UK: Weekly Tax Update - Monday 29 October 2012

Last Updated: 1 November 2012
Article by Richard Mannion


1.1. Updated HMRC DOTAS guidance

HMRC has updated its DOTAS guidance to incorporate the new regulations on SDLT disclosure obligations effective from 1 November 2012, and the recent consolidating regulations for income tax, corporation tax, CGT and NIC.

1.2. Certain FATCA deadlines deferred

The IRS has announced changes to certain timelines under the Foreign Account Tax Compliance Act (FATCA) for withholding agents and foreign financial institutions (FFIs) to complete due diligence and other requirements and it has issued certain additional guidance concerning gross proceeds withholding and the status of certain instruments as grandfathered obligations.

The proposed deadlines for new account opening procedures would have required them to be in place by 1 January 2013. This deadline has been extended to 1 January 2014.


2.1. High Income Child Benefit Charge

HMRC has released more detailed guidance on the High Income Child Benefit Charge and has started writing to taxpayers about the new charge, which will no doubt start to focus minds on what action needs to be taken.

The following practical tips may be useful in answering some of the questions likely to arise:

  • Assume that you have a stay at home Mum who looks after children under 12 and her partner has a taxable income exceeding £60,000. Mum should still make claims child benefit because the entitlement to child benefit will give her a NIC credit - which may be important in deciding whether she qualifies for the full retirement pension in due course.
  • Where one of the partners has taxable income in excess of £60,000 (assume Dad for this illustration), Mum should consider electing not to receive the child benefit. In other words Mum claims the benefit, but then elects not to receive the cash. This will save her partner the hassle of having to complete a tax return via self-assessment if not already doing so.
  • Making an election needs thinking about:
    • Mum will currently be receiving an amount of tax-free cash
    • electing will save Dad a tax liability that he would otherwise suffer, but it will leave Mum out of pocket
    • consequently there may need to be a family "summit meeting" to discuss a redistribution of the family finances.

Stopping Child Benefit

The means of electing not to receive Child Benefit have now been outlined. The election can either be made online or by telephone or writing to the Child Benefit Office.

The election to stop Child Benefits has to be made by the recipient and the online request form includes a personal declaration. (

The information required is as follows:

  • email address
  • full postal address including postcode
  • date of birth
  • National Insurance number
  • Child Benefit number, and
  • the full name and date of birth of any children Child Benefit is received for.

Restarting payments

An individual can decide to start receiving Child Benefit payments again at any time by using an online form or calling the Child Benefit Helpline or writing to the Child Benefit Office.

In order to restart receiving Child Benefit payments it is the person who is entitled to Child Benefit who can ask for the payments to be started again – although HMRC does say authorised agents will soon be able to request that payments are restarted for their clients.

With an income over £60,000 the payments can only restart from the Monday after the Child Benefit Office gets the request.

Restarting when income drops below £60,000

The Commissioners for HMRC have published "directions" which amend the effect of the legislation by allowing an election to be revoked and child benefit to be restarted if the individual's, or partner's, income drops to below £60,000 for a full tax year, in which case the application to restart Child Benefit can be in respect of payments for up to two years after the end of that tax year.


3.1. Hok Ltd – penalties for late filing of form P35

In 2011 the First-tier Tribunal allowed, in part, an appeal by Hok Limited against penalties imposed by HMRC for the Company's failure to submit an employer's end of year return by the due date. Although it was conceded by the Company that the return was late and it had no reasonable excuse for the lateness, the Tribunal concluded on grounds of fairness that the Company should be penalised for only the first of the five months which passed before the return was submitted.

The Upper Tribunal has now considered HMRC's appeal against that decision and found in their favour. HMRC argued:

  • the First-tier Tribunal has no jurisdiction to discharge penalties if they are properly due;
  • its jurisdiction was limited to determining whether or not the return was late as a matter of fact and, if so, whether there was a reasonable excuse for the lateness;
  • fairness is not a permissible consideration;
  • even if the First-tier Tribunal did have further jurisdiction, there was no basis on which it could properly have exercised that jurisdiction in this case in order to discharge the penalties.

The Upper Tribunal was aware that this appeal involved an important point of principle and said that there are many other cases pending before the First-tier Tribunal in which the same issue arises. With that background it was unfortunate that the company was not represented by counsel.

The end of year return should have been submitted by the Company on or before 19 May 2010, but it was not in fact submitted until 15 October 2010 after HMRC has issued a penalty notice. Thus four whole months and one part month had elapsed between the due date and the submission of the return and five penalties of £100 each were imposed.

The company acknowledged that HMRC was entitled to levy a penalty, but argued that if HMRC had notified it of its default earlier the return would have been submitted at a far earlier time, thus avoiding on going penalties.

The First-tier Tribunal had ruled as follows:

  • HMRC ran a 'structured programme to enable penalties to be issued regularly throughout the year, rather than waiting for the late return to be submitted and then issue a final penalty. These penalties, although aimed at encouraging compliance and having the effect of reminding are not designed to be reminders for the outstanding return.
  • HMRC deliberately waited until four months have gone by and did not issue the first interim penalty notice until September of the year of default. By that time a penalty of £400, being four times £100 per month, is said to be due. The effect of HMRC desisting from sending out a penalty liability notice very soon after 19 May of the relevant year, and choosing deliberately to delay that penalty notice until four months had gone by, resulted in the taxpayer facing a minimum penalty of £500.
  • HMRC took the stance that it was the responsibility of the taxpayer to make the necessary filing and it had no obligation to issue any reminder. "However, we have no doubt that any right thinking member of society would consider that to be unfair and falling very far below the standard of fair dealing and conscionable conduct to be expected of an organ of the State.

After the appeal hearing concluded, the Upper Tribunal's attention was drawn to a recent change in HMRC's practice regarding the earlier penalty notices and they therefore asked for written submissions on the new procedure.

HMRC argued that the legislation makes it clear that an officer may determine what penalty is appropriate or correct (s 100), that in this case there is only one possible correct penalty, namely that prescribed by s 98A (£100 for each month or part of a month for which the return was late) and that the tribunal's power on appeal against fixed penalties is limited by s 100B(2)(a) to correcting mistakes.

In other words the tribunal may decide that the officer was wrong in his belief that a penalty was due and discharge it or it may decide that he imposed a penalty of the wrong amount, and replace it with the correct amount. The rather wider power applicable to other penalties, set out in s (2)(b), cannot be invoked.

The tribunal agreed that while s 100 states that the officer "may" impose a penalty, thus affording him some discretion, there is no mechanism by which the Tribunal may review the exercise of that discretion. Similarly, the discretion to mitigate a penalty is conferred by s 102 on the Board, but not on the Tribunal, and the legislation does not provide any mechanism by which the refusal of the Board to exercise that discretion in accordance with s 102 may be challenged before the First-tier Tribunal.

The judge in the First-tier Tribunal Geraint Jones QC has become well-known for his common-sense judgements and so it was disappointing to see that the Upper Tribunal went to some lengths to diminish that common-sense approach:

"We end with some comments about the judge's reasoning. In their Decision the Tribunal asserted, as the extracts set out above show, that HMRC's practice was deliberate, and that it was designed to ensure that a defaulting employer paid a minimum of £500 in penalties. There was no evidence before the Tribunal from which they could draw such a conclusion; it was based entirely upon the judge's perception (which emerges from the Decision and from what he said in Royal Institute of Navigation) that because, as he assumed (and it was no more than assumption), a penalty notice could have been sent out within a month, the fact that it was sent later meant that HMRC deliberately delayed. He appears to have made no enquiry of HMRC about the justification or reasons for the practice and simply dismissed the explanation (which we acknowledge was somewhat opaque) given in the statement of case; and in neither case did the judge give HMRC an opportunity to make representations before condemning their conduct as unfair, even unconscionable. Against that background, in our judgment, the Tribunal's comments to that effect were not appropriate."

It was unfortunate that the taxpayer was not represented in this case. A counsel for the taxpayer might well have drawn the Tribunal's attention to the fact that it was possible for HMRC to issue fixed penalty notices in respect of late VAT returns within days of the due date. In the case of VAT there was no similar escalation of the penalty the longer the default went on, and some commentators had pointed out that this meant that there was no incentive for HMRC to delay the issue of VAT penalty notices.


4.1. CFC draft regulations

Draft regulations have been published by HM Treasury at

CFC Banking Capitalisation Regulations

The draft regulations provide a capitalisation safe harbour in respect of' banking CFCs' within banking groups. If a banking CFC meets the conditions set out in the regulations, the effect will be that no CFC charge will arise under Chapter 6 of the CFC regime, which deals with the capitalisation of CFCs with trading finance income.

These regulations are intended to reduce the compliance burden in relation to banking CFCs, by providing a mechanical test of the level of capitalisation in those CFCs. They are open for comment until19 November.

Life Insurance Companies – CFC interaction

These regulations are intended to ensure that the new CFC regime interacts appropriately with the existing rules for the taxation of offshore funds held by Life Insurance Companies, particularly section 212 TCGA 1992. The regulations are designed to prevent double taxation and reduce compliance burdens in respect of life insurance companies' offshore funds. These draft regulations are open for comment until 19 November.

Worldwide debt cap – CFC Interaction

These regulations make some amendments to the debt cap and CFC rules to ensure that the two regimes interact correctly. The regulations ensure that the debt cap mechanisms for reducing or eliminating a corporation tax charge can also be applied, in appropriate circumstances, to a CFC charge. They do this by making sure that a CFC charge can be included as part of the allocated amount within the debt cap rules. These draft regulations are open for comment until 21 November.

4.2. Community Infrastructure Levy

Planning Minister Nick Boles has confirmed that changes to planning laws will ensure planning applicants no longer face the threat of being double charged a costly planning levy for local infrastructure,.

The possible double charging has been identified by builders and developers as disproportionate and making unviable key development and regeneration proposals that would bring locally-supported homes and jobs.

Under the proposed change, applicants will be able to amend planning conditions on existing consents to make them feasible without having to pay another Community Infrastructure Levy on the same development.

Leading British developer Land Securities has announced it will proceed with an estimated £350million scheme that will deliver 2,500 jobs as a result of the proposed changes.

Planning Minister Nick Boles said:

"Stopping this unnecessary double charging is an important step in the Government's bid to do all it can to get the economy growing by supporting locally-led sustainable development.

...This is just one of many measures we have committed to in order to unblock barriers to growth and to make the planning system simpler and more effective."

The Community Infrastructure Levy helps support growth by contributing to essential infrastructure. Funds are raised from developers undertaking new building projects and can be used to fund a wide range of infrastructure that is needed as a result of development, including new or safer road schemes, flood defences, park improvements, green spaces and leisure centres.

The draft regulations laid in parliament - include measures to stop applicants being charged the levy twice if they amend existing planning consents through Section 73 of the Town and Country Planning Act 1990.

The regulations include a proposal to introduce a new provision so that CIL already paid can be set off against any CIL liability in relation to the section 73 application and provision in relation to overpayments.

4.3. Commission gives green light for enhanced cooperation on Financial Transaction Tax

According to the European Commission the 10 Member States that wish to apply an EU financial transaction tax (FTT) through enhanced cooperation should be allowed to do so, because all the legal conditions for such a move are met. This is the conclusion of the proposal for a Council Decision adopted by the Commission on 23 October 2012.

The proposal for a Council Decision is an important procedural step in the enhanced cooperation process. It must be adopted by a qualified majority of Member States, and receive the Parliament's consent, in order for the 10 Member States to move forward. Later in the year, the Commission intends to table the substantive proposal on the harmonised FTT, for discussion and adoption by the participating Member States. That proposal will be very much along the lines of the original FTT proposal tabled by the Commission in September 2011, as requested by the Member States in their letters. However, the Commission will carefully examine whether some adjustments are required to reflect the smaller number of Member States that would be applying it.

4.4. Commission refers the UK to the CJEU over the attribution of gains and transfer of assets legislation

On 24 October 2012 the European Commission decided to refer the United Kingdom to the EU Court of Justice for its tax regime concerning the attribution of gains to members of non-resident companies. Under UK legislation, a parent company in the United Kingdom is taxed for the capital gains of its subsidiaries in other Member States, while no similar taxation exists when subsidiaries are located in the United Kingdom.

If a UK resident company acquires more than a 10% stake in a company resident in another Member State and the latter company disposes of an asset and realises a capital gain, this gain may be taxable in the Member State where that company is resident. However, this gain will also be immediately attributed to the UK company and therefore be liable to corporation tax. The UK company cannot avoid this tax charge, even if it proves that the relevant transactions were carried out for valid commercial reasons and lacked any tax avoidance purpose.

If a UK resident company has a similar stake in another UK resident company which, in turn, realises a gain on the disposal of an asset, the company disposing of the asset would be liable to corporation tax under UK law. However, the UK resident participating company would not be liable to any tax in the United Kingdom on such a gain.

The Commission is of the opinion that this restriction is disproportionate, in the sense that it goes beyond what is reasonably necessary in order to prevent abuse or tax avoidance.

The referral to the Court of Justice is the last step in the infringement procedure.

Also on 24 October 2012, the European Commission decided to refer the United Kingdom to the EU Court of Justice (ECJ) for its regime concerning the taxation of transfers of assets abroad. UK legislation provides for a difference in treatment between domestic and cross-border transactions.

If a UK resident invests capital in a UK company, the company will employ the capital to generate income. In this situation, the company will be taxable on the income generated, but the investor will not be taxed until the company makes a distribution to him/her, for example by way of a dividend.

If a UK resident invests capital in a company in another Member State, the company is liable to be taxed in that Member State on the income it generates. However in this scenario the investor would be subject to UK income tax on that income, even though the income has not been distributed to him/her.

The Commission is of the opinion that this restriction is disproportionate, in the sense that it goes beyond what is reasonably necessary in order to prevent abuse or tax avoidance.

The referral to the Court of Justice is the last step in the infringement procedure.

4.5. Whether derivative transactions represent income profits and losses and the application of the Ramsay principle

The Upper Tribunal has overturned those parts of the First-tier Tribunal's decision in the Explainaway Ltd case that were in favour of the taxpayer. The Upper Tribunal concluded that in the circumstances of the case, the result of derivative transactions entered into did not represent income profits or losses so that the transactions did not create losses. They also concluded that Ramsay principles could be applied to disregard losses and gains on derivatives that were part of the scheme. The Upper Tribunal confirmed the decision of the First-tier Tribunal that the sale of a subsidiary (Quoform Ltd) did not create an allowable loss.

This was a case examining a scheme entered into in 2001 and 2002 by companies in the Paul Rackham Limited group to avoid a corporation tax charge on the gain on disposal of a 50% share of its holding in Waste Recycling Group Ltd (WRG). If the scheme had worked as intended the group would have mitigated the whole of its gain on disposal of shares in WRG, and obtained interest relief for loans taken out as part of the scheme.

The scheme was designed to mitigate the gain arising on the disposal of 50% WRG (£8.6m), purportedly eliminating the gain altogether. If done today, it may not have been necessary to enter into the scheme in the first place, assuming Paul Rackham Ltd's investment in and disposal of an interest in WRG had met the conditions for the substantial shareholdings exemption (which became effective for disposals occurring on or after 1 April 2002).

There have been other changes in legislation making the sort of planning arrangement that Explainaway undertook difficult to replicate today, including s16A TCGA which introduces a restriction for allowable losses when undertaken to secure a tax advantage, and the exclusion from exemption for distributions that are part of a tax advantaged scheme.

The result of the Upper Tribunal's decision in Explainaway meant that the First–tier Tribunal's conclusion that the derivative transactions deferred the gain on disposal of WRG by one year was held to be incorrect, so that the original gain (£8.6m) was chargeable when realised.

4.6. OECD consultations on updated model tax treaty provisions and tax treaty issues on emissions permits and credits

The OECD released three updated discussion drafts on 19 October, following responses to earlier consultations.

  • Beneficial owner – open for consultation until 15 Dec 2012 This revised discussion draft focuses on the proposals made with respect to Article 10. This draft includes a summary of the comments received and an explanation of the changes made with respect to each relevant paragraph of the Commentary on that Article (as well as a new proposal for a clarifying change to the wording of paragraph 2 of Articles 10 and 11 that addresses a triangular case that was raised in some of the comments received). The Annex includes a consolidated version of the revised proposals for Articles 10, 11 and 12 where changes made to the proposals included in the first discussion draft are underlined.
  • Permanent Establishment – open for consultation until 31 January 2013 This consultation updates the revised proposals for interpreting article 5 of the model tax convention (permanent establishments). The changes to the original proposal are underlined and are in response to comments made in earlier consultations.
  • Emissions permits and credits – open for consultation until 15 January 2013 This revised discussion draft includes the revised analysis of the Working Party. Section 1 provides an overall background explaining the nature of emissions permits, certified emission reduction credits (CERs) and emission reduction units (ERUs). Section 2 analyses the tax treaty issues related to these instruments (collectively referred to as "emission permits/credits"). Section 3 includes proposed changes to the Commentary on the OECD Model Tax Convention that reflect the analysis in section 2.

5. VAT

5.1. VAT and storage

The Upper Tribunal has considered the First-tier Tribunal's decision in the case of UK Storage Company (SW) Ltd, concluding that the earlier decision (that the supply of storage did amount to an exempt supply of leasing or letting of immovable property) was based on an error of law.

The company entered into contracts with customers whereby the customer had access to a storage unit (consisting of steel cladding with a roller door that was assembled as a unit on site and slotted into a concrete base by lifting and dropping the unit into place using a vehicle with a telescopic boom). Although the units were moveable and the contract was structured so as to be a licence rather than a lease, the overall nature of the supply might be regarded as the entitlement to use storage facilities on land for an agreed term. In common with other storage providers at the time, there was a term in the contract which indicated UK Storage Company (SW) Ltd would have the right to require the customer to move his stored items to a new unit.

The First-tier Tribunal held that the units could be regarded as much more permanent and immovable than the units in the case of David Finnamore [2011] UKFTT 216 (TC) TC01081 and taking account of all the circumstances could be considered as immovable property. However the Upper Tribunal held that the earlier Tribunal had incorrectly applied the tests set out in the CJEU case of Maierhofer (Case C-315/00). They held:

In relation to the concept of immovable property, the CJEU did not provide an exhaustive definition of immovable property but held at [35] that the letting of a building constructed from prefabricated components fixed to or in the ground in such a way that they cannot be either easily dismantled or easily moved constitutes a letting of immovable property for the purposes of the exemption, even if the building is to be removed at the end of the lease and re-used on another site. The CJEU also stated at [35] that the structures do not need to be inseverably fixed to or in the ground and the term of the lease is not decisive.

We conclude from Maierhofer that, in order to be immovable property for the purposes of the exemption, a building or structure must be fixed to or in the ground in such a way that it cannot be either easily dismantled or easily moved. The fact that the building or structure is not inseverably fixed to or in the ground and that it will or might be removed at some point in the future does not prevent it from being immovable property.

In our view, applying Maierhofer, it is necessary in this case to ask the following questions:

  1. were the storage units fixed to or in the ground?
  2. if so, could the units be

    1. easily dismantled and removed; or
    2. easily moved without being dismantled?

In order for the storage units to be classified as immovable property, the answer to the first question must be "yes" and the answer to both parts of the second question must be "no".

As the units were not 'fixed to or in the ground' (a question not asked by the First-tier Tribunal), the Upper Tribunal concluded the units were not immovable property. It therefore followed that any agreement between the company and its customers could not be a licence to occupy land. However if the Upper Tribunal had concluded the units were immovable property, they would have agreed with the First-tier Tribunal that the agreement created a licence to occupy.

In relation to whether the supply was a single supply of a licence to occupy land or of storage services, the Upper Tribunal commented:

We consider that the FTT could only have inferred from the evidence that the customer was not concerned with the specific unit or location where the goods are stored but rather that the goods would be secure from loss and damage until they are needed. In our view, the licence to occupy a unit or area of land cannot be regarded as constituting an end in itself for an average customer but constitutes a means of better enjoying the principal supply, namely the provision of secure storage of the customer's goods. We consider that the typical customer's economic reason for entering into the Agreement was to obtain storage services and that is the nature of the single supply by UK Storage.

5.2. Decision to appeal on decision in GMAC and BT on VAT and bad debt relief

In August 2012 the Upper Tribunal considered the cases of GMAC and BT concerning VAT and bad debt relief and whether the Insolvency and Property Conditions were appropriate. The Upper Tribunal has now permitted HMRC to make an application within 14 days to appeal the decision in the BT case to the Court of Appeal. They have rejected the contention made on behalf of GMAC that a reference on the windfall issue to the CJEU was unnecessary.

5.3. VAT fraud: rare win for taxpayer in latest case of missing trader intra-community fraud (MTIC fraud)

The recent case of JDI Trading Limited v HMRC regarding alleged MTIC fraud stands out as one of just a handful of victories for the taxpayer in the field of MTIC fraud. Martin O'Neill of Smith & Williamson acted for JDI.

In this case, it was found that JDI did not, and could not, have known that fraud was being carried out by others in its supply chain. The Tax Tribunal therefore ruled that JDI had a valid claim to repayment of VAT of £688,421 incurred on its supplies. The case concerned nine transactions in consignments of mobile phones which were purchased in the UK and subsequently exported to Europe.

Martin summarised the case as follows:

"The Tribunal heard at length about how JDI conducted business, and its directors' understanding of how its market operated. It concluded it could not have known of this fraud. Crucial to the case was JDI's adherence to its own procedures, and also its ability to disprove certain damaging assumptions as to the role of the grey market in global trade.

In contesting this case, we disputed HMRC's entire approach to cases of this type as well as the evidence they served. In doing so we successfully challenged the evidence, such that the tribunal exerted a higher degree of evidential rigour on HMRC. We sought at all stages to prevent the making of unpleaded, unproven and damaging allegations in court. Another fundamental i factor in determining the outcome of this case was that we persuaded the judge to exclude the evidence of an expert whose testimony had previously been accepted on similar cases.

While the taxpayer has won few cases of this type, it demonstrates that not all MTIC appeals inevitably lose in Tribunal, and that legitimate businesses which have exercised proper care in the management of their affairs, can, if they stand firm against the authorities, prevail in appeal proceedings.

Litigating cases of this type is highly specialised, requiring solid expertise and persistence - you cannot take shortcuts while preparing such a case. This is arguably a landmark decision in a notoriously complex area of VAT law. In our experience, HMRC will attempt to fight the case on their own terms and on issues with which the Tribunals regularly find in their favour. Companies facing similar cases need to plan to take HMRC's case on at a fundamental level and at the outset should talk to an expert in this field.

It is likely that HMRC will maintain its approach to MTIC fraud by denying VAT repayments on suspected cases for the foreseeable future. All companies involved in the export of goods need to be aware of this.

MTIC fraud is complex, highly technical and is no longer confined to mobile phone and computer component industries. Businesses can unwittingly get caught out. However, if they carefully check new suppliers, document their approach and are prepared to pursue their case if appropriate – they should not lose out."

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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This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.