UK: Weekly Tax Update - Monday 28 January 2013

Last Updated: 31 January 2013
Article by Richard Mannion

1 GENERAL NEWS

1.1 Financial transactions tax

The Council of the European Union has adopted a decision authorising 11 member states to proceed with the introduction of a financial transaction tax (FTT) through "enhanced cooperation" (16977/12).

The 11 countries are Belgium, Germany, Estonia, Greece, Spain, France, Italy, Austria, Portugal, Slovenia and Slovakia.

The Commission will now make a proposal defining the substance of the enhanced cooperation, which will have to be adopted by unanimous agreement of the participating member states.

Discussions on a 2011 proposal aimed at introducing an FTT throughout the EU received insufficient support within the Council. That proposal involved a harmonised minimum 0.1% tax rate for transactions in all types of financial instruments except derivatives (0.01% rate). The aim was for the financial industry to make a fair contribution to tax revenues, whilst also creating a disincentive for transactions that do not enhance the efficiency of financial markets.

In September and October 2011, the 11 member states wrote to the Commission requesting a proposal for enhanced cooperation, specifying that the scope and objective of the FTT be based on that of the 2011 proposal. It is only the third time that an enhanced cooperation has been launched to allow a limited number of member states to proceed with a particular measure, and the first time in the area of taxation.

Requirements for enhanced cooperation are laid down in article 20 of the Treaty on European Union and articles 326 to 334 of the Treaty on the Functioning of the European Union. In particular, it must be established that the objectives cannot be attained within a reasonable period by the EU as a whole. At least nine member states must participate, and the cooperation must remain open for any others that wish to join.

1.2 Interim GAAR advisory panel

The Exchequer Secretary to the Treasury announced on 7 November 2012 that HMRC would appoint interim members to the GAAR Advisory Panel, led by Graham Aaronson QC, to oversee the development of the new guidance. Graham Aaronson QC was asked to convene the group and make recommendations for appointments to cover a range of interests; including business, tax advisers and the wider taxpayer interest. On the recommendation of Graham Aaronson, the Commissioners for HMRC have appointed the following individuals:

  • Graham Aaronson QC (Chair)
  • John Barnett
  • John Bartlett
  • Emma Chamberlain
  • Rob Clayton
  • Bill Dodwell
  • Steve Edge
  • Francesca Lagerberg
  • David McNair
  • Richard Murphy
  • Gary Richards
  • Tim Voak

These interim appointments will end on 31 March 2013. The process to appoint the Chair of the Advisory Panel is currently in progress.

http://www.hmrc.gov.uk/news/gaar.htm

2 PRIVATE CLIENT

2.1 Office of Tax Simplification – Final report on pensioner taxation

The Office of Tax Simplification (OTS) has issued its final report on simplifying pensioner taxation. The executive summary is copied below:"This final report is the culmination of a year and a half's work looking in detail at pensioners' experiences of the tax system. It builds on the work of the interim report on pensioner tax issues, published in March 2012, which reviewed the tax system and compiled a list of priority areas for further review. It is these priority areas that we have considered in more detail and which form the basis of our recommendations.

As a society we are getting older and increasing numbers of us can expect to celebrate our centenary. For the purposes of this review, we have defined the pensioner population as those aged over 60 although many such people will not have ceased work. The path from work into retirement is also becoming increasingly complex with the end of a compulsory retirement age and increasing numbers of people working longer, or mixing paid work with drawing a pension.

In addition to the phasing out of compulsory retirement ages, other policy changes have occurred during the review. Previous rises in the personal and age allowances have taken many out of taxation and reduced the eligibility and effectiveness of many of the allowances we have reviewed. We also note that the Government's commitment to a flat-rate State Pension for new retirees will mean that future pensioners will have more certainty about their State Pension income.

For many, the most radical simplification we could recommend would be to exempt the State Pension from tax. However, this is in our view not a realistic option, even with some pragmatic adjustment to the personal allowance in exchange. Whilst noting that such an exemption would simply confirm what many mistakenly believe to be the case, one cannot ignore the large hole in the public finances it would create. There are significant issues of fairness towards other taxpayers, especially as the wealthiest pensioners would benefit most, and over the last decade, pensioners have seen their incomes increase faster than other groups

Our recommendations for simplifying pensioner taxation are in two broad parts: legislative change to remove complexity in the tax system, and administrative improvements which will make it simpler for pensioners to comply with their obligations and claim their entitlements.

The administrative changes we suggest will also be of benefit to many non-pensioner taxpayers who face similar complexities in managing their affairs especially in relation to savings taxation. We are looking to HM Revenue & Customs (HMRC) and the Department for Work and Pensions (DWP) to invest in improved communications and processes to ease the administrative burden on pensioners. This administrative investment contrasts with the policy recommendations which may generate some modest net gains for the Treasury, depending on what compensation is put in place. Our brief is to design a package of recommendations which are broadly revenue neutral. It is therefore important that the administrative recommendations are given equal consideration as the policy changes we propose.

The age allowance

Our interim report suggested that we review the complexities surrounding the age related allowance and its taper system in particular. We have not considered this proposal further as the Chancellor announced at Budget 2012 that the age related allowance would be phased out.

One personal allowance for all, with the potential elimination of tapering, is clearly a big simplification. It will remove a great deal of confusion, missed claims for the higher allowance and problems with tapering and is therefore something we would support from a simplification point of view. However, we acknowledge there may be interim complexities (and unmet expectations) for those caught in the transition.

Administrative improvements

In our interim report in March 2012, we highlighted administrative improvements that HMRC could achieve relatively quickly. We were very pleased that HMRC rose to the challenge, and has made good progress in taking these forward. Perhaps the most promising result is that our review has prompted much closer working between HMRC and the DWP, including a single point of contact for staff in each department on pensioner issues, and electronic transfer of pension information from the DWP to HMRC when someone starts to draw their State Pension.

Our review has highlighted the need to improve communications about tax and the State Pension, and how the Pay as You Earn (PAYE) system operates for those with income from several sources.

  • We recommend that every April the DWP issues a P60 type form ("DWP60") stating the amount of taxable income (from the State Pension and other taxable state benefits) which a pensioner was entitled to in the previous tax year. This would give pensioners an accurate figure for their taxable state income and enable them to check they are paying the right amount of tax. Currently pensioners receive an annual letter from the DWP setting out their entitlement for the forthcoming year; however, they do not receive a statement of their full annual entitlement for the previous tax year. A DWP60 would also reduce the complexity which arises from payment of the State Pension on a weekly rather than monthly basis as many pensioners find it difficult to calculate their annual income for a particular tax year. This would bring the DWP into line with other pension providers and reduce errors and confusion for pensioners who complete self-assessment tax returns, and help pensioners in PAYE to check their tax codes;
  • We recommend that HMRC introduces a single composite PAYE coding notice ("Form P2C") which would aggregate the various individual codes for each source of income in PAYE and provide a reconciliation to the personal allowance. This would provide explanation and reassurance, and make it easier to spot errors. A consolidated notice will enable pensioners to see at a glance how their personal allowance is used and to check that they are paying the correct amount of tax. There will also be a wider benefit to younger taxpayers with multiple jobs who will also find it easier to check that they are paying the correct amount of tax;
  • The review highlighted a widespread lack of understanding of concepts such as the personal allowance, the use and meaning of tax codes and which parts of their income are taxable. To enable pensioners to understand these important areas better we recommend that the HMRC/DWP communications review includes a review of communications about how the State Pension is taxed, and clearer information about how personal allowances and tax codes operate, and which documents and figures pensioners need to be aware of;
  • Our work has highlighted a lack of understanding and engagement with tax issues across the working population in PAYE, even before they retire. Although we have not made specific recommendations in this area (as this is beyond our remit) we believe further education work is needed to engage taxpayers of all ages who are in PAYE about the need to understand their tax codes, personal allowance and savings taxation. This is an area of communications which merits further investigation. We note the Government's work on transparency in tax including the proposal to introduce personalised tax statements from 2014 and feel that improved communications have the potential to engage and inform more people about tax;
  • We recommend improvements to Form R85, which is issued by banks and enables non-taxpayers to have the interest on their savings paid gross rather than after deduction of tax at the 20 per cent basic rate. Our specific recommendations to Form R85 are that:
    • HMRC redesigns the Form R85 and helpsheet to make it easier for individuals to use. HMRC should also liaise better with banks and building societies to ensure that taxpayers receive the correct information and advice on registering for gross interest;
    • HMRC considers annual checks to ensure savers are not over or underpaying tax through matching data and taxpayers' records. This is in line with the recent suggestions of the Low Incomes Tax Reform Group (LITRG) after their most recent R85 "mystery shopper" exercise; and
  • Finally as part of the Government's "Digital by Default" strategy, HMRC should provide the facility for people in PAYE to be able to submit the Form R40 (to reclaim tax paid on savings or investment income) electronically. The paper Form R40 should also be revised with clearer headings and explanations and should be tested with pensioner groups.

Policy recommendations

The policy areas we have reviewed in detail in Chapter 5 include a range of often outdated, ineffective or badly targeted allowances and reliefs which span both income and savings taxation.

Savings taxation is an area of complexity for all taxpayers. We have looked in detail at the 10% savings rate which, as it is restricted to a narrow band of income and savings, is both complicated to understand and to claim if the taxpayer does not file a self-assessment tax return.

  • We recommend that the 10 per cent savings rate is removed, as awareness and claim levels are so low that it is ineffective in incentivising savings;
  • Our view is that any savings incentives should be focused around Individual Savings Accounts (ISAs) as they have high levels of brand recognition and awareness and are already in place; and
  • We would advise against any changes to the savings tax regime which involve complicated eligibility calculations or a reclaim process, because they create barriers to take up.

We have reviewed the married couple's allowance which is complex to understand and administer, and only available to people born before 6 April 1935.

Logic would suggest that this allowance is removed as there is no clear rationale for retaining it – unless it is intended to encourage over 78 year olds to marry or enter into a civil partnership. Clearly as those eligible get older, the allowance will be claimed by fewer people and will eventually become obsolete. Against this, there is the argument that the married couple's allowance for all its complexity, is at least well-established and reasonably well understood (in principle, if not in detail). Because of this, we conclude that it would be difficult to abolish the allowance.

  • If married couple's allowance is to remain we recommend that it is drastically simplified with a removal of the current system of income abatements and changing the 10 per cent rate system to a flat-rate payment.

Another area of review has been blind person's allowance which does not provide a benefit to the majority of blind people whose earnings or pensions are within their personal allowance. The allowance provides the largest benefit to higher rate taxpayers.

In order to make a claim for blind person's allowance in England and Wales a person must be certified blind and be on a local authority register of blind persons. Charities have highlighted that the requirements for registering as blind can make the blind person's allowance claims process time consuming and complex.

  • The OTS remains of the view that the blind person's allowance is ineffective in helping the general population of blind people and that it would be better if it were abolished and the funds used to provide direct grants and support to blind people. This could involve grants to buy equipment to enable younger blind people to enter employment and increased support to access digital government services; and
  • If the abolition/grant route is not taken up, we recommend that the claims process is simplified. We agree with a proposal made by the Royal National Institute for the Blind that a medical diagnosis of blindness should trigger an automatic notification to local authorities and HMRC.
  • The review has also looked at a little known relief for interest on loans for life annuities taken out before April 2009. This relief offers limited benefit to a small and rapidly decreasing group of pensioners and its removal would enable the remaining complex legislation relating to MIRAS (mortgage interest tax relief at source) to be abolished. This would be a significant legislative simplification:
  • We recommend that sunset legislation is introduced to remove the relief for interest on loans for life annuities taken out before April 2009 at a fixed date in the future e.g. in five years time possibly with a pragmatic adjustment to related interest payments. This should follow a consultation on the likely impact and compensation for the loss of the relief."

www.hm-treasury.gov.uk/d/ots_final_review_pensioner_taxation_230113.pdf

2.2 Sole traders and sideways loss relief

As part of the phased roll out of the settlement opportunity HMRC has written to individuals who have taken part in sole trader schemes setting out the broad terms under which HMRC is proposing to allow settlement.

Sole trader schemes are those which have sought to create a loss through a self-employed trade that would involve substantial expenditure said to be incurred in the trade, or a write-off of expenditure or the value of rights or assets through Generally Accepted Accounting Practice.

Terms of settlement

  • Loss relief against other income will be allowed in an amount equivalent to your contribution to the sole trader scheme personally contributed by you as the cash contribution, less any element expended on unallowable fees. (Unallowable fees are those spent on tax advice or circular funding arrangements).
  • The balance of the loss claim will not be allowable.
  • Loan interest will only be allowable to the extent that it represents the allowable expenditure paid out of the initial cash contribution.
  • Any share of income attributable to the cash element of expenditure will be taxable in full.
  • Any share of income attributable to the loan financed element will only be taxable in so far as it represents investment income over and above the return of the initial capital.

Example

  • Sole trader invests £1 million into a scheme
    • £200,000 is cash from his own resources.
    • £800,000 is by way of loan finance as part of the scheme.
  • The objective is to claim loss relief of £1 million. At a tax rate of 40 per cent this equates to £400,000 cash tax.
  • Relief allowed under the opportunity is limited to £200,000 (less any disallowance for fees). At a tax rate of 40 per cent this equates to £80,000 cash tax.

What to do now

Whilst not of general applicability to sole trader schemes, within the specific terms of this settlement opportunity HMRC is prepared to settle with individual sole traders, irrespective of whether or not the promoter or the other participants in the scheme continue to disagree with HMRC's view.

This new handling strategy will not apply to cases already adopted for criminal investigation. Any cases which are, during the course of an enquiry, identified as falling within HMRC's criminal investigation policy, or civil investigation of fraud procedures, will no longer be dealt with under this handling strategy.

http://www.hmrc.gov.uk/press/sole-trader.htm

3 BUSINESS TAX

3.1 Draft guidance on Finance Bill changes for unauthorised unit trusts

In 2011 the government consulted on the taxation of unauthorised unit trusts (UUT) with the introductory comment:

'Whilst avoidance schemes have been used to exploit the current legislation, the vast majority of investors use UUTs for normal commercial reasons and it is important that any changes not only tackle avoidance but also reduce burdens on industry and investors. Modernisation of the rules for UUTs would also complement other reforms to the tax code over recent years for other forms of collective investment schemes, such as authorised investment funds and investment trusts'.

A further consultation took place in May 2012. The proposals for exempt and non-exempt UUTs (EUUTs and NEUUTs) were:

EUUTs

  • to reduce the administrative burdens on EUUTs and their investors, by simplifying the basis of calculating income for tax purposes, amending the rules for when income is deemed to be distributed, and removing the requirement for trustees to deduct tax from deemed payments to investors;
  • to provide greater certainty for EUUTs and their investors by removing cliff-edges that can result in EUUTs losing their exempt status if an existing investor loses its own exempt status or an ineligible investor is inadvertently admitted;
  • to allow EUUTs to invest in a more tax-efficient way in offshore non-reporting funds, and introduce 'white list' provisions in order to prevent defined investment transactions from being characterised as trading transactions for tax purposes.

NEUUTs

  • to bring NEUUTs within the charge to the full rate of Corporation Tax, with distributions from NEUUTs being treated as corporate dividends;
  • to provide transitional rules and temporary preserved treatment for NEUUTs that have one or more exempt investor as at 24 May 2012.

In response to the consultation the above proposals have been modified in the proposals included in Finance Bill 2013 as follows:

  • the proposals to deal with minor and inadvertent breaches of the rules for EUUTs have been revised so that adverse consequences will only apply to ineligible investors; and
  • grandfathering of the current rules for NEUUTs with one or more exempt investors as at 24 May 2012 has been put in place until HMRC, in further consultation with industry, are able to introduce appropriate reliefs to mitigate adverse tax effects of restructuring. Relevant funds would then be required to restructure from the start of a prescribed tax year, taking into account the time required to effect restructures.

On 24 January 2013 draft guidance on the proposed changes was published (http://www.hmrc.gov.uk/drafts/uut-guidance.pdf). That includes the following notes on effect and transitional rules:

The effect of the draft provisions is that the tax treatment of the trustees or unit holders will depend on whether a UUT is

  • an exempt unauthorised unit trust (EUUT),
  • a non-exempt unauthorised unit trust (NEUUT), or
  • a mixed unauthorised unit trust (MUUT).

Transitional provisions will apply in each case.

The current provisions for UUTs and their investors will remain in force unless and until the proposed changes come into effect. The current legislation is set out in the ITTOIA05, ITA07 and CTA09 & CTA10. Guidance on the current provisions can be found in HMRC's Savings and Investment Manual at SAIM 6050 to SAIM 6230.

Chapters 1 and 2 of [Regulation] UUT2013 come into force on the day after the day on which the Regulations are made [to be a date after the date Finance Bill 2013 receives Royal Assent]. Accordingly, on or after that day, the managers or trustees of a UUT may make an application in writing to the Commissioners for a UUT to be approved as an EUUT.

Apart from Chapters 1 and 2, the Regulations [will] come into force on 6 April 2014.

The effect of the commencement and transitional provisions [in Part 4 of the regulations] will be as follows –

  • For EUUTs preparing annual accounts to an account year ending on or before 31 October 2013, 2014-15 will be a transition tax year and the full effect of the new rules will apply from the 2015-16 year onwards;
  • For EUUTs preparing annual accounts to an account year ending after 31 October 2013, 2013-14 will be a transition tax year and the full effect of the new rules will apply from the 2014-15 year onwards; and,
  • NEUUTs will be brought within the charge to corporation tax (CT) from the end of the 2013-14 tax year. This is except where grandfathering provisions apply in the case of NEUUTs with one or more exempt investors as at 24 May 2012. Grandfathering will remain in place for those NEUUTs to prevent exempt investors being adversely affected until appropriate reliefs can be introduced to allow such NEUUTs the opportunity to restructure prior to being brought within the charge to CT from a prescribed date.

Where, as set out in Regulation 29, the transitional year of an EUUT is 2013/14 or 2014/15, provisions apply to determine the income of the trust for that year and the date on which deemed payments or deemed deductions are treated as made by the trustees.

NEUUTs will come within charge to corporation tax on 6 April 2014, except those that are MUUTs as noted below, and will therefore prepare their final income tax return for 2013/14.

Regulation 30 includes provisions that will apply for 2013/14 for a UUT that becomes a NEUUT on 6 April 2014 to determine the income of the trust for 2013/14 and the date on which deemed payments or deemed deductions are treated as made by the trustees.

Regulation 31 provides an exception to the tax treatment of trustees or unit holders of NEUUTs that are MUUTs – that is, NEUTTs with one or more exempt investor as at 24 May 2012. The tax treatment of trustees or unit holders of MUUTs will continue on the basis of current tax legislation and HMRC guidance as referred to at 2.4 above. This grandfathering has been introduced to allow such MUUTs that are currently part of a fund structure time to restructure. HMRC will work with industry so that such restructures can be undertaken without adverse consequences for investors.

The response document can be found at: http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageLibrary_ConsultationDocuments&propertyType=document&columns=1&id=HMCE_PROD1_032483

4 VAT

4.1 Rooms provided in hotels or similar establishments with catering

HMRC has issued Brief 2/2013. Normally, hotels (and similar establishments) supply both the venue and the catering. However, in some instances the catering may be supplied by third parties. When the previous version of the guidance (Notice 709/3) was written, HMRC's view was that, where both the room and the catering were supplied by the hotel or similar establishment, the whole supply (including the provision of the room) would be standard rated. However, where the catering was supplied by a different person, the supply of the room only by the hotel would be exempt (unless the supplier had opted to tax). HMRC subsequently changed its view on this point, but did not update its guidance to reflect this.

An updated version of Notice 709/3 Hotels and holiday accommodation was published in October 2011. Paragraph 4.1 of the updated Notice confirms that the provision of accommodation in an hotel, inn, boarding house or similar establishment for the purpose of catering is standard rated regardless of whether the catering is provided by the operator of the hotel, etc, or by another person.

Where businesses have treated supplies as exempt from VAT in the past no assessments will be issued or action taken to correct the treatment of such supplies. All supplies should, however, be treated consistently with HMRC's revised interpretation from the date of Brief 2/2013 (22 January 2013).

http://www.hmrc.gov.uk/briefs/vat/brief0213.htm

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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