UK: Weekly Tax Update - Monday 11 March 2013

Last Updated: 19 March 2013
Article by Smith & Williamson


1.1 Consultation on qualifying rules for community amateur sports clubs

The Government has announced it intends to amend the law to make the qualifying conditions for the Community Amateur Sports Clubs (CASC) scheme clearer for sports clubs.

Enabling legislation will be introduced in the Finance Bill to be published on 28 March 2013. This will allow HMRC to set out clearer detailed rules in secondary legislation after a public consultation.

HMRC will publish a consultation document in the spring which will set out proposals for the new, clearer, conditions.

The Community Amateur Sports Club (CASC) scheme provides a number of charity-type tax reliefs to support local sports clubs. In order to access these tax reliefs clubs must meet certain conditions and must register with HMRC.

However, some of the eligibility rules in the legislation are unclear and cause confusion. This makes it difficult for clubs and HMRC always to be sure about whether a club is entitled to relief. Clearer, more certain rules would help existing and prospective clubs to be confident about what they need to do to qualify, and would help ensure that the scheme fully achieves the Government's aim of supporting and encouraging sport at a community level.

Some areas cannot be clarified without legislation. To provide certainty as quickly as possible, the Government will include provisions in the Finance Bill, to be published on 28 March, allowing clearer detailed rules to be set through secondary legislation. HMRC will then publish a consultation document after the Finance Bill is published setting out proposals for these rules. These proposals will cover a range of issues, including:

The maximum annual fee, to include the costs of participation, which a club can charge and still be considered a CASC. The consultation will seek views on a range of maximum fees up to £1,040 (£20 per week). Recognising that some sports have higher costs, CASCs will be able to charge more than the maximum annual fee if they have measures in place to allow people on low and modest incomes to participate fully at a cost of no more than the maximum fee.

The rules and limits for CASCs on generating income from social and non-sporting activities will be updated to provide clarity. The consultation will explore a number of possible limits. Where clubs generate income over the limits, the consultation will also explore how clubs can separate this activity into a wholly-owned subsidiary company.

The consultation will include proposals for more generous rules for travel expenses, and changes to allow clubs to make limited payments to players.

Following the consultation, the Government would expect regulations to be laid in the autumn, setting out detailed rules, subject to the usual parliamentary processes.

As well as providing certainty for existing CASCs, the Government hope that the changes will encourage more clubs to apply and qualify for CASC status. Depending on the outcome of the consultation, it is possible that some existing CASCs may need to make changes to the way they operate if they wish to continue claiming relief. For example, they may need to make allowances for those on low or modest incomes. However, while the consultation is ongoing, CASCs will not need to make any changes.

While HMRC has been reviewing the CASC regulations, a number of clubs that have applied to HMRC have had their applications put on hold. The Government are sorry for the delays they have experienced.

HMRC is writing today to each of those clubs whose application has been put on hold to draw their attention to this statement. HMRC will write again to each club when the consultation document is published explaining how the proposed new rules are likely to affect the club and its application.

One outcome of HMRC's review of the current rules that does not require legislative change is that clubs can offer junior memberships without voting rights and still qualify as CASCs. We are pleased to announce that HMRC will be applying this rule with immediate effect.


2.1 Whether HMRC could suspend a penalty in the case of a 'one-off' error

The First-tier Tribunal has recently heard the case of David Testa, where the taxpayer appealed against HMRC's refusal to suspend a penalty imposed under paragraph 1 of Schedule 24 to Finance Act 2007 for an admittedly careless inaccuracy in the self- assessment tax return for the year ended 5 April 2010. The inaccuracy had led to an underpayment of tax, due to a severance payment being omitted from the tax return. The payment was detailed on a payslip given to Mr Testa following the issue of a form P45.

The penalty imposed on the underpayment was reduced to 15% by HMRC, as it had accepted Mr Testa's explanation of how the error had occurred and he had admitted his carelessness and co-operated throughout the enquiry. Mr Testa requested that the penalty should be suspended, but HMRC refused this request on grounds to the effect that suspension was not available for one-off errors. As this was a severance payment, and such events were unlikely to occur annually, HMRC deemed this particular scenario a one-off event.

The legislation is set out in paragraphs 14-17 of Schedule 24 Finance Act 2007, and provides that penalties may be suspended wholly or in part, for a period not exceeding two years, if compliance with a condition of suspension would help a person to avoid becoming liable to further penalties under paragraph 1 for careless inaccuracy. If the condition is satisfied within the specified period, all or part of the penalty is cancelled; if part of the penalty is cancelled, the remainder becomes payable. However if, during the specified period, the person becomes liable to another penalty under paragraph 1, the suspended penalty or part becomes payable.

In Mr Testa's case, he had offered to satisfy a condition of maintaining the use a tax adviser to ensure that future negligence did not occur. HMRC rejected this offer, but the tribunal found that:

"... it should be considered on its merits in accordance with the terms of the legislation by reference to whether or not it will help the Appellant to avoid future careless inaccuracies in his self-assessment tax returns; it should not be simply ignored or discarded as a result of a policy which says that "there can be no suspension of penalties for one-off errors".

In this case, however, HMRC have treated the Appellant's suggestion in precisely that way. Although the suggestion was put to them twice, they did not give any indication as to why they considered it did not meet the requirements of the legislation, beyond their blanket statement that "one-offs" were not appropriate for the suspension regime. Not only have they taken into account matters that they should not have taken into account (in simply following their general policy of "no suspension for one-offs"), there is also no evidence (which could have been provided by, for example, a reasoned discussion and rejection) that they gave any proper consideration to the suggestion actually made by the Appellant.

As a result we find that HMRC have acted in a way which is flawed for the purposes of paragraph 17(6) of Schedule 24 FA07."

2.2 Whether an inaccuracy was careless

The First-tier Tribunal has considered whether an inaccuracy was careless in the case of Julie Ashton.

Ms Ashton had received severance payments from her employer, BP. A P45 was issued, and subsequently, she received three other payments from BP in the form of either cash or share awards. Letters were sent from BP to Ms Ashton detailing the payments and advising her that basic rate income tax had been deducted at 20% under PAYE. Ms Ashton omitted to return the three payments received after the issue of the P45, and following an enquiry into her tax return a penalty was imposed for the underpaid tax. HMRC imposed the penalty at a rate of 15% for carelessness, which was after the maximum reduction possible for a prompted disclosure.

The issue in Ms Ashton's case was whether the inaccuracy on the tax return was "careless" within the meaning of paragraph 1 of Schedule 24, FA2007. The following arguments were made by Ms Ashton:

  • A non-specialist taxpayer cannot be expected to know more than that income tax is payable on income and that income tax at source is collected under the PAYE scheme;
  • The PAYE system is designed to collect the correct amount of tax with no need for disclosure from the employee, and the employee is entitled to assume that this has occurred;
  • There is no obligation on the employee to understand detailed tax provisions;
  • A non-tax expert would be entitled to conclude that 20% was the correct amount of tax for the additional payments;
  • She was unaware of her obligation under tax law to return the additional payments and to pay tax on those additional payments.

The tribunal dismissed the appeal on the basis that:

"... a prudent and reasonable taxpayer must at the very least be expected to take prudent and reasonable steps to ascertain what are his or her tax obligations. Only where a taxpayer has done so could it be said that the ignorance of the law is not due to a "failure to take reasonable care". The Tribunal does not accept the Appellant's argument, at paragraph 12 of her grounds of appeal, that "no other knowledge about tax is reasonably known by a non-specialist taxpayer" than that "income tax is payable on income" and that "income tax from earnings is collected at source under the PAYE scheme". Even if a taxpayer genuinely had no other knowledge than that, a prudent and reasonable taxpayer would take steps to obtain whatever other knowledge is needed in order to complete their return. Ways in which such knowledge can be obtained would include contacting an HMRC helpline. Of course, a taxpayer could also seek professional advice, if the taxpayer so chose. "

Furthermore, it was stated that:

"... Even if all of the tax liability had been met by PAYE deductions, which the Appellant says she erroneously thought to be the case, a prudent and reasonable taxpayer would have realised that it was still necessary to return all of the income in the tax return, and would have realised that the figures in the P45 were insufficient for this purpose. A prudent and reasonable taxpayer would have realised that she needed to do more than simply include in the tax return the information contained in the P45, and that it was necessary to include additional information relating to the post-termination payments. A prudent and reasonable taxpayer, realising that they had had insufficient understanding of tax law or of how and where to return these types of payment, would have sought assistance or advice."

The issue of suspending the penalty was not part of the grounds for appeal, but was raised at the hearing. The tribunal can only order HMRC to suspend a penalty if they find that HMRC's decision not to suspend the penalty was flawed. In this case, the tribunal did not find an identifiable flaw in HMRC's decision.

2.3 Life assurance policies – tax implications of partial surrender

In 2006 Joost Lobler, a Dutchman who was working in the UK, invested $1,400,000 in life assurance policies. In the next two years he withdrew most of his investment by making a partial surrender of each policy. He did not declare the events on his tax returns, and HMRC issued assessments charging tax under ITTOIA 2005, s 461 et seq, treating $1.3m as taxable income and becoming liable to pay $560,000 in tax. The First-tier Tribunal dismissed the taxpayer's appeal.

Mr Lobler invested US $1.4 million in a series of life assurance policies with Zurich Life on 1 March 2006 and within the next two years withdrew $1.4 million from the policies leaving the policies with comparatively negligible value. The form in which he made the withdrawal was by a partial surrender of each policy. As a result of the tax legislation in Chapter 9 Part 4 of the Income Tax (Trading and Other Income) Act 2005 ("ITTOIA") dealing with life insurance policies he is treated as having in those years realised taxable income of $1.3 million.

The prescriptive legislation had given rise to this particularly unfair result, as there was no gain in real terms.

In this case, Mr Lobler had not understood the tax consequences of his withdrawals and said that he made a mistake in the way in which he withdrew funds from the policies. He did not realise that the effect of making a partial surrender was that almost all the amount he withdrew would be treated as taxable income.

The tribunal dismissed the appeal, stating that although the legislation produced an 'outrageously unfair result', there was 'no way to give a different interpretation to the legislation'.

The case highlights the need to obtain financial advice and to be aware of the potential pitfalls.

2.4 HMRC target those who sell a residential property other than their own Residence

HMRC has issued the following press release:

People who have sold properties that are not their main homes, and who have not told HMRC about any profit made, are being targeted in a new campaign.

The Property Sales Campaign is aimed at those selling homes in the UK or abroad, where Capital Gains Tax (CGT) should be paid on any profits made. This includes, for example, properties people have sold that were given to them, and the sale of holiday homes.

People will have until 9 August to tell HMRC about any unpaid tax on property sales, and until 6 September to pay the tax owed.

After 6 September, HMRC will take a much closer look at the tax affairs of those who have sold properties other than their main home, but who appear to have paid no CGT. By using this campaign to come forward voluntarily, people will receive the best possible terms, as any penalty they pay by coming forward voluntarily will be lower than if HMRC comes to them first.

Marian Wilson, Head of HMRC Campaigns, said:

"Some people will not understand that selling a second home, a holiday home or a property disposed of as a gift could attract Capital Gains Tax. They need to look at our website or contact us. Telling HMRC about your tax liabilities is simple and straightforward, and help, advice and support are available.

"It is better to come to us before we come to you. After the opportunity closes on 6 September, HMRC will use information it holds about property sales, in the UK and abroad, to identify people who have not paid what they owe. Penalties – or even criminal prosecution – could follow."

People can take part in the campaign by:

  • telling HMRC about unpaid tax by 9 August
  • disclosing the details of what they owe
  • paying the tax owed by 6 September.

2.5 Guidance on tax treatment of payments to individuals and other non-corporates following share capital reduction

HMRC has published guidance on the tax treatment of payments to individuals and other non-corporates following a share capital reduction. Companies Act 2006 has made it much easier for private companies to reduce share capital (including share premium accounts) and create distributable reserves as a result of the reduction.

The guidance applies to payments from UK incorporated companies undertaking such reductions in accordance with UK company law. It also applies to payments from other UK resident companies that are incorporated outside the UK which have undertaken capital reductions in accordance with the company law of the company's territory of incorporation. The guidance does not apply to payments from non-UK resident companies.

The guidance comments:

".....a payment which is a repayment of share capital (including for this purpose share premium – section 1025 CTA 2010) following such a reduction is not a distribution and so will not be chargeable to income tax. There may, however, be a charge to capital gains tax under section 122 Taxation of Chargeable Gains Act 1992, as a capital distribution (which should be distinguished from the 'capital dividend' mentioned above).

If, however, share capital (including premium) is reduced and a reserve is created and treated as a realised profit that treatment will be applied for tax purposes also. This may, for example, arise in accordance with The Companies (Reduction of Share Capital) Order SI 2008/1915, made under section 654(2) of the Companies Act 2006. This means that:

  • a dividend payment out of the reserve which is a distribution permitted under company law will be a dividend for the purposes of section 1000(1)A, and
  • any other payments out of a reserve of this type will be a distribution under section 1000(1)B and thus potentially subject to the exceptions in sub-paragraphs (a) and (b) where appropriate, as for instance where the reserve is subsequently employed in a share capital reduction, such as a redemption or repayment of share capital.

    But no part of the reserve will be treated as representing a repayment of capital on the shares whose cancellation or reduction was the means of creating it."

There are also some helpful comments on when HMRC regards the application of reserves created from share capital and share premium for paying up and distributing new share capital, as 'new consideration'.

"...Where shares have been issued at a premium and that premium is then applied in paying up share capital, the premium applied is treated as "new consideration" in relation to that share capital: section 1115 (2) and (3) CTA 2010. Where the share premium has been cancelled and taken to a reserve as part of an arrangement for the reorganisation of the company's share capital, HMRC's view is that section 1115 (2) and (3) CTA 2010 will apply providing the amounts used to pay-up new shares can be identified as the cancelled share premium and distinguished from other distributable reserves.

Where, however, cancellation of share premium does not form part of a recognisable scheme for re-organising share capital, but rather is assimilated to distributable reserves such that the share premium loses its practical identity, HMRC's view is that amounts subsequently applied in paying up share capital no longer fall within section 1115 (2) (b) CTA 2010, and so the share capital issued as paid up will not be treated as issued in return for the receipt of new consideration....

Section 1115 (4) to (6) CTA 2010 covers circumstances in which amounts derived from the value of share capital may be treated as new consideration. The main rule, at section 1115(4), is that consideration derived from the value of share capital (or securities) of a company, or from voting or other rights in the company, is not treated for distribution purposes as new consideration. However, this is subject to exceptions at section 1115(5) and where the exceptions apply, to a limitation at section 1115(6). Section 1115(5)(c) applies to consideration derived from the giving up of rights to share capital (or securities) on cancellation or extinguishment, or on its acquisition by the company.

HMRC's view is that where share capital is reduced and taken to a reserve as part of an arrangement for the reorganisation of the company's share capital, this will amount to the cancellation by the company under section 1115 (5) (c) providing this involves the shareholder giving up the right to the share capital as part of the reorganisation. Reorganisation for this purpose means a scheme or arrangement that includes the cancellation of share capital in a company followed by a fresh issue of shares. Application of the reserve in these circumstances will be treated as new consideration in relation to the fresh issue.

The two situations in which this interpretation is most likely to have an impact are:

  • where shares are issued as paid up from the reserve, the shares would be treated as paid up other than for new consideration for the purposes of determining whether there is a distribution under either section 1022 or 1026 CTA 2010, unless the facts show that there is a reorganisation to which the above analysis applies, and
  • where a distribution is made from the reserve, the share capital that has been reduced would not be treated as new consideration in determining the amount of the distribution under section 1000(1) B CTA 2010."

2.6 CGT private residence relief

Susan Bradley - TC/2012/06966

Mr & Mrs Bradley lived together as husband and wife in a jointly owned property, 118 Ashley Road. In addition to this property, Mrs Bradley also owned two other rental properties; 124 Exning Road and 68 Weston Way.

In August 2007, Mr & Mrs Bradley separated and Mrs Bradley moved into Weston Way, which had become vacant. Mrs Bradley's intention was to divorce from Mr Bradley after two years of separation. The property at Weston Way was a small bedsit, and therefore, when Exning Road became vacant in April 2008, Mrs Bradley moved into that property. Mrs Bradley carried out some home improvements to this property, including redecoration, new carpets and a new cooker.

Mrs Bradley had not transferred her post to either Weston Way or Exning Road. She was on amicable terms with Mr Bradley, and would either collect her post from Ashley Road, or her daughter (who lived at Ashley Road) would bring post to her when visiting. Also, Mrs Bradley continued to hold a joint account with Mr Bradley, although she also had two other accounts in her own name – one for the rental properties and one for her personally. She did not require any maintenance from Mr Bradley.

In March 2008, Mrs Bradley had instructed estate agents to sell Exning Road, however, she did not receive any offers as the market was low. In autumn 2008, Mrs Bradley reconciled with Mr Bradley, and she moved back into Ashley Road in November 2008. The property at Exning Road was sold in January 2009 and Mrs Bradley claimed PPR relief.

HMRC denied the PPR claim, and the First-tier Tribunal heard the appeal. In reviewing the facts, the tribunal found that whilst they accepted Mrs Bradley had intended to permanently separate from her husband in 2007, this did not mean that Exning Road would qualify as her main residence. The appeal was dismissed, with the tribunal stating:

"We find that Mrs Bradley did not occupy Exning Road as her residence. At the time she moved into Exning Road she had already placed it on the market, and she never withdrew her instructions to the estate agents. We have no doubt that if someone had offered her the asking price for the property, she would have sold it. We find that she never intended to live permanently at Exning Road; it was always only ever going to be a temporary home, and therefore it was never her residence."


3.1 Extension of time for claiming tax credits in respect of capital allowances

A statutory instrument has been issued extending the time period in which expenditure on capital allowances qualifying for 100% first year allowances must be incurred in order to make a tax credit claim (for loss making companies incurring qualifying expenditure on environmentally beneficial expenditure). The time period is extended from 31 March 2013 to 31 March 2018.

4. VAT

4.1 VAT status of investment management services provided to pooled defined benefit pension schemes

The CJEU has delivered its decision in the case of Wheels Common Investment Fund Trustees Ltd (Wheels) and others (case C-424/11) that a defined benefit pension scheme and a pooled fund of investments in respect of such funds do not represent 'special investment funds' for the purpose of exempting investment management services provided to them, where the members do not bear the risk arising from the management of the funds.

The case was taken to the CJEU to clarify whether the pension funds under the trusteeship of Wheels met the definition of 'special investment funds', following on from the 2008 change to the UK interpretation of this definition with respect to the inclusion of OEICs and authorised Unit Trusts as a result of the CJEU case C‑363/05 JP Morgan Fleming Claverhouse Investment Trust and The Association of Investment Trust Companies.

The decision is clear in respect of defined benefit schemes (where the beneficiaries do not bear the risk arising from the management of the fund), and should mean that pension fund investment managers will not now have to make a reclaim in respect of the output VAT they charge on investment management services, nor revise their partial exemption calculations (nor organise a transfer of the balance to their pension fund clients under the unjust enrichment principles).

However the position is not so clear for pension funds where the beneficiaries do bear the risk arising from management of the fund and where the funds used are open to the public. The CJEU decision in Wheels does not discuss the VAT issues for this type of fund. There are two other CJEU cases which may have an impact on VAT associated with managing pension funds. They are:

  1. Fiscale eenheid PPG Holdings BV ("PPG") (Case C-26/12, referred from the Netherlands) which seeks to clarify whether in establishing a pension fund for employees, an employer can recover input tax incurred by it on investment management services for that fund. This was heard on 6 February 2013 and the decision is awaited. It will be interesting to see how the Court decides who has received the services (the employer, or the trustees of the pension fund), and whether the VAT recovery position is influenced by who pays for the services.
  2. ATP PensionService A/S ("ATP") (Case C-464/12, referred from Denmark) which seeks to clarify whether investment management services provided to a defined contribution pension scheme can be treated as exempt and to what extent other associated services are also so treated. The application in this case was made in October 2012 and the case has yet to be heard. Looking at the guidance given by the CJEU in Wheels, it appears as though the beneficiaries of the pension fund will have to show they bear the risk of managing the fund, They will also need to show that the principle of fiscal neutrality with respect to the definition of special investment funds is not offended by the Danish rules as applied to the funds used by the pension schemes to which ATP provides its services. Whether this will have wider application, perhaps to the UK, is difficult to say at this stage.

4.2 What constitutes a new claim compared to an amended claim and whether HMRC can rely on a defence of unjust enrichment

The Upper Tribunal has concluded in the case of Reed employment Ltd's appeal against the First-tier Tribunal's decision in March 2011 on the following points:

  • That after submitting a claim with respect to overpaid output VAT in relation to temporary employment services provided to clients who were not able to recover input VAT (the irrecoverable claim amounting to around £4m) and obtaining repayment in respect of that claim, the subsequent submission of a claim to a repayment of overpaid VAT on the same issue, but with respect to clients who could fully recover input VAT (the recoverable claim amounting to around £64m plus interest), was not an amendment of the old claim, but the submission of a new claim. This was because the claim was in respect of a different business sector and was not an area of uncertainty identified when the original claim was submitted.
  • Due to the incorrect application in UK law of the original three year cap on reclaims and the denial of repayment in cases of unjust enrichment, Reed would not be subject to denial of repayment due to unjust enrichment if the claim was treated as made before 26 May 2005. However as the 'recoverable claim' was not treated as an amendment, this contention of Reed failed. Reed attempted to argue that in the light of the factual circumstances created by the introduction of the three year cap, the principles of effectiveness, equal treatment and fiscal neutrality would mean that Reed would not be subject to any restriction due to 'unjust enrichment' in respect of its 'recoverable claim' that was submitted in in 2009. The Upper Tribunal agreed with the FTT that there was no claim as a result of the application of the principles of effectiveness or equal treatment. With respect to fiscal neutrality there had to be a comparator against which to judge whether this principle had been breached. No evidence of this was submitted by Reed, who pointed out that HMRC would be in a much better position to know if other traders had submitted successful claims that would mean Reed was disadvantaged by submitting its claim in 2009. However the Upper Tribunal concluded that as there was no evidence to assess this, the challenge based on fiscal neutrality failed.

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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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.