UK: Weekly Tax Update - Monday 11 February 2013

Last Updated: 18 February 2013
Article by Smith & Williamson

1. GENERAL NEWS

1.1 Finance Bill 2013

Finance Bill 2013 will be published on Thursday 28 March.

1.2 Making a claim for repayment of tax

There are two legal routes for claiming repayments of tax:

  • Statutory claims. These can be made within the period for amending an income or corporation tax return (two years from the end of an accounting period for a company and by 31 January following the filing date for a personal tax return). Where the claim relates to a mistake, the period for making a claim extends to four years (from the end of the accounting period for companies and the end of the relevant tax year for individuals). A successful claim for repayment will result in the repayment of the overpaid tax plus (if applicable) interest calculated at simple interest rates. Appeals on statutory claims are dealt with through the Tribunal system which has particular rules on when costs can be claimed.
  • Common law claims. These can be made within six years from the date on which the mistake leading to the overpayment could, with reasonable diligence, have been discovered. There is an alternative deadline of six years from the date of payment of the tax. A common law claim will be for restitution, damages and compound interest. It may be very difficult to justify a claim for damages in relation to overpaid tax, as has been demonstrated in the Franked Investment Income (FII) group litigation order (GLO). However a payment of compound interest can exceed the repayment of tax several times if the time period involved is sufficiently large. It may be possible to claim more costs under a common law claim than under a statutory claim. It may also be possible to obtain an interim repayment under a common law claim which may not be possible under a statutory claim.

Where returns have been made on the basis of the practice generally prevailing, a statutory claim for repayment could be rejected for direct tax. Whether any provision in UK tax law can be read as complying with EU law may depend on whether a 'conforming interpretation' can be read into the legislation. The Supreme Court in the FII GLO case (May 2012 UKSC 19) clarified that the 'conforming interpretation' cannot be applied to re-interpret a cardinal feature of the legislation (which the prevailing practice provision in TMA s33 was deemed to be).

The consequences for the claimants in the FII GLO were that an outstanding claim under a statutory route did not comply with EU law as it does not provide an effective remedy, and could therefore be invalid.

There are currently a number of areas where UK law is seen as not compliant with EU law. Amendments to some of these areas are proposed for Finance Bill 2013. The areas include:

  • Transfer of assets abroad (ITA part 13 chapter 2).
  • Attribution of gains (TCGA s13).
  • Group relief (CTA10 s107).
  • Tax charges on migration (TCGA s185 & 187, also TCGA s80, 83, 168 and balancing allowances on capital allowances on a trade being taken outside the UK tax net).

If claims for repayment of taxes already paid are being considered, appropriate thought will need to be given to the time limits for making a claim, and whether the claim should be made using a statutory or common law process or both. The decision as to what sort of claim is appropriate can be complex and appropriate advice should be taken.

A question on procedure around the making and recovery of interim payments has recently been determined at the High Court in the case of GKN Holdings plc and others (2013 EWHC 108 (Ch)).

www.bailii.org/ew/cases/EWHC/Ch/2013/108.html

1.3 Draft secondary legislation removing references to ordinary residence

HMRC has published three sets of draft secondary legislation to complement draft clauses published on 11 December 2012 for inclusion in Finance Bill 2013.

  • The Income Tax (Removal of Ordinary Residence) Regulations 2013

    At Budget 2012 the Government announced its intention to abolish 'ordinary' residence for tax purposes. Draft primary legislation was published for inclusion in Finance Bill 2013 which will remove the concept of 'ordinary' residence from primary legislation for most tax purposes. Draft regulations now published will remove references to being 'ordinarily resident' from various statutory instruments not covered by provisions in that Finance Bill. An initial draft of these regulations was published for comment alongside the primary legislation on 11 December 2012 and this revised draft now also removes references to 'ordinarily' resident from both the Offshore Funds and Pensions regulations. This instrument will be laid in time to come into force from 6 April 2013, so any final comments on this revised draft should be sent to HMRC by 28 February 2013.
  • The Authorised Investment Funds (Tax) (Amendment) Regulations 2013

    Draft regulations are published that will remove corresponding references to ordinary residence from the Authorised Investment Funds Regulations. These regulations have not been published before but will not be laid until Royal Assent of the Finance Bill. Comments to HMRC are therefore welcome on the draft by 3 April 2013.
  • The Temporary Non-Residence (Miscellaneous Amendments) Regulations 2013

    At Budget 2012 the Government also announced its intention to introduce a Statutory Residence Test from 6 April 2013. The Statutory Residence Test contains revised rules concerning the taxation of temporary non-residents. Draft regulations are published to bring two existing similar provisions in secondary legislation into line with the new rules in the Statutory Residence Test. These regulations have also not been published before but will not be laid until Royal Assent of the Finance Bill. Comments to HMRC are therefore welcome on the draft by 3 April 2013.

www.hmrc.gov.uk/drafts/draft-leg-fb-2013.htm

www.hmrc.gov.uk/drafts/removal-or-checked.pdf

www.hmrc.gov.uk/drafts/aif-checked.pdf

www.hmrc.gov.uk/drafts/temp-non-residence.pdf

2. PRIVATE CLIENT

2.1 Trusts – Capital & Income

The Trusts (Capital and Income) Act 2013, which reforms aspects of the law on the classification and apportionment of income and capital in trusts, received Royal Assent on 31 January 2013.

The Act makes three main changes:

  • disapplying the statutory rule requiring time apportionment of income and certain case-law rules of apportionment, for trusts coming into existence after commencement, unless the settlors opt for these rules to apply.
  • classifying corporate receipts from all tax-exempt demergers as capital rather than income.
  • enabling trustees of charities with permanent endowment to make a resolution opting for total return investment in accordance with new Charity Commission regulations.

The majority of the Act will be brought into force by a Commencement Order.

3. PAYE AND EMPLOYMENT MATTERS

3.1 Regulations concerning abolition of the State Second Pension for defined contribution pension schemes

HMRC has published for external comment a draft Statutory Instrument and draft Explanatory Memorandum that make a number of amendments to existing Regulations in connection with the abolition of the State Second Pension for defined contribution pension schemes. These Regulations follow the changes published in the draft Finance Bill 2013.

From 6 April 2012, contracting out through a defined contribution scheme was abolished, under legislation introduced by DWP in Pensions Acts 2007 and 2008. Certain provisions of the tax legislation are therefore no longer needed and could cause confusion if they remain on the statute book.

The Finance Act 2013 amended the pensions tax primary legislation to remove or amend the relevant provisions, bringing it in line with the Pensions Acts. Some provisions will however still be needed to cater for late payments, repayments or recoveries and certain administrative functions to be carried out. The legislation will continue in force in relation to these specific provisions, where they are in respect of contracted out periods before 6 April 2012.

The changes set out in the draft Statutory Instrument make changes to SI 2009/1171 to ensure that the abolition of contracting out of the State Second Pension through defined contribution (money purchase) pension schemes works as intended. These changes include clarification that age-related rebates paid by HMRC, and 'minimum payments' made by employers to registered pension schemes and recovered from employees are 'members contributions' for the purpose of the limit on part-refund payments relating to short service.

The draft regulations are open for comment until 1 March 2013.

www.hmrc.gov.uk/drafts/contracting-out-conqs-regs-em.pdf

4. BUSINESS TAX

4.1 HMRC Settlement Opportunity – UK GAAP corporates & sideways loss relief

HMRC has written to companies who have taken part in UK GAAP Corporate schemes, setting out the broad terms under which they are proposing to allow settlement. These schemes have sought to create a loss through the write-off of expenditure or the value of rights or assets through Generally Accepted Accounting Practice.

Terms of the Settlement

  • Loss relief against other income will be allowed in an amount equivalent to the cash contribution [presumably the amount contributed from internal resources], 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.
  • 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

  • Corporate Partner A invests £1m into a partnership;
  • £200,000 is cash from their own resources;
  • £800,000 is by way of loan finance as part of the scheme;
  • the objective is to claim loss relief of £1m;
  • at a corporate tax rate of 28% this equates to £280,000 cash tax;
  • relief allowed under the opportunity is limited to £200,000 (less any disallowance for fees);
  • at a corporate tax rate of 28% this equates to £56,000 cash tax.

What to do now

Whilst not of general applicability to partnerships, within the specific terms of this settlement opportunity HMRC is prepared to settle with individual corporate partners, irrespective of whether or not the partnership itself continues 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.

Link to overview of the settlement opportunity, including detailed questions and answers:

www.hmrc.gov.uk/press/settle-opp-tax-avoid.htm

4.2 Alternative dispute resolution for SMEs and individuals

Following a two year pilot, HMRC has decided to move alternative dispute resolution (ADR) for small and medium enterprises (SMEs) and individuals into 'business as usual' from 2013/14.

www.hmrc.gov.uk/news/alternative-dispute.htm

http://hmrc.presscentre.com/Press-Releases/Success-of-Alternative-Dispute-Resolution-service-6871a.aspx

4.3 Employee ownership and share buy backs

Following consultation draft regulations were published in October 2012 concerning the proposed amendment to Companies Act 2006 to facilitate companies being able to operate an efficient and flexible internal share market. The consultation closed on 16 November 2012 and a response document and a note of further steps are due by 16 February 2013.

The draft regulation is intended to come into force on 6 April 2013 and:

  • removes the requirement on private limited companies to pay in full the purchase price of shares in cases where the buy back is for an employees' share scheme; this will allow a private company to pay for its shares by instalments;
  • reduces the requirements for shareholder authorisations concerning contracts for share buyback to be passed by special resolution (a majority of 75% of shareholders) to ordinary resolution (being a simple majority, i.e. over 50% of shareholders);
  • allows a private limited company to hold its shares in treasury and to deal with such shares as treasury shares.

www.gov.uk/government/uploads/system/uploads/attachment_data/file/32716/12-1162-employee-ownership-share-buy-backs-consultation.pdf

www.gov.uk/government/uploads/system/uploads/attachment_data/file/32719/12-1248-companies-act-2006-amendment-part-18-regulations-draft.pdf

www.bis.gov.uk/Consultations/employee-ownership-share-buy-backs-implementation-nuttall%20review-recommendation

5. VAT

5.1 Updates to VAT Notices

HMRC has updated VAT Notice 702/7 Import VAT relief for goods supplied onward to another country in the EC. It explains how VAT registered persons who import goods from outside the European Union (EU) may claim 'onward supply relief' or 'OSR' from the import VAT that would otherwise be chargeable. The Notice has been changed to make it clearer that a VAT registered importer acting as agent in an onward supply must be 'acting in his own name' in relation to that supply. It has also been changed to address changes to the way VAT identification numbers are entered in box 44 of the import declaration.

http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageVAT_ShowContent&id=HMCE_CL_000147&propertyType=document#P13_781

VAT Notice 700/18 (relief from VAT on bad debts) has been re-written to explain the rules and time limits which currently apply to bad debt relief claims, and to remove details of historical changes which are no longer relevant. Worked examples have also been amended to reflect the 20% standard rate of VAT which was introduced on 4 January 2011.

http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageLibrary_PublicNoticesAndInfoSheets&propertyType=document&columns=1&id=HMCE_CL_000274

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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