UK: Weekly Tax Update - Monday 13 August 2012

Last Updated: 20 August 2012
Article by Richard Mannion

1. Private Clients

1.1. Penalty reduced by special circumstances

The First Tier Tribunal has recently considered the case of Susan Roche (TC02019). Ms Roche had been made redundant in late April 2008 and received a redundancy payment of £194,748. Ms Roche had subsequently moved house and put the papers relating to the redundancy into storage on the basis that she assumed that the redundancy payment would be reflected in the 2008/9 P60 in due course.

Ms Roche completed the 2008/9 tax return in January 2010 and omitted to include the redundancy payment, a small pension, a small benefit in kind and bank interest of £4,284. HMRC opened an enquiry into the tax return and Ms Roche immediately provided details of the omitted income.

HMRC calculated a penalty of £5,490 and offered to suspend an amount of £160 relating to the bank interest. Ms Roche appealed against the penalty, the amount of the penalty and HMRC's decision not to suspend the whole penalty.

The First Tier Tribunal agreed that Ms Roche had been careless in omitting the redundancy payment and the pension from her tax return. However it went on to consider whether there were special circumstances that should have been taken into account as follows:

51. A crucial feature of Schedule 24 is that it does not include a defence of a "reasonable excuse". So although penalties for late filing of returns or late payment of tax are subject to such a defence, there is nosuch concept in the case of penalties for inaccuracies. That said, it may be that the particular circumstances of the case are such that the actions of the taxpayer are not careless, or they might constitute "special circumstances" justifying a reduction in the amount of the penalty.

52. Paragraph 11, Schedule 24 gives HMRC discretion to reduce the amount of a penalty because of special circumstances.

53. Special circumstances do not include the (in-)ability of the taxpayer to pay the penalty itself (paragraph 11(2)(a) , Schedule 24), or the fact that the loss of revenue from one taxpayer is balanced by an overpayment by another (paragraph 11(2)(b) , Schedule 24). Neither of these circumstances is in point in this case.

54. The jurisdiction of the Tribunal in an appeal relating to special circumstances is limited. We can only apply a reduction on account of special circumstances (to a different extent than that applied by HMRC) if we consider that HMRC's decision is "flawed" when considered in the light of principles applicable to proceedings for judicial review (paragraph 17(3)(b), Schedule 24). HMRC applied no reduction on account of special circumstances. We need to consider whether HMRC, in exercising their discretion not to make any reduction, acted in a manner that no reasonable body of Revenue commissioners could have acted. Did the HMRC take into account any irrelevant factors, or fail to take into account relevant factors, in reaching their decision?

55. In our view HMRC's decision to apply no reduction was flawed.

56. Mr Reeve in his submissions told us that HMRC had considered that paragraph 11 did not apply, as the reason for the inaccuracies in Ms Roche's return was her carelessness. However we find that HMRC did not give proper consideration to the issue of special circumstances. Although both the original letter calculating the amount of penalties (dated 2 February 2011) and the review letter (dated 13 May 2011) mention Ms Roche's redundancy, it is only to state that the redundancy occurred 21 months before the date of the tax return, and that therefore Ms Roche's stress would have diminished by then. No consideration was given to the reasons why Ms Roche had boxed-up her papers, and the stress she was under at the time she packed-up her home – even though these issues were raised by Ms Roche in her correspondence with HMRC.

57. In particular no reference is made in any of HMRC's letters to their discretion to reduce penalties to take account of special circumstances, and there is no statement that they had reached a decision that no such circumstances existed. Nor can the letters be read in any way that might suggest that, although no express reference is made in the correspondence to special circumstances, HMRC had in fact applied their mind to the issue and had reached the conclusion that there were none.

58. We therefore find that HMRC had not given proper consideration to the potential for there to have been special circumstances, and we find that HMRC's failure to turn their mind to this issue amounts to a "flaw".

In summary the Tribunal considered that there were special circumstances which justified a reduction in the amount of penalty:

  • Ms Roche had found herself suddenly and unexpectedly made redundant.
  • Her redundancy occurred at a time when she was part way through refurbishing a derelict house to create a new home. She was therefore placed under severe financial pressure.
  • This occurred during the financial crash, which made it difficult for her to refinance her mortgage or sell her old house and investment property, thus increasing her financial stress. Although it may have been careless of Ms Roche to have boxed-up her redundancy papers (as judged by the objective standard of a reasonable and prudent taxpayer), we can understand why she did so, given the stress that she was under and her desperate need to de-clutter her home to make it as saleable as possible. Because Ms Roche had boxed-up her redundancy papers, they were not available to her at the time she completed her tax return online.

It is disappointing that this case should have ended up in the tribunal having gone through the internal review process without HMRC apparently considering the point about special circumstances. However it is encouraging that the tribunal recognised the point and found in favour of an unrepresented taxpayer who appeared in person.

2. IHT & Trusts

2.1. New Form IHT35

HMRC has published a new form IHT35 Claim for relief - loss on sale of shares.

The form is used to claim relief when 'qualifying investments' that were part of the deceased's estate are sold at a net loss within 12 months of the date of death. Qualifying investments are general shares or securities listed on a recognised stock exchange and/or holdings in authorised unit trusts.

3. PAYE and Employment matters

3.1. Aberdeen Asset Management plc and the discounted option scheme

Aberdeen Asset Management plc appealed the First Tier Tribunal's decision concerning their discounted option scheme on the basis that the Tribunal had erred in law as follows:

  • First, in deciding that, when each employee received shares in a company which owned money, the employee thereby received money for PAYE purposes.
  • Secondly, in deciding (in the alternative) that the shares were "readily convertible assets".

The first point depended on whether the transfer of shares to an employee was a "payment" within the meaning of ICTA88 section 203 and the PAYE Regulations. In the judgement of the Upper Tribunal:

The transfer of shares to an Employee was not a "payment" to that Employee for the purposes of section 203.

The powers which he had over "his" company did not result in his rights being "as good as cash" as Mr Ghosh would have it or, as I would say, being able to turn what was prima facie a benefit in a form not consisting of money (ie shares) into a benefit consisting of money. The money is not unreservedly at the disposal of the Employee, a condition which is, I consider, a necessary, even if not a sufficient, condition for there to be a payment within section 203.

This was in contrast to the FTT who had determined there had been a payment on the basis that the money held by the company had been unreservedly placed at the disposal of the employee.

However the Upper Tribunal agreed with the First Tier Tribunal that what was received was a readily convertible asset and therefore subject to income tax according to ICTA s203J. They concluded:

...the powers of the 100% shareholding in each of the actual money box companies amounted to "arrangements" the effect of which was to enable the shareholder to obtain an amount of money. The critical elements in that conclusion are (i) that the company held only cash and had no liabilities at the time of the transfer (ii) that the shareholder was able unilaterally to exercise appropriate company law procedures such as winding-up, payment of dividend or reduction of capital and distribution and (iii) he was thereby enabled to obtain cash.....

...The arrangements not only have to have the effect that the shareholder is enabled to obtain an amount of money, but they must also have the effect that the actual amount is, or is likely to be, similar to the expense incurred in providing the shares. This requirement is satisfied, in my judgment, in the present case. The money in the Company is of an amount similar to the expense in providing the 100% shareholding to the Employee. The Employee can exercise his powers as a 100% shareholder to obtain all of the money in the Company (less, perhaps, some costs and expenses). He will therefore obtain an amount similar to the expense incurred in providing him with the shares.

Similar conclusions with respect to readily convertible assets were made in respect of the 50% interests in the scheme.

The tax years concerned in the Aberdeen case were 2000/01 to 2002/03 and the legislation in force for those years was subsequently superseded by Finance Act 2003. Under current legislation, shares that are not deductible for corporation tax purposes are automatically deemed to be readily convertible assets (s702(a) and (b) ITEPA).

3.2. PAYE Pooling - informal review outcome

The informal review of PAYE Pooling, which looked at a possible change to the PAYE system to give closely connected employers the option of being treated as a single entity for PAYE purposes, has concluded that no further work will be undertaken to introduce a legislative change during the introduction of PAYE in real time.

As a concession, HMRC will allow employers who currently have an informal agreement to pool payrolls to continue with those arrangements until further notice. No new applications to pool payrolls will be accepted.

HMRC will continue to monitor the issues arising with PAYE Pooling with a view to reconsidering the benefits of regulatory change after RTI has been introduced.

4. Business tax

4.1. The Patent Box

HMRC has published a new guide on the Patent Box regime, explaining who can elect for the Patent Box, which patents are eligible, and how and when to claim.

4.2. Roll-over claim fails in Upper Tribunal

The Upper Tribunal has ruled in favour of HMRC in the case of Mertrux Ltd v HMRC [2012] UKUT 274 (TCC)

Mertrux received a payment of £1.7m on the termination of its Mercedes dealership and the transfer of that part of its business to Leadley Ltd. Mertrux treated the payment as consideration for the disposal of goodwill and claimed roll-over relief on the whole amount. HMRC took the view that only one-half of the payment represented the sale of goodwill and restricted the claim for roll-over accordingly. Mertrux appealed to the First Tier Tribunal and in June 2011 the FTT allowed the company's appeal – see Informal 25 July 2011.

HMRC appealed to the Upper Tribunal on the grounds that the FTT had erred in law and reached a conclusion it was not entitled to reach on the facts. HMRC argued that half the payment related to early termination of the Dealer Agreement and this was a separate asset from the goodwill. The Upper Tribunal agreed with HMRC.

4.3. Whether tax return posted in time

The First Tier Tribunal has reconsidered the case of Eamas Consulting LLP. The FTT had originally dismissed Eamas' appeal in 2010 and Eamas had appealed to the Upper Tribunal. The Upper Tribunal remitted the matter to the FTT for consideration by a different constituted panel.

The representative partner gave evidence that he had posted a nil return for the partnership well before the filing deadline. He said that it had been submitted at about the same time as his personal return which HMRC had duly received well before the deadline.

HMRC insisted that the return had not been received and issued penalty notices in February 2009 against which Eamas appealed. A duplicate return was finally submitted to HMRC on 26 August 2009, but it transpired that the delay was because HMRC did not respond timeously to the partnership's request for a blank return, with responsibility for the partnership's tax affairs passing between Leicester, Maidstone, Bradford, Salford, Londonderry, London NW and Ipswich tax offices in the meantime

The judge Malcolm Gammie accepted the representative partner's evidence that he had properly posted the return in good time, saying:

"Properly stamped and addressed the return would be treated as delivered in the ordinary course of post. Even without that presumption, having accepted that Mr Eames posted the return as he claimed, the Tribunal considers that he has a reasonable excuse for any period of default and that the appeal should be allowed."

4.4. EU consults on tax obstacles to cross border venture capital investment

The European Commission has launched a public consultation to collect factual examples of direct tax problems that arise when venture capital is invested across borders. Due to mismatches between the tax systems of the EU's 27 Member States, venture capital funds can face problems of double taxation as well as legal and administrative uncertainty when they invest across borders. These problems could hinder the full development of the venture capital market in Europe and therefore compromise the provision of financing to the EU's most innovative small and medium-sized enterprises (SMEs).

Algirdas `emeta, Commissioner for Taxation, Customs, Anti-fraud and Audit, said: "Venture capital is an essential source of financing for companies, in particular innovative start-up SMEs facing the costs of developing know-how. SMEs are the backbone of the EU's economy and help to generate economic growth and new jobs. It is therefore the collective responsibility of the Commission and Member States to find solutions to tax obstacles that hinder cross-border venture capital within the EU."

The aim of the public consultation is to find concrete examples of direct tax problems and to assess the impact of these problems in terms of additional costs to investors and SMEs in the EU. The Commission also seeks suggestions from respondents on feasible solutions to address any such problems. On this basis, the Commission will be able to decide if there is a need for EU-level solutions to remedy the problems and develop the most appropriate policy response by 2013. The Commission has invited all interested parties, including individual citizens, businesses and business organisations, tax administrations and tax professionals in academia, to provide their views on this matter by 5 November 2012.

The public consultation is available at:

4.5. Draft CFC regulation on excluded territories

The Excluded Territories Exemption (ETE) is part of the new controlled foreign companies (CFC) regime. The purpose of the ETE within the new regime is to exempt CFCs that are resident in territories where the CFC's income is taxed at a rate broadly similar to that of the UK main corporate tax rate and where the CFC satisfies some general residence and income conditions.

The draft regulations provide the list of excluded territories for the purposes of the ETE and set out a simplified ETE that is available for CFCs in Australia, Canada, France, Germany, Japan and USA. The simplified ETE is intended to allow groups to deal quickly with CFCs in these territories, which are major trading partners that have tax regimes broadly equivalent to the UK's. The simplified ETE is an additional, optional basis for exemption that will not affect entitlement to ETE under the normal rules.

Comments on the draft regulations are requested by 28 September 2012.

5. VAT

5.1. Whether pub rental charges relate in part to residential parts of the property

This case relates to rent which Enterprise Inns plc and Unique Pub Properties Limited receive in respect of around 7,500 public houses they own, only a small proportion of which (around 151) contained no residential accommodation. The pubs in question contain both commercial and residential accommodation, and HMRC maintain that the rent relates in part to the residential areas. The companies, on the other hand, argue that the rent is derived exclusively from the commercial parts of the pubs.

Until April 2008, the companies had declared output VAT on rental income on the basis that 90% was attributable to commercial property and 10% to residential property (to which the option to tax could not apply). This was standard practice in the brewing sector at the time.

The agreements under which pubs were let would describe the relevant premises in such a way as to encompass any residential areas as well as the commercial ones. Rent was expressed as a single sum. Nothing was said about whether the rent was attributable exclusively to the commercial areas or, if not, how it was to be split between commercial and residential areas. The companies challenged the 90:10 apportionment from April 2008, and the First Tier Tribunal agreed with HMRC that the 90:10 split should remain in place.

The appeal to the Upper Tribunal was on the basis that the First Tier Tribunal's decision was deficient in more than one respect. One of the specific grounds of appeal was to the effect that the Tribunal wrongly took into account the absence of evidence as to the tenants' perspective and failed to take into account evidence that no charge was made for residential accommodation. Another ground of appeal was that the Tribunal erred in its approach to the companies' invoicing arrangements. A further submission was that the Tribunal's approach to the contracts between the companies and their tenants was misconceived.

The Upper Tribunal dismissed the appeal and concluded as follows:

The Tribunal was, in my view, entitled to arrive at the conclusion that rent was attributable to the residential parts of the pubs. I have not been persuaded that the Tribunal's conclusion was one for which there was no evidence or that it was otherwise unreasonable.

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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Richard Mannion
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