in relation to certain tax checks.

2. Private Clients

2.1. Review of pensioner taxation

The Office of Tax Simplification (OTS) is currently reviewing pensioner taxation, looking at the broad aspects of the tax system that affect pensioners, and identifying ways that this overly-complex part of the UK's tax system can be simplified. Its initial report has now been published and the final report will be published later in the year.

The interim report concentrates on identifying the areas of the tax system that cause older taxpayers the most problems. It offers few immediate recommendations for change, but instead highlights problem areas and possible directions of travel for the future of the review. The areas to be reviewed further include the age related allowances, the married couples allowance and the taxation of savings, as well as the convoluted PAYE forms and the administrative processes pensioners face.

This report sets out in detail the full scale of the task facing pensioners who have to navigate through a maze of special tax rules and unfamiliar forms. The OTS will now be looking to explore both technical and administrative simplifications in these areas before making final recommendations to the Chancellor.

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

"Too many people find the tax system gets more complex as they get older. Many of the issues we highlight are well known but we have taken our time to consider and document the full extent of the current system, taking into account fully the concerns and complexities, before we make any solid recommendations.

"Our report floats a number of possible ways forward to mitigate the difficulties pensioners face. We haven't shied away from the big issues and I hope that this interim report helps stimulate a debate on pensioner taxation. We are aiming to make final recommendations that will mean pensioners can have a better understanding of a simpler tax system, and can deal with their responsibilities more easily."

2.2. Commission plans to ease legal burden for cross-border successions

European Commission proposals to ease the legal burden when a family member with property in another EU country passes away have moved an important step closer to final approval following a vote in the leading European Parliament committee.

Around 12.3 million Europeans live in another EU country and there are around 450,000 international successions each year, valued at more than EUR 120 billion. As owners of properties (houses and bank accounts) families are confronted with different rules on jurisdiction and applicable law in the 27 EU Member States. For example, if a German citizen with a house in southern France dies, would French or German succession law apply to his property?

The Parliament vote may soon lead to a substantial simplification of the settlement of international successions by providing a single criterion for determining both the jurisdiction and the law applicable to a cross-border succession namely the deceased's habitual place of residence. The vote also paves the way for the introduction of the European Certificate of Succession, which will allow people to prove that they are heirs or administrators of a succession without further formalities throughout the EU. This will represent a considerable improvement from the current situation in which people sometimes have great difficulty exercising their rights. The result will be faster, cheaper procedures.

Following the vote in the European Parliament's Legal Affairs Committee, the legislation will now pass to the European Parliament plenary and the Council of the 27 Justice Ministers for their approval.

3. IHT & Trusts

3.1. Trusts (Capital and Income) Bill

This short Government Bill has recently been introduced into the House of Lords, with the date for the second reading yet to be announced.

The first three sections reverse the effects of certain legal decisions on the apportionment of income and capital in new trusts, and grant the trustees powers to compensate income beneficiaries for any consequent losses. The next section makes the investment and use of endowment funds by charities more flexible.

4. PAYE and Employment matters

4.1. Simplification review of the four Government approved employee share schemes

The Office of Tax Simplification (OTS) has now completed its simplification review of the four Government approved employee share schemes that attract special tax reliefs.

Its recommendations include both technical and administrative simplifications and have been put forward to encourage take up of the schemes, and reduce the burdens on those that offer them. The key recommendations are:

  • Introduce a self-certification system - the OTS found unanimous agreement that the approval process with HM Revenue & Customs (HMRC) caused employers problems, which ranged from the volume of paperwork required, to delays in acceptance and lengthy negotiations over whether a share scheme was eligible. The OTS believes it is time to move to a self-certification process in line with self-assessment principles.
  • Review the CSOP scheme – during the review, the OTS considered if the Company Share Option Plan (CSOP) was still relevant today. Whilst evidence points to usage reducing, it is unclear as to why. The OTS therefore recommends that further work is done in this area to establish if CSOP is still relevant, or could be phased out or replaced.
  • Merge EMI and CSOP share schemes – the OTS established that there is clear scope for changes to simplify the schemes on offer that will make a genuine difference to employers. The OTS therefore, recommends that if CSOP is found to be still of use, then the EMI and CSOP schemes should be merged. This would take some of the confusion out of the system, and as these two schemes are broadly similar, a merger would be relatively simple. This merger would significantly reduce the amount of share scheme legislation.
  • Technical simplifications – the OTS has also put forward many detailed recommendations to individual schemes regarding the harmonisation of definitions, adjusting time limits for today's employment climate, and modifying certain conditions.

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

"We have looked hard to see whether the approved share schemes are still valid, given their decline in usage. Accordingly, we spent a lot of time gathering the views of the people that use them, and found that employers saw real benefits, citing greater commitment from employees, and better engagement across all employees.

"We think the way forward is to improve the current schemes and this has led us to recommend a number of technical and practical changes. Overall, we think the recommendations put forward today offer a common sense approach to simplify the various schemes for the thousands of employers offering them throughout the UK and will encourage wider use."

The second stage of the review will start after the Budget and look into unapproved share arrangements – ones that do not attract special tax reliefs.

5. Business tax

5.1. OECD report on hybrid mismatch arrangements, tax policy and compliance issues

Aggressive tax planning is an increasing source of concern for many governments. The OECD has produced a report describing the most common types of hybrid mismatch arrangements (i.e. arrangements exploiting differences in the tax treatment of instruments, entities or transfers between two or more countries) and the effects they aim to achieve. These include:

  • Double deduction schemes (exploiting the different classification of one entity by two countries, eg. one country treats an entity as transparent while the other treats it as opaque);
  • Deduction without corresponding taxation (exploiting the different classification of instruments between two countries (e.g. debt in one country and equity in another country);
  • Foreign tax credit generators (arrangements generating foreign tax credits that arguably would not otherwise be available).

The report summarises the tax policy issues raised by these arrangements and describes the policy options to address them, with a focus on domestic law rules which deny benefits in the case of hybrid mismatch arrangements and countries' experiences regarding their application. The report concludes that the same concern that exists in relation to distortions caused by double taxation exists in relation to unintended double non-taxation and recommends a number of actions to be undertaken,3746,en_2649_33767_49720433_1_1_1_1,00.html

5.2. Tax contribution of business

The CBI has produced a paper highlighting the significant contribution business makes to the UK economy and society, and combating the misunderstanding (and, sometimes, misinformation) that has been clouding the debate.

The paper "Tax and British Business: Making the Case", and its accompanying briefing note, show why a balanced and proportionate tax regime is needed to allow business to continue to grow the UK economy and contribute to society. the-facts/.

6. VAT

6.1. VAT on photobooks

HMRC Brief 04/12 confirms HMRC's position following the decision in the case of Harrier LLC in the First Tier Tribunal.

The case concerned the liability of photo books. The Tribunal found against HMRC with regard to most of the items in question and upheld Harrier's appeal that the photo books were zero-rated. HMRC have decided not to appeal the decision.

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

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