UK: Weekly Tax Update - Monday 25 June 2012

Last Updated: 9 July 2012
Article by Richard Mannion

1. General news

1.1. NAO report regarding large tax disputes

The National Audit Office has concluded, on the basis of an examination by former High Court tax judge Sir Andrew Park, that five large tax settlements were reasonable and the overall outcome for the Exchequer was good. However, it expressed concerns about the processes by which the settlements were reached and over poor internal communication of the reasons for settlement.

The NAO's review of the settlements followed serious concern by the Public Accounts Committee about how HMRC had handled them or overlooked governance arrangements. The NAO also examined the basis of concerns expressed by whistleblowers.

According to NAO's report, all five settlements were reasonable under the circumstances and at least one may have been better than reasonable. The report says that these large settlements are complex and there was no clear answer to what represented the 'right' tax liability. In each case, there was a range of justifiable positions HMRC might have taken. The NAO's examination included consideration of whether the settlement in each case was as good as or better than the outcome that might be expected from litigation, taking into account the risks, cost, uncertainties and timescale of the latter option.

The report notes that specialist staff were sometimes excluded from the final settlement negotiations and HMRC did not always ensure that these staff involved understood the reasons for settlement. Poor internal communication of the reasons resulted in a loss of confidence in the settlements, both internally and externally.

It is not clear that all settlements were fully compatible with HMRC's Litigation and Settlement Strategy. For instance, there are some disputes where the only possible outcomes are either that the taxpayer owes nothing or that it owes the full amount. In these circumstances, the Litigation and Settlement Strategy does not permit 'splitting the difference'. In one settlement, HMRC settled for less than if it had won in litigation. This was reasonable, given the costs and uncertainties of litigation, but was not clearly compatible with the Strategy.

In most cases, there was no need to seek legal advice before agreeing settlement terms. In one case, HMRC did not consult its lawyers when it should have done because there was ongoing litigation.

The findings of the report confirm the NAO's concerns regarding the governance arrangements operating in these cases. HMRC has acknowledged that its governance processes need strengthening and is introducing new arrangements, including the appointment of an assurance Commissioner, who will approve all large settlements.

www.nao.org.uk/publications/1213/settling_large_tax_disputes.aspx

2. Private Clients

2.1. Statutory residence test and reform of ordinary residence

The Government has published its response to the June 2011 consultation on a statutory residence test, including draft legislation for Finance Bill 2013 setting out the detail of the proposed test.

There are a number of changes to the original proposals for a statutory residence test as follows:

  • Part A: the threshold for automatic non-residence for individuals who have been resident in one or more of the previous three tax years will be raised from 10 to 15 days.
  • Part A: the Government will consult further on two alternative options to amend the definition of Full Time Work Abroad.
    • Increasing the number of working days allowed in the UK from 20 to 25 working days.
    • Increasing the number of hours that constitute a working day from 3 to 5 hours.
  • Part A: international transportation workers will be excluded from being eligible for Full Time Work Abroad.
  • Part B: the Government will consult further on whether to increase the qualifying period for Full Time Work in the UK from 9 months to 12 months.
  • Part B: international transportation workers will be excluded from being eligible for Full Time Work in the UK.
  • Part C: the "family" connection factor will be amended so that only time spent with a child in the UK will be relevant.
  • Part C: the definition of accommodation will be simplified and will apply where an individual has accommodation that is available to be used by them for a continuous period of at least 91 days in a tax year and the individual spends at least one night in that place during the tax year.
  • Day counting: there will be a provision for exceptional circumstances which will allow days of presence to be disregarded where an individual spends a day in the UK for reasons beyond their control.
  • Split year treatment: the conditions will be amended for individuals who leave the UK to live abroad. In particular, they will be able to spend up to 15 days in the UK in the part of the tax year after their departure.
  • Split year treatment: this will also be available for the spouses or partners (civil and common-law equivalent) of individuals who work full-time abroad.
  • Transitional rules: there will be a transitional provision to allow the new statutory rules to be applied to previous tax years only where the individual needs to know what their residence status was in a year prior to the introduction of the test to determine their residence in future years.

Comments on the draft legislation and further consultation questions are invited by 13 September 2012.

The Government had already announced that it had decided to abolish the concept of ordinary residence for tax purposes, but it will retain overseas workday relief and put it onto a statutory footing.

http://www.hm-treasury.gov.uk/consult_statutory_residence_test.htm

2.2. Written Ministerial Statement on IHT anti-avoidance

The Exchequer Secretary to the Treasury (David Gauke) published the following written Ministerial Statement on 20 June 2012:

"Anti-avoidance provisions in clause 208 of Finance Bill 2012 are being introduced to close tax avoidance schemes involving arrangements to acquire interests in offshore 'excluded property' trusts, which are not subject to inheritance tax (IHT) charges. The schemes take advantage of this special treatment with the effect that UK domiciled individuals avoid IHT charges which would normally be due when they transfer assets into trusts.

Clause 208 may not be fully effective in deterring some variants of these schemes, particularly those involving arrangements using onshore vehicles. It may also inadvertently apply to some arrangements not made for tax avoidance purposes, especially those entered into prior to its introduction.

I am announcing today that amendments will be introduced at Report with the aim of ensuring that the new provisions: do not affect existing arrangements and are effective in stopping avoidance schemes involving the acquisition of interests in settled property; target the intended schemes correctly; and protect significant amounts of revenue. The amendment and provisions in clause 208 will have effect from today (20 June 2012)."

www.hm-treasury.gov.uk/d/financebill2012_amendments_cl_208.pdf

3. Business tax

3.1. Consultation on incentives for the creative sector

HM Treasury has issued a consultation on corporation tax reliefs for the creative sector. Three areas are targeted for relief, namely animation, high-end TV, and video games. The consultation recognises that the corporation tax system can support a limited number of special allowances and reliefs, and believes that targeting these areas will help towards:

  • making the UK the technology centre for Europe; and
  • avoiding the risk of underinvestment in these sectors that could occur without the relief.

The Government wants to build on the success of film tax relief and on the experience of other countries offering similar targeted relief.

The illustrations of relief show an enhanced deduction of the lower of (i) the UK core expenditure and (ii) 80% of total core expenditure. The relief will be available for qualifying expenditure incurred on or after 1 April 2013 (with the requirement that it be paid within four months of the end of the accounting period in order to qualify for relief). If the business is loss making, the enhanced deduction (or loss if lower) would result in a repayable credit. Where a creative sector tax relief is claimed, it will not be possible to claim other reliefs (such as research & development tax relief or film tax relief).

Animation

Animation relief would encompass relief for the costs of producing animated programmes. The proposed definition of animation is a sequence of images in 2 or 3 dimensions created by recording still images or objects, one frame at a time with incremental changes in position, form or appearance between frames to create the impression of movement.

The Government is targeting animation 'intended for broadcast' and the scope of the relief will exclude specified categories to ensure the relief is targeted appropriately. For example animation produced for advertising purposes, news or weather, or for game shows will be excluded. Animation programmes which are pornographic in content will be excluded from relief. An initial proposal is that a production will qualify as animation if expenditure on animation amounts to at least at least 75% of production costs.

Qualifying expenditure is proposed to be expenditure directly incurred in the production of the animated programme but excluding, for example, the costs of financing, advertising etc. Grants and other public subsidies will also be netted off against these expenses. The qualifying 'core expenditure' is proposed to include all production costs that are integral to the production process itself, including relevant pre and post production.

There is discussion of the boundary between speculative expenditure (not intended for relief) and expenditure which is highly likely to result in a marketable product (intended for relief). One approach would be for early stage costs associated with a specific project to become eligible for relief once the programme has been formally commissioned by a broadcaster. Alternatively, only costs incurred in producing programmes with the potential to be broadcast as a finished product would be eligible for relief. To qualify for animation relief the production will need to qualify as a British production via a cultural test.

High-end television

The Government is targeting high-end television 'intended for broadcast'. The relief is proposed to apply to drama productions and this would include comedy programmes. However, drama for these purposes does not include advertising, discussion programmes, news or current affairs programmes, quiz show, panel shows, variety shows, or similar entertainment. The Government proposes to adopt a monetary threshold of £1 million (of production costs) per hour of programme running time (excluding any commercial breaks), which the consultation document indicates aligns with how the industry currently operates. There is a minimum proposed running time of 30 minutes.

As for animation relief, the relief will apply to expenditure directly incurred in the production of the high-end television programme but excluding, for example, the costs of financing, advertising etc. Grants and other public subsidies will also be netted off against these expenses. The qualifying 'core expenditure' is proposed to include all production costs that are integral to the production process itself, including relevant pre and post production.

Relief will not be available for speculative expenditure. One approach proposed would be for early stage production costs associated with a specific project to become eligible for relief once the programme has been formally commissioned by a broadcaster. Alternatively, only costs incurred in producing programmes with the potential to be broadcast as a finished product would be eligible for relief.

To qualify for high-end TV relief the production will need to qualify as a British production via a cultural test.

Video games

The proposals set out that to qualify for the relief a UK incorporated company must be engaged in the production of video games and meet all of the following four criteria:

  • There must be a 'video game' being produced. A similar definition to that used in France is proposed. 'leisure software made available to the public on a physical medium or online and incorporating elements of artistic and technological creation; the latter cover not only PC and console video games but also mobile games, on-line games for one or more players, educational or edutainment software and, provided that they incorporate sufficient interactivity and creativity, cultural CD-ROMs';
  • The video game must be intended for commercial release;
  • The video game must be certified as a cultural product by satisfying a cultural test;
  • At least 25 per cent of the core expenditure incurred on the video game by the production company must relate to expenditure on goods or services that are used or consumed in the UK.

The qualifying 'core expenditure' is proposed to include all production costs that are integral to the production process itself, including relevant pre- and post-production. This will include for example, expenditure directly incurred in the production of the video game but excluding, for example, the costs of financing, advertising etc. Grants and other public subsidies will also be netted off against these expenses. There would be no relief for debugging and maintenance once a certain stage of development (known as 'open beta') has been reached.

There can be significant lead-in times and costs to production, but the relief will not be available for speculative production costs. One approach for permitting relief for early stage expenditure would be for early stage production costs associated with a specific project to become eligible for relief once the video game has been formally commissioned by a publisher. Alternatively, only costs incurred in producing a video game with the potential to be approved for commercial release could qualify.

A threshold for entry is a feature of some other regimes and the Government has initially suggested £50,000. To qualify for the relief the video game will need to qualify as a British video game via a cultural test.

www.hm-treasury.gov.uk/press_48_12.htm

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

www.hm-treasury.gov.uk/d/consult_creative_sector_tax_reliefs_180612.pdf

3.2. Draft guidance on new controlled foreign company rules

HMRC has issued draft guidance on certain chapters for the new CFC regime Further draft guidance will be issued over the summer. The draft guidance available covers:

  • An overview.
  • Chapter 3 – the gateway charge.
  • Chapter 4 – profits attributable to UK activities.
  • Chapter 5 – non-trading finance profits.
  • Chapter 9 exemptions for from qualifying loan relationships.

www.hmrc.gov.uk/drafts/cfc.htm

3.3. Disclosure of documents in a dispute involving transfer of assets abroad

The First Tier Tribunal has rejected both the taxpayer's and HMRC's request for the other party to disclose various documents in preparation for a future hearing.

The taxpayer (Peter Fisher and others) requested HMRC to disclose various internal documents covering the period from December 1998 to October 2001 concerning their views on the viability of telebetting businesses prior to the 2001 reduction in betting duty, their views on the legislation in force at the time and notes of discussions with other leading UK telebetting participants. The taxpayer contended that this was required to support their case that their reason for transferring business assets from a UK company to a Gibraltar company were commercially motivated and not tax motivated within the meaning of the transfer of assets abroad legislation in force at the time (ICTA s741). They considered HMRC interpreted the legislation as requiring both a subjective and an objective test and therefore this information would be required to support their responses to HMRC's view of the objective matters.

HMRC commented that they regarded the test as a subjective one, although a subjective motive could be ascertained from objective factors. The Tribunal agreed that the test was a subjective one, but also that the evidence requested was not required, as if the taxpayer was not aware of this information at the time of his subjective decision to relocate a business from the UK to Gibraltar, it could not have influenced his decision.

The taxpayer had disclosed various Counsel's opinions, instructions and documents to HMRC and had therefore waived privilege on the relevant Counsel's opinions. In the disclosures they had also listed a meeting with Counsel in December 2001, but not disclosed the instructions or note of conference.

HMRC were seeking disclosure of these documents on the grounds that privilege had been waived. Privilege had been waived in respect of instructions and meetings with Counsel concerning the possibility of criminal prosecution for non-UK based businesses (or their agents) advertising their betting services. The taxpayer would be relying on this evidence as part of the reason why the business was relocated to Gibraltar. Advice from Counsel concerning tax, given in 2000 was disclosed (and privilege therefore waived), but was not to be used by the appellants in dealing with the points of issue. The taxpayers therefore contended that the 2001 advice on tax was also privileged.

While the issues were more finely balanced, the Tribunal agreed with the taxpayer, but commented that the 2001 advice could later be determined to be required for the case so that privilege would need to be waived.

www.financeandtaxtribunals.gov.uk/judgmentfiles/j6449/TC02021.pdf

4. VAT

4.1. HMRC guidance on land and property (V1-8)

HMRC has updated its internal guidance on land and property.

http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel= pageVAT_ShowContent&id=HMCE_PROD1_023492&propertyType=document

5. Tax Publications

Investing in companies

Investing in smaller businesses can often be viewed as risky. But there can be significant tax incentives for investing in some companies, which help to mitigate economic risk.

For those companies looking for alternatives to bank funding, the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs) are options well worth exploring. In relation to the EIS, tax relief is potentially available to owner-managers of businesses, as well as outside investors.

In this guide we examine the EIS and funding from VCTs, which can be an important source of financial support for smaller businesses. We also examine the new Seed Enterprise Investment Scheme (SEIS).

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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