UK: Weekly Tax Update - Monday 7 January 2013

Last Updated: 10 January 2013
Article by Richard Mannion


1.1 UK/US FATCA agreement

On 18 December HMRC published a response document, draft regulations and guidance following earlier consultation on the implementation measures for the US/UK FATCA agreement. Comment is invited by 13 February 2013.

1.2 HMRC Digital Strategy

In November 2010 the UK Digital Champion published a report on how Government should deliver its digital and internet services in the future. The report set out how government should transform its digital services and use of the internet so that public services are provided digitally 'by default'. Key to this approach is that non-digital solutions to service delivery are only implemented by exception.

HMRC has published a report on its digital strategy setting out 22 ways in which HMRC will make its digital services straightforward, convenient, and the channel of choice for customers.


2.1 Statutory residence test

HMRC has published draft guidance on the application of the statutory residence test and eligibility for overseas workday relief.

2.2 Personal representatives and agent authorisation

HMRC has changed its processes to accept a form 64-8 for a deceased customer as long as the department is able to verify the personal representative who has signed the form.

When completing form 64-8 the personal representative should:

  • Put their name in the first box on the left. They should also add their signature next to their name.
  • Enter their address in the 'Give your personal details or company registered office here' box.
  • Include their date of birth and National Insurance number just above the 'For official use only' on form 64-8.
  • The National Insurance number or Unique Tax Reference (UTR) of the deceased person should be included in the boxes on the right.

The completed form should be sent to HMRC at the following address:

HM Revenue & Customs
Central Agent Authorisation Team
Benton Park View
Newcastle upon Tyne
NE98 1ZZ

2.3 Settlement opportunity for participants in tax avoidance schemes

HMRC has issued the following press release:

"On 3 December 2012, the Government announced additional investment in HMRC to clamp down on tax avoidance and evasion. Following this announcement, we are inviting some participants in certain schemes to settle their tax liabilities by agreement, without the need for litigation. We believe that this settlement opportunity offers both the taxpayers and HMRC the best opportunity to resolve these disputes in a way which is cost-effective and consistent with the law. Where people decline the settlement opportunity, we will increase the pace of our investigations and accelerate disputes into litigation.

We will update these pages with details of the opportunity available for specific schemes as they become available. We aim to contact all those who are eligible for the offer by the end of January 2013.

The settlement opportunity is made in accordance with HMRC's Litigation and Settlement Strategy. HMRC will advance all available arguments if disputes are litigated. As well as continued uncertainty, delay in resolution, additional costs and potential reputational damage, taxpayers who choose the litigation route may end up with a worse tax result than they would obtain under the settlement opportunity.

Outline of the settlement opportunity

The schemes included in the settlement opportunity generally seek to create tax relief much greater than the real economic cost borne by the participants. HMRC has a high success rate in litigating these types of scheme.

The settlement opportunity will be offered to participants in the following schemes:

  • schemes which seek to use Generally Accepted Accounting Practice (GAAP) to write off expenditure or the value of assets to create losses either for sole traders, or individuals or companies in partnership;
  • schemes seeking to access the film relief legislation for production expenditure;
  • schemes seeking to create losses in partnerships through reliefs such as first year allowance, payments made for restrictive covenants, specific capital allowances.

There are some schemes with these features which are specifically excluded from the settlement opportunity (see FAQs). More detail will be given for individual schemes which are included but, broadly speaking, we will restrict relief so that expenditure which is not part of the real economic cost borne by the participants will be excluded when calculating losses or capital allowances. Broadly this means that, subject to the particular facts of the scheme, only amounts equivalent to the actual cash contribution funded by the participant and expended in the claimed trade will be allowed when computing losses or capital allowances. No relief will be allowed for interest on any loan used to fund contributions to the partnership in excess of the initial cash contribution. Where fees are paid for the provision of the wider funding arrangements, tax advice or litigation protection, it is likely that they will not be allowable.

Under this settlement opportunity the treatment of income that is received by the partnership, individual or company will depend on the particular arrangements. In general where there is a contingent right of future income from the asset purchased, it is expected that that income will be taxable in full. Where the income arises directly from the repayment of the circular loan finance, amounts received over and above the initial finance will be taxed as investment income on an amortised basis over the period of the unwind. The return of the initial finance will be treated as a capital receipt and not taxed.

We reserve the right to rely on all arguments available including those that may deny any relief completely in litigation.

The settlement opportunity is open to partnerships, individual partners, company partners and sole traders who have used certain schemes. The settlement opportunity extended to partners is restricted to the specific circumstances of the schemes covered by this settlement opportunity. It is not open to partners in any other partnerships."

2.4 Self Assessment auto-coding: a guide for tax agents

HMRC has published guidance to explain how PAYE tax codes are automatically updated with information from Self Assessment (SA) tax returns. The guide explains what auto-coding is, when it happens, and provides answers to commonly asked questions.

Auto-coding was introduced for SA tax returns for 2010/11 where taxpayers have a PAYE source of income. Auto-coding uses the information of other income and deductions from the return to calculate and issue a revised tax code automatically for the current tax year.

2.5 Damages following fraudulent misrepresentation in promoting a film tax scheme

The High Court has determined that a taxpayer was entitled to damages against an individual who fraudulently misrepresented information about a film tax scheme and her expertise in this area in order to entice investors to participate. In this instance the damages (computed by considering the amount of tax the taxpayer had to refund HMRC) were £185,832.


3.1 Newsletter for trusts and estates practitioners

HMRC has published the latest newsletter for trusts and estates practitioners, with items on Excepted Estates, New Inheritance Tax toolkit, Paying Inheritance Tax by instalments, HM Revenue and Customs Bereavement processes, Reduced rate of Inheritance Tax – form changes, Reduced rate of Inheritance Tax – guidance, Foreign Tax Credit Relief, Time limits for claiming reliefs and Legislation for the Inheritance Tax (Market Makers and Discount Houses) Regulations 2012.

3.2 Gift Aid Small Donations Scheme becomes law

The Small Charitable Donations Bill received Royal Assent on 19 December 2012 and takes effect from 6 April 2013.

GASDS allows eligible charities and Community Amateur Sports Clubs to claim Gift Aid style top-up payments on small cash donations without requiring the donor to provide a Gift Aid declaration.

HMRC is due to publish guidance regarding the scheme for consultation in early 2013.


4.1 Finance Bill 2013 – EMI Options

The relaxation of the 5% of shares rule for shares acquired under an EMI option put forward in the Budget proposals of March 2012 has been further widened. In addition to removing the 5% threshold test for shareholdings, the holding period of one year will be deemed to have commenced at the date of grant of the option rather than from the date of exercise.

This means that options holders can access the advantageous rates of CGT under Entrepreneurs' Relief (currently 10%) without the requirement that the shareholder own 5% of the capital of the company or having held the shares for at least a year while remaining an employee throughout.

This proposed amendment, if enacted, will apply to disposals of shares on or after 6 April 2013. This is a welcome and unexpected reform which will give much greater planning opportunities for EMI option holders.

How it works

The original Budget proposals had provided for all shares acquired under an EMI option scheme to be identified as a holding which automatically satisfied the 5% of shares holding test for Entrepreneurs' relief purposes. All the other tests still had to be passed in the ordinary way. These included the requirement that the shares were held for a year before the relevant disposal and throughout that period the employee had to remain in employment. If this had been enacted unaltered, it would have raised problems for very many option holders because they would need to have exercised their options at least a year before any exit, thus paying for the shares well before any exit was in prospect. It might be thought that that was the essence of Entrepreneurs' Relief – that the shareholder had taken a genuine investment risk - but it has been decided to ease the position of EMI option holders still further.

For disposals of shares acquired under EMI options post 6 April 2013, provided at least one year has elapsed since the grant of the original option under which the shares were acquired, they will be treated as forming a separate pool of relevant EMI Shares capable of qualifying in their own right for ER. The other ER tests, other than the 5% test remain in place, in particular the requirement that the company is a suitable trading company and the employee has been an employee throughout the year prior to disposal. This will almost invariably be the case as EMI options generally lapse where employees leave service because of the loss of tax relieved status of the option itself.

4.2 OTS review of employee benefits and expenses

The Autumn Statement mentioned that the Government would ask the Office of Tax Simplification (OTS) to carry out a review of ways to simplify the taxation of employee benefits and expenses, including employee termination payments. The terms of reference for this review have now been published.

4.3 December Employment Related Securities Bulletin

HMRC's December Employment Related Securities Bulletin covers:

  • Autumn statement changes to tax advantaged employee share schemes;
  • Changes to guidance on tax advantaged employee share schemes;
  • Seven year SAYE contracts.

4.4 Contract with no written terms – whether one of employment or for services

HMRC sought to levy unpaid taxes and interest on a salesman (in a window and conservatory business), where HMRC considered the individual was a self-employed individual rather than an employee. Mr Yetis was engaged to generate leads rather than conclude sales contracts and he contended that he was an employee.

While there was no written agreement between Mr Yetis and the business (Style Superior Windows & Conservatories Ltd), Mr Yetis maintained the terms were that he would receive a basic weekly wage (£200) plus commission. The difference between the terms applicable to him and other salesmen (who received a 10% commission) were that he would receive a basic weekly wage plus a smaller commission (2%).

Around the time when he started to work for the business, Mr Yetis signed a statement saying that he was self-employed and confirming that he would be responsible for his tax and NICs. That statement was not available to the Tribunal. Mr Yetis did not deny signing such a statement but said that the statement did not reflect the true position. He said that he was not self-employed and should not have been asked to sign it. Unlike the employees, however, Mr Yetis did not receive any payslips or P60s and was not paid when he went away on holiday (apart possibly from one week, which the Tribunal did not regard as conclusive).

The Tribunal determined the main factors indicating Mr Yetis' relationship with the business were:

  • He was not permitted to supply a replacement.
  • He was not at risk of financial loss during the period in question and did not provide his own equipment.
  • The payment arrangements for Mr Yetis were much closer, though not identical, to those of Style's employees than to the commission only remuneration for the salesmen.

On balance the Tribunal concluded Mr Yetis was an employee for the period in question.

4.5 Proposed legislation of ESC A4 and A10

HMRC has issued a consultation document to expose for comment draft legislation needed to enact the existing tax treatment under two extra statutory concessions (ESCs A4 and A10).

Part-time directors frequently act for a modest fee or for no fee but have their expenses of travelling from home to board meetings or for other business purposes paid for them by the company. Under the provisions of the benefits code, such travelling expenses may be taxable as employment income of the director without any corresponding tax deduction. ESC A4 modifies the normal rules. Although the wording of the concession refers to a directorship being held as part of a "professional practice", which is undefined, the new legislation applies to a director carrying on a trade, profession or vocation.

ESC A10 applies to lump sums paid under pension schemes in respect of foreign service and is largely obsolete following the introduction of ITEPA Part 7A, but continues to apply in respect of payments of lump sum relevant benefits, rights to receive which accrued to employees before 6 April 2011, whenever the lump sum is paid.


5.1 First year allowances on plant or machinery hired out

The case of MGF (Trench Construction Systems) Ltd (MGF) examined the scope of the exclusion from first year allowances for construction equipment contained in general exclusion 6 in CAA01 s46(2) – expenditure on plant or machinery for leasing.

HMRC's guidance at CA23115 sets out how HMRC's interpretation of this exclusion for the construction industry has developed as a result of case law. It indicates that where plant is provided along with other services so that it meets the definition of a construction contract under the Housing Grants, Construction and Regeneration Act 1996, then there is more than mere leasing and expenditure on plant used in such an arrangement is not excluded from first year allowances. The guidance implies that indicators of other services being present include the provision of plant with an operator and the provision of building access services along with scaffolding (rather than just the mere provision of scaffolding). It also indicates that each case has to be determined on its own facts.

MGF provided temporary works excavation support equipment to the construction industry. A key element of this service was ensuring the design of the equipment (often specific to each site) was to the required standard to ensure safe construction operations could take place. Design monitoring services were also offered throughout the use of the equipment. The design element of the services was provided by a subsidiary of MGF. The marketing material used indicated that the design services were provided directly to the customer by the subsidiary, though in fact it was MGF that contracted directly with the client and the subsidiary invoiced MGF for its services. There was no obligation to take up the design services, though in a significant number of instances it was so taken up.

MGF claimed 40% first year allowances under what was s44 CAA01 (FYAs for SMEs) for the three years ended 30 June 2008, which if disallowed would have created an extra corporation tax liability of £550,713. HMRC argued the design services were not an integral part of the hire of the equipment, but even if they were, the services were provided by the subsidiary to the customer and not by MGF.

The Tribunal concluded as follows:

We agree with HMRC's guidance to the extent that there is a distinction to be drawn between leasing of assets and the provision of services which include the use of assets. HMRC accept that the exclusion will not apply where assets are provided for use together with the provision of further services, unless those further services are merely subsidiary to the hiring of the asset. The appellant did not take issue with the test stated in those terms, but contended that the services in the present case were more than merely subsidiary. They were a key element of what the customer was purchasing.

The application of such a test inevitably involves a question of degree. In particular whether the service provided with the leasing makes the overall package something more than merely leasing assets. The paradigm case in a construction context may be that referred to in the HMRC guidance. The supply of plant or machinery such as a crane with an operator. However, whilst that supply may be at one end of a spectrum there will be other cases, not necessarily involving supplies of operators or labour, that amount to more than the leasing of assets for these purposes.

In summary the Tribunal found that the design services were supplied by MGF and that it was providing an overall service beyond the leasing of assets referred to in General Exclusion 6 and therefore allowed the appeal.

5.2 Income tax loss relief on shares

The case of Dr Saund is an example of an unfortunate situation where income tax loss relief for a loss in value of shares was denied due to the fact that shares had not been issued, and in any event the taxpayer was unable to demonstrate that there would have been the required loss in value for the relief claimed.

In 2004, a dentist (Dr Saund) invested in his wife's company which had a business as a language college. His wife was the only shareholder and company secretary. He provided finance and accumulated a director's loan account amounting to £850,000 over a three year period. By January 2007 the company had not yet become profitable and it was suggested by his accountant that the company would be in a better negotiating position with banks if his loan account was substantially converted to shares. A board meeting was held on 12 January where £742,500 of the loan account was converted into 99 shares. However the allotment was never registered (Dr Saund's wife was suffering from terminal cancer) and liquidators were instructed on 29 January 2007. A statement of affairs was produced on 20 February 2007 showing the full amount of the loan account outstanding, rather as reduced for the 99 shares referred to in the 12 January board meeting. The company was eventually dissolved in August 2009.

Dr Saund claimed share loss relief amounting to £386,596 in 2006/07 (the subject of the appeal) and £245,052 in 2005/06, believing that his shares had been issued and not understanding that the statement of affairs presented in February showed the full amount of his loan account outstanding.

The Tribunal concluded that the shares had to be actually issued (something more than allotment) to be capable of coming within what was at the time ICTA s574. Furthermore they were not convinced that the shares had become of negligible value at the time claimed. The appeal therefore failed. The point to take from this case is to consider the potential availability of tax relief for investments in unquoted trading companies and the most effective means of making the investment at an early stage in the process, and ensure the appropriate administrative procedures, to evidence what is intended, are carried out.

5.3 CFC regulations – banking profits

SI 2012/3041 provides for exemption from the CFC charge for accounting periods commencing on or after 1 January 2013 for a foreign company (regulated in the foreign territory in which it is resident) that is part of a UK group and is undertaking banking activities. Certain conditions need to be met.

The first condition is that the CFC is a member of a UK banking group (its "parent group") which is required by the Financial Services Authority to prepare consolidated financial information.

The second condition is that the CFC's tier one capital ratio at the end of the relevant accounting period does not exceed 125% of its parent group's tier one capital ratio.

The third condition is that it is reasonable to suppose that the CFC's average tier one capital ratio during the relevant accounting period did not exceed 125% of its parent group's tier one capital ratio.

There is a regulation indicating how the capital ratio should be calculated.

5.4 Debt cap regulations

The new section 314A TIOPA includes a Controlled Foreign Company (CFC) charge as a financing income amount for all debt cap purposes. Section 293 TIOPA exempts a financing income amount for the purposes of corporation tax. However, the CFC charge is not within the charge to corporation tax. Therefore it cannot be made exempt from corporation tax by virtue of section 293 TIOPA in the way that other financing income amounts of a company are exempted.

SI 2012/3045 addresses this issue by amending the relevant sections of Part 7, to ensure that a CFC charge which is a financing income amount can be treated as exempt where it is specified in a statement of allocated exemptions within section 292(4) TIOPA. The amendments come into force on 1st January 2013.

Part 7 of the Taxation (International and Other Provisions) Act 2010 ("TIOPA") applies to groups of companies. It provides for the disallowance for corporation tax purposes of net financing deductions of the UK members of a group to the extent that the total of those deductions exceeds the "available amount". The available amount is the sum of the amounts disclosed in the financial statements of the worldwide group for the relevant period of account in respect of matters specified in section 332(1) of TIOPA 2010 or in regulations made under that section.

A mismatch may occur if the amount disclosed in the financial statements of the worldwide group in respect of a liability differs from the amount accounted for in respect of the same liability by the UK member of the worldwide group. SI 2012/3111 alters the way in which the available amount is calculated in certain cases where there is a mismatch.

5.5 Anti-avoidance: trade and property business deductions

The Government has announced that it will introduce targeted anti-avoidance rules (TAARs) to the income tax and corporation tax provisions governing the relationship between rules prohibiting and allowing deductions from profits of a trade or property business. The TAARs will have effect from 21 December 2012.

The Government is acting because HMRC was recently notified of an avoidance scheme that seeks to exploit the rules in relation to a property business to generate artificial loss relief for use by companies to reduce their corporation tax profits. The Government does not accept that the scheme has the effect intended, but to remove any doubt prompt action is being taken to protect the Exchequer.

The provisions in sections 31 and 274 of The Income Tax (Trading and Other Income) Act 2005 and sections 51 and 214 of the Corporation Tax Act 2009 govern the relationship between rules prohibiting and allowing deductions. They provide that certain business expenditure incurred by trades and property businesses, that would otherwise be disallowable, can be deducted from business profits.

Legislation will be introduced in Finance Bill 2013 to amend all of the above sections to include a TAAR. The TAAR will apply where a permissive rule would otherwise allow a deduction in calculating the profits of a trade or property business for an amount which arises from tax avoidance arrangements. The effect will be that the rules prohibiting a deduction take precedence over those allowing a deduction.

Tax avoidance arrangements are those to which the person is party and the main purpose, or one of the main purposes, is the obtaining of a tax advantage. The term 'arrangements' will be widely defined.

The amendments will apply to amounts which arise directly or indirectly in consequence of, or otherwise in connection with, arrangements which are entered into on or after 21 December 2012, or any transaction forming part of arrangements which is entered into on or after that date, except where the arrangements are, or any such transaction is, pursuant to an unconditional obligation in a contract made before that date.

Draft legislation, an explanatory note and a TIIN are available in the Budget 21 March 2012 - Updates.

5.6 Community Investment Tax relief for companies

Assuming the legislation in the draft Finance Bill published on 11th December is passed companies investing in Community Investment Finance Institutions (CDFIs) will need to comply with the new limit for relief to be introduced. This will introduce a new section, s220B in CTA 2010, which will limit the relief to a maximum of €200,000 in any three year period. This will only apply to investments made on or after 1 April 2013.

The limit is being introduced to ensure the scheme is compliant with the de minimis limit for unnotified State aid. CITR was previously an approved State aid, but such approval has now expired. Following discussions with the European Commission it has been decided to bring the aid within the de minimis rules namely the €200,000 limit mentioned in the previous paragraph.

Investment into CDFIs can be made either by equity or by loan. Different calculations will apply depending on the method of investment.

Relief under CITR is given over a five year period, but the de minimis calculation will only require a company to take account of a three year period and not the whole amount of the relief due in the full period.

The note at the following link sets out examples of the calculations.

5.7 Time limit for group relief claims

The Court of Appeal has upheld the February 2012 decision of the High Court judicial review case of Bampton Property Group Ltd ( [2012] EWHC 361 (Admin)). In the particular circumstances of this case, HMRC was not obliged to point out that the group's claim to use losses, made in time, contained an error. As a result, the claimants failed to make a claim for loss relief in time, and HMRC was entitled to refuse to extend time.

The Court of Appeal rejected the argument that HMRC's refusal of the claim should fail because inadequate reasons for the rejection were given in the rejection letter (reasons were provided two months after the letter). It also concluded that particular comments in Code of Practice 14 (concerning the statement that HMRC does not want taxpayers to overpay and will inform the taxpayer if it finds something wrong) imposed no obligations on HMRC to disclose a matter which had been spotted prior to the enquiry but which was not present to the minds of the officials of HMRC handling the affairs of the taxpayer during the enquiry.

The Court of Appeal also discussed the reference to 'tax avoidance' in SP5/01 (see below), concluding that this did not refer to an express anti-avoidance provision and that the term 'tax avoidance' should be interpreted as set out in IRC v Willoughby [1971] 1 WLR 1071, where Lord Nolan held that:

"The hallmark of tax avoidance is that the taxpayer reduces his liability to tax without incurring the economic consequences that Parliament intended to be suffered by any taxpayer qualifying for such reduction in his tax liability. The hallmark of tax mitigation, on the other hand, is that the taxpayer takes advantage of a fiscally attractive option afforded to him by the tax legislation, and genuinely suffers the economic consequences that Parliament intended to be suffered by those taking advantage of the option."

The Bampton Property Group Ltd was part of Daejan Holdings plc and the High Court case discussed the procedural aspects of amending group relief claims where initial group relief calculations had been incorrectly calculated so as to leave excess losses stranded in a group holding company. The stranded losses led to a loss of tax relief that would otherwise have resulted in a repayment or tax credit amounting to just under £1m.

The group had entered into an arrangement available until members became part of a group on or after 21 March 2007 (as a result of FA07 introducing FA94 s227A). Until this point, it was possible to acquire a company which was a 'Lloyds underwriter' where it was possible to know in advance that a loss was to be incurred for tax purposes in the following accounting period.

FA94 s227A now requires that for group relief concerning corporate losses of Lloyds underwriters, companies must be in the group relationship for the period prior to that in which the Lloyds losses were declared. Losses incurred in a prior year could be allowed for tax purposes in the following year, i.e. the year in which they were declared. The dispute surrounded whether HMRC should operate the provisions around the admission of late claims for group relief (in FA98 Sch18 para 74 and SP5/01) so as to permit group relief claims to be amended after the normal date for amendment had closed.

The errors in apportionment were brought to the attention of the claimants by HMRC within the time period for amending the returns (on 1 February 2008), but neither the company nor its advisers properly corrected the apportionment. Further evidence from internal HMRC documentation indicated HMRC were aware of the quantum of errors in September 2006 and that there was spare capacity within the group to cover the apparently stranded losses. HMRC issued closure notices on 4th and 5th March 2008 (in respect of the years ended 31 March 2005 and 2006). This crossed with a letter from the company's advisers submitting amended group relief claims for the year ended 31 March 2006. There was further communication from HMRC on 28 March 2008 in response to the advisers' letter of 4 March, again expressing confusion over the apportionments. The expiry limits for the claims ran out on either 3 or 4 April 2008.

The High Court found in favour of HMRC that there were no grounds to permit a judicial review to reverse HMRC's refusal to admit late group relief claims.


The time limit for group relief claims to be made or withdrawn (FA98 sch18 para 74) is whichever is the last of the following dates:

  • 12 months after the filing date for the claimant company's tax return for the accounting period for which the claim is made;
  • If notice of enquiry is given into that return, 30 days after the enquiry is completed;
  • If after such an enquiry an officer amends the return in a closure notice, 30 days after the amendment is issued;
  • If after an appeal is brought against such an amendment, 30 days after the date on which the appeal is finally determined.
  • A claim for group relief may be made or withdrawn at a later time if an officer of Revenue & Customs allows it.

SP5/01 sets out when HMRC will allow a late claim. Late claims may be admitted if there were circumstances beyond the company's control that mean the statutory time limits were missed. However the following circumstances are not regarded as beyond the company's control:

  • Oversight or negligence on the part of the company or its agents;
  • Failure without good reason to compute the necessary figures;
  • A wish to avoid commitment pending clarification of the effects of a claim;
  • Illness or absence of an agent or adviser to the company.

If a late claim forms part of a scheme or arrangement, the main purpose or one of the purpose of which is the avoidance of tax, then that will be taken into account in HMRC's approach.

Code of Practice 14 (COP14 – Corporation Tax Self-Assessment Enquiries) in relation to enquiries into corporation tax self assessment enquiries into tax returns and claims made outside returns includesthe comment:

"We want to make sure companies do not pay too much or too little tax. Either way we will tell you if we find something wrong."

5.8 Simpler income tax for smaller businesses – further legislation

The draft legislation published on 11 December 2012 has been amended to include the transitional rules for the cash basis for small businesses and for simplified expenses for small businesses.

The further provisions now available cover:

  • spreading of adjustments on leaving cash basis accounting;
  • cash basis adjustments for capital allowances; and
  • transitional provisions with respect to the repeal of ITTOIA s238 & 239 and application of new s239A and 239B.

A technical note has been issued concerning the proposals:

Updated legislation and explanatory notes can be found at:


6.1 Imminent withdrawal of VAT exemption for research

The UK has received notification from the European Commission that its exemption for business supplies of research between eligible bodies does not comply with European legislation. The UK has accepted that this is the case and plans to withdraw the exemption from 1 August 2013 (the date is still subject to negotiation with the Commission). HMRC has therefore issued a consultation document (for response by 14 March 2013)

6.2 Connection charges for water

HMRC has issued a Brief concerning a change of policy on the VAT status of first time connection charges for water supply, which will now be seen as ancillary to the main supply of water, providing the supplier of the water and connection are made by the same taxable person (or by entities within the same VAT group) to the same customer. The Brief provides examples indicating HMRC's view of the VAT treatment of the supplies in different situations.

6.3 Subsidy payments by third party linked to the supply of free environmental consultancy and whether this amounts to consideration for VAT

The First-tier Tribunal has considered whether the funding received by a trading company Groundwork Environmental Services (Cheshire) Ltd (Groundwork) within a groundwork trust was consideration for the supply of environmental and energy efficiency consultancy services. The funding was provided by the Northwest Regional Development Agency and the European Regional Development Fund, while the consultancy services were provided free to businesses in the Northwest of England. The issue was of significance for the trading company because if the funding was regarded as within the scope of VAT, it would be able to recover input VAT on the costs of generating the consultancy services.

The question which the Tribunal were concerned with was whether the payments received by Groundwork were "subsidies directly linked to the price of the supply". There is no definition of 'consideration' in VATA 1994, but Article 73 Principal VAT Directive (Directive 2006/112/EC) provides:

" In respect of the supply of goods or services, other than as referred to in Articles 74 to 77, the taxable amount shall include everything which constitutes consideration obtained or to be obtained by the supplier, in return for the supply, from the customer or a third party, including subsidies directly linked to the price of the supply."

The main guiding case the Tribunal considered in determining whether the funding was within the scope of VAT was the ECJ case of Office des Produits Wallons ASBL v Belgium (case C-184/00). That case highlighted the requirement for there to be a specific link between the funding and the particular goods or services for which it was provided, such that the price of the goods or services should be determined no later than the date of payment of the subsidy.

In the circumstances of Groundwork's case, while there was a fixed maximum amount of funding, it could only be drawn down on the submission of monthly reports setting out the actual project expenditure, which was required to be auditable. In addition to directly attributable costs, the funding reimbursed some overhead costs which were not be allocated to specific identifiable projects.

The Tribunal concluded there was a direct link between the funding and the service provided so that the funding did represent consideration within the scope of VAT, and was not a global grant outside the scope of VAT. They considered that the fact that some overheads had not been allocated to specific projects did not invalidate the claim, and that it would be possible to make a specific allocation if the need had arisen. During the course of the case there was some discussion of how in practical terms Groundwork would charge VAT to its clients where the service was offered free, but that issue was outside the scope of what the Tribunal was required to decide upon.

6.4 Grattan plc

The CJEU has issued a preliminary ruling in the January 2011 First tier Tribunal case of Grattan plc (, concerning the offsetting of commission due to agents of a mail order company against their individual outstanding accounts with their employing business for goods they had purchased at an earlier date.

The question referred by the First-tier Tribunal was:

"In relation to the period before 1 January 1978, do taxable persons have a directly effective right under Article 8(a) of the Second directive and/or the principles of fiscal neutrality and equal treatment to account for VAT in respect of supplies of goods by reference to the consideration that is actually received by the supplier (that is, reduced by any discount or reduction."

The CJEU determined that it was incorrect to treat supplies before and after 1 January 1978 differently (the UK was required to amend its legislation from 1 January 1978). The Court examined the provisions for the calculation, declaration and payment of VAT in relation to a chargeable event. They concluded there was no provision for the occurrence of the chargeable event to be set at a subsequent time, or its deferral in another manner. Nor did the directive provide for the alteration of a tax debt that has arisen. They further concluded that there was no right to treat the basis of assessment of a supply of goods as retrospectively reduced where, after the time of that supply of goods, an agent received a credit from the supplier which the agent elected to take either as a payment of money or as a credit against amounts owed to the supplier in respect of supplies of goods that had already taken place.∂=1&cid=2950688


NTBN250 - Direct and indirect tax implications of expenditure on partnership tax work

This briefing note sets out the background for business expenditure to be deductible for direct tax purposes and for the input VAT to be recoverable, relating the points to costs for work done on partnership tax issues.

NTBN248 - DOTAS 'Lifting the lid on tax avoidance'

This briefing note outlines the December 2012 draft legislation and discussion on refinements to the DOTAS regime in the response to the earlier 2012 consultation document 'Lifting the lid on tax avoidance'.

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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