UK: Weekly Tax Update - 22 April, 2013

Last Updated: 24 April 2013
Article by Smith & Williamson


1.1 Updated guidance on the general anti-abuse rule (GAAR)

Updated guidance (approved by the interim Advisory Panel) on the general anti-abuse rule was published on 15 April 2013. The guidance now covers:

  • Purpose, summary and specific points (parts A, B and C, which expand the previous part A guidance on scope)
  • Examples: part D, expanded to cover 36 examples, and a section on the transitional application rules. This section now includes three examples on PAYE & NIC, though nothing on share schemes. The previous guidance on examples was known as part B and covered only fifteen examples.
  • Procedure (now part E, previously part C).

The examples aim to cover the following broad categories:

  • Straightforward legislative choices (situations envisaged by statute and where Parliament has given taxpayers a choice, such as the main residence election);
  • Long established practice (arrangements that have become embedded into tax or business practice, for example a listed company seeking to return funds to shareholders and giving them a choice as to whether those funds are returned as capital or income);
  • Situations where the law deliberately sets precise rules or boundaries (where taxpayers can assume they are on the right side of the line if they have satisfied the statutory condition and there is no contrivance about what they have done);
  • Standard tax planning with some element of artificiality (moving more obviously into GAAR territory, though very much dependent on facts and circumstances. Examples of being on the right side of the line here are the examples concerning late paid interest and BMBF v Mawson in the context of corporation tax);
  • Transactions demonstrably contrary to the spirit of the law (the case of Mayes is mentioned here);
  • Contrived or abnormal arrangements that produce a tax result not in any way consistent with the legal effect and economic substance of the underlying transaction (the case of Mayes is mentioned for this category too).

1.2 Scottish Landfill Tax

A bill has been introduced in the Scottish Parliament that makes provisions for a Scottish tax on disposals to landfill, to be called the Scottish Landfill Tax. The intention of the UK Government is that the provision in the 2012 Act disapplying the UK Landfill Tax regime from Scotland will be brought into force with effect from the end of March 2015 by a Treasury Order in the UK Parliament.

1.3 Spotlight – stripped bond tax avoidance scheme

The following note has appeared on HMRC Spotlights:

The First-tier Tribunal has ruled in HMRC's favour in two cases involving similar products marketed by banks as investments.

The cases concern 'Flexi-notes' supplied by Kleinwort Benson and STICS (Sterling Investment in Capital Security) supplied by UBS.

Broadly speaking, the banks sold bonds which had been 'stripped' of their interest coupons to their clients at a discount. Later, their clients would either sell the bonds back to the bank at a higher price or redeem them at maturity. The banks sold the products to give a relatively safe interest-like return 'tax free' but the tribunal ruled in both appeals that the return (the profit) was taxable as income.

As a result of HMRC's enquiries, the vast majority of people who took up these products have already agreed that the income they received from these products is taxable and have paid the tax due in full. Following these tribunal decisions, HMRC will now seek full payment of the tax due plus interest from the small number of users who have yet to concede.

Similar products were marketed by other banks. HMRC considers that the return made by investors in respect of all of these 'stripped bond' products is taxable as income. Finance (No. 2) Act 2005 brought in legislation which put the position beyond doubt.

If you've used this scheme and wish to minimise any potential interest (and penalties - were HMRC to find you had been careless), you should contact HMRC on either Tel 0161 261 3013 or Tel 0161 261 2193.


2.1 Voluntary NI contributions

Social Security (Contributions) Regulations 2001 (SI2001/1004) makes provision, amongst other things, for the payment of voluntary National Insurance contributions (voluntary Class 2 and Class 3) to be made, subject to certain conditions, within a period of six years from the contribution year to which they relate. Amendments were made to extend the period of time in which to make voluntary contributions for contributors who will reach pension age on or after 6th April 2017, and as a consequence of the unavailability of pension statements between 2013/14 and 2016/17 (inclusive), will not be in a position to make an informed decision regarding payment of voluntary contributions for the tax years 2006/07 to 2016/17.

As a consequence of the introduction of the Single Tier Pension being brought forward to 2016, it is necessary to make provision to enable voluntary contributors who will reach pension age on or after 6th April 2016 to be able to take advantage of the extended period. SI 2013/718 makes this change.


3.1 Deductibility of loan relationship debit arising on a change from UK GAAP to IFRS

The First-tier Tribunal has concluded that a significant accounting debit (€83.8m) arising on a loan relationship, recognised on a change from UK GAAP to IFRS, was deductible for tax. It concluded that the accounting was correct and that the unallowable purpose rule was not triggered.

Fidex Ltd (Fidex - a UK company in the BNP Paribas SA group) and its holding company Fidex Holdings Ltd (FHL) were an off balance sheet group whose purpose was to issue commercial paper in the capital markets, collateralised by a diversified portfolio of highly rated bonds. Fidex was debt financed by BNP, but its purpose ceased in 2002 when the BNP group was required to consolidate the Fidex group onto its balance sheet. Fidex continued to hold a bond portfolio. In between 17 and 22 December 2004 an acquisition and refinancing exercise was undertaken whereby BNP Paribas subscribed for further shares in FHL, FHL subscribed for further shares in Fidex and BNP Paribas released approximately $24m of Fidex's indebtedness (thus boosting Fidex's distributable reserves).

On 22 December 2004 Fidex issued four classes of preference shares to Swiss Re for a total consideration of €84.5m. The preference shares were referenced to four bonds already held by Fidex (the bonds had been acquired in 2000), the bonds having a total value of €85m maturing on various dates between March and July 2005, so that the preference shareholders had rights to 95% of the amounts received from the bonds.

Fidex petitioned the High Court to reduce its share premium account by €85m on 1 February 2005 and this was duly confirmed by the High Court on 23 February 2005. On receipt of the proceeds of the bonds, the dividends due on the preference shares were paid and the preference shares redeemed.

From an accounting perspective, in the year ended 31 December 2004 the four bonds were recognised as assets of Fidex, while the preference shares were recognised in equity. The basis for this presentation was the terms of FRS4, while FRS5 (reporting the substance of transactions) did not override this accounting treatment (so as to de-recognise the 95% of the bonds tied to the preference share rights), as FRS5 only applied to transactions and not assets.

Fidex changed its accounting from UK GAAP to IFRS for the accounting period commencing 1 January 2005. IAS32 required the preference shares to be reflected as a liability. IAS39 required the derecognition of the 95% element of the bonds (due to substance over form issues) attributable to the preference shares. The option available in IFRS1 had been adopted not to restate the comparative balance sheet and income statement (year ended 31 December 2004) for the year ended 31 December 2005. FRS25 adopted the equivalent of IAS32, but was only required to be applied for accounting periods commencing on or after 1 January 2005. It was claimed that the outcome of these accounting changes was a loan relationship debit of €83.8m in the year ended 31 December 2005.

The Tribunal concluded that under what was then FA96 Sch9 para 19A (now CTA09 s316 & 317), the conditions required for the debit to be recognised were met (i.e. that the accounting was correct).

The Tribunal had no hesitation in deciding that the main, or one of the main, purposes of Fidex entering into the project to issue and redeem the preference shares was a tax avoidance purpose. However when seeking to determine whether the unallowable purpose rule (what was FA96 Sch 9 para 13, and now CTA09 s441 & 442) denied deduction they considered they were bound to look at the accounting period when the debit arose (i.e. the year ended 31 December 2005). When considering the unallowable purpose rule, what is now CTA09 s442 refers to the need to consider the purpose 'at times in that period' (the period in which the debit in this case arose).

While the Tribunal considered that in the year ended 31 December 2004 the main purpose of entering into the transactions was tax avoidance (the decision to adopt IFRS for the accounting period commencing 1 January 2005 was made on 22 December 2004), for the year ended 31 December 2005 they concluded the main purpose of holding the bond assets was to meet the cashflow obligations arising from the preference share arrangement, and so tax avoidance was not the main purpose for that year.

While this case has a significant amount of pre-planning, it was based around particular commercial circumstances. It is an example of some of the issues that could arise on a change of accounting standard used, such as the move to adoption of FRS102. From the amount at stake, HMRC might be expected to appeal the decision, and it will be interesting to see if subsequent courts follow the FTT's limitation of the application of the unallowable purpose rules for loan relationships to specific accounting periods. Whether the planning adopted would be reasonable considered a reasonable course of action under the terms of the GAAR only time will tell, and there will undoubtedly be those on both sides of the argument.

3.2 The development of mobile applications to assist with record keeping

HMRC has worked with the software industry to establish a catalogue of smart phone applications to help small businesses with their record keeping. It has also worked with the software industry on additional mobile/desktop applications/software to support the cash basis and flat rate simplified expense measures introduced in Finance Bill 2013. The news note and links to relevant suppliers can be found from the links below.

3.3 Recovery of SDLT as a result of HMRC change of policy on whether a property business is a TOGC for VAT purposes

HMRC has issued a Brief following its earlier VAT Brief 30/12 and its change of policy after the FTT decision in the Robinson Family case. The Brief comments:

There may be situations where for a variety of reasons, not just those discussed in Brief 30/12, tax was charged on the grant of an interest in land when in fact the transaction qualified as the transfer of a going concern, and no VAT was chargeable. This would have resulted in SDLT being assessed on a VAT-inclusive value rather than a VAT-exclusive one.

If a business believes that it has overpaid SDLT on such a transaction, it may make a claim for overpayment relief. The legislation relating to such claims is at schedule 10, paragraph 34, FA 2003.

The criteria that must be met and the exclusions from claims are set out at paragraph 34A of Schedule 10. Guidance can be found in the Stamp Duty Land Tax Manual (SDLTM) at SDLTM52500 and 54000.

Case G (liability calculated in accordance with practice generally prevailing - SDLTM54170) will not apply to exclude a claim where the amount of the chargeable consideration has been reduced as a result of a reduction in VAT following this case.

Claims must be made within four years of the date of transaction. HMRC will be unable to accept any refund requests for transactions that took place more than four years before the date of claim.

3.4 EU casts doubt on the proposed UK tax relief for video games

The European Commission has sent a letter to the UK requesting further information on the video games relief proposed in Finance Bill 2013, casting doubt that:

  • the aid is necessary;
  • it would be legal and compliant with internal market rules for the video games scheme to treat expenditure on goods or services 'used or consumed' only in the UK as being eligible;
  • offering this type of aid against the background of a global subsidy race could avoid fuelling a subsidy race between Member States;
  • the proposed UK video games cultural test is sufficiently restrictive to ensure that the aid supports only games with cultural content without leading to undue distortion of competition in what seems to be a very competitive market.
  • the measure is compatible with the internal market.

Commission Vice-President in charge of competition policy Joaquín Almunia observed: "The market for developing video games is dynamic and commercially promising. It is not clear whether the taxpayer should be subsidising this activity. Such subsidies could even distort competition."

3.5 iXBRL, on-line filing and new accounting standards

HMRC has issued an update to iXBRL filing two years on. Included in the notes are the following extracts:

HMRC will continue to work with software houses to improve their products and support agents. For example, later this year HMRC will introduce a new detailed profit and loss account taxonomy. There will then be a single tagging requirement, whether the detailed profit and loss account appears in the accounts or the tax computations. It will make it easier for users to provide the right information with a consistent and comprehensive set of key data. Improvements are also being made to the structure of the HMRC computation taxonomy to make it more straightforward to work with.

HMRC's approach during the transitional period has been to advise and support people to comply with requirements, not to reject returns or penalise people for getting things wrong. There will be no sudden change to that approach. In particular, the principle of 'reasonable excuse' continues. That is, the law provides that where a person has a reasonable excuse for failing to do what they are required to do they will not be penalised. However, HMRC is now seeing very few cases where there is still a genuine reasonable excuse for not filing online, or for failing to meet the XBRL tagging requirement. They have accepted a few thousand paper returns for periods ending after 31 March 2011. Such cases will be exceptional in the future.

HMRC is paying increasing attention to returns which appear not to have the expected number of tags or where tagging is clearly inaccurate. XBRL data makes accounts and computations available for computerised analysis tools and the application of risk rules. This enables better-targeted compliance checks, reducing burdens for the compliant and helping HMRC get the right tax in to the benefit of society. Partial or inaccurate tagging makes it more likely that a return will be selected for detailed risk analysis leading to a compliance check.

However, there will be no short-term change to tagging requirements. Two recent developments in relation to accounting standards and UK Generally Accepted Accounting Practice (GAAP) make it undesirable to introduce other changes to accounts preparation requirements for tax purposes at this time:

  1. The Financial Reporting Council has recently published new UK accounting standards (FRS 101 and 102).
  2. The Department for Business, Innovation & Skills has consulted about proposals for the implementation of European Union (EU) Micros Directive (Directive 2012/6/E).

The new accounting standards, and the proposals if implemented, require or permit companies to prepare their accounts using different conventions, involving a reduced disclosure framework, compared to those currently applying under UK GAAP or International Financial Reporting Standards (EU-adopted IFRS). Each will, in time, require the preparation of a new XBRL taxonomy to fully match the new standard.

It will be some time before these new taxonomies can be finalised and built into accounts preparation software. HMRC's own tagging requirements will be amended to reflect these new taxonomies in due course but again, this will not be possible before the second half of 2014.

However, both of the new accounting standards and the micro entities proposals are developments of the existing requirements. Companies adopting them before the new taxonomies are available will be able to meet their existing XBRL accounts tagging obligations by selecting the most appropriate tags from the existing taxonomies, as follows:

  • early adopters of FRS 101 or 102 should tag using the existing IFRS taxonomy;
  • companies preparing accounts under any eventual UK Micro Entities disclosure framework, if adopted according to current proposals, should use the existing UK GAAP taxonomy.

3.6 UK challenge regarding the Financial Transaction Tax (FTT)

HM Treasury has filed a challenge at the Court of Justice of the EU on the authorising decision for FTT. It stressed that it is not challenging the principle of FTT, or the right of Member States to introduce an FTT. It is challenging aspects of the proposal linked to the extraterritorial approach, which infringe the rights of non-participating member states and contravene international tax rules.

It is thought the ECJ will say this is premature, but HM Treasury is protecting its position. No other member states are joining the UK, although other member states have been informed of the challenge. HMT will still be working with European counterparts on the FTT brief.

3.7 Registering a non-UK resident company for tax where it has a UK permanent establishment

HMRC had previously advised us to apply to Companies House (using form CT41G) to register a non-UK resident company with a UK permanent establishment as within the charge to tax. However Companies House replied that the registration should be made through HMRC.

Subsequently we have found the registration can be made by submitting details to HMRC by fax to the following fax number: 020 7667 2594.


4.1 Whether parking penalty charges are subject to VAT

The Court of Appeal has overturned the First-tier and Upper Tribunal decisions concerning whether VAT was due on car parking penalties levied by Vehicle Control Systems (VCS) who operated car parking control services for clients to whom the land used for car parking belonged.

The FTT held that VCS had no right to sue in trespass because it did not have the right to possess or occupy the car park. It also held that there was a contract between VCS and the motorist; but that the parking and penalty charges were consideration payable under that contract, and hence within the scope of VAT.

The Upper Tribunal concluded there was no contract between VCS and the motorist as it was not in a position (due to its limited licence) to offer the motorist a right to park. It therefore concluded that VCS was acting on behalf of its land-holding client and the motorist such that parking penalties would be outside the scope of VAT as damages for trespass. However by permitting VCS to retain the charges, this was consideration for a standard rated supply.

The Court of Appeal however, concluded that the contract between VCS and the landowner gave VCS the right to eject trespassers. It also concluded there was a contract between VCS and the motorist that gave VCS that same right. The parking penalty charge consideration received by VCS was therefore outside the scope of VAT as a breach of contract between the motorist and VCS.

4.2 Whether an option to tax had been made in respect of buildings

Exeter Estates issued a letter on 26 January 2007 giving notice to opt to tax land in Devon with effect from 24 January 2007. This was followed up by a file note dated 20 February 2007 and a letter of the same date to the OTT unit clarifying that the option to tax excluded buildings which had been outlined in blue on the original plan submitted. A letter from the OTT unit acknowledging receipt of the correspondence on the option to tax was sent on 5 March, followed by a similar letter dated 27 April.

However it appeared as though HMRC never received the 20 February correspondence and concluded that the buildings in question had been part of the option to tax (so that VAT should have been accounted for on the income arising from those buildings).

The Tribunal concluded that Exeter Estates had made clear its intention as to the area to which the option to tax should apply, and there was no evidence of HMRC determining a different area. The notes and evidence from Exeter Estates of correspondence and contact in February 2007 and lack of precision on anything different from HMRC in the March correspondence were supportive of this conclusion.

This is an example of the value of retaining good records to support the VAT treatment of significant transactions involving land and buildings.

4.3 Deductibility of input VAT concerning aircraft and the Lennartz method

The First Tier Tribunal has concluded that JNK 2000 Ltd was entitled to fully recover input VAT on costs in respect of the purchase and maintenance of a helicopter. In the period in question there had been 54.3 flying hours, 11.9 of which had been by the main shareholder of the company and his son, but which had been charged for by the company at commercial hiring rates (and the income from which had borne output VAT). HMRC had questioned the business use of the helicopter contending that it had been purchased for both business and private use and an apportionment of input VAT was required.

The Tribunal concluded that despite the fact that there had been use of the helicopter for private purposes by the company's shareholder and family, this had been charged for by the taxpayer at commercial rates and could be considered part of its business activities. It also concluded that there had been no application of the Lennartz method of accounting for VAT and the disputed input VAT should be recoverable.

4.4 Impact of retail distribution review on consultancy services to employers for contract-based Group Personal Pension plans

HMRC has issued Brief 09/13 concerning the VAT treatment of consultancy services on contract based group personal pension plans, provided to employers. It arises as a result of the ending of commission based payment arrangements from 1 January 2013 and their replacement with consultancy charges, and HMRC's review of typical contract agreements made in the sector.

Included in the Brief is the following comment:

"...the 'consultancy charge' is a fee paid in return for advisory, administration and other services supplied to the employer. The fact that the (net of VAT) 'consultancy charges' are paid via the pension provider does not alter the VAT analysis. The same VAT analysis also applies to any separate fees charged to employers.

EBCs [Employee Benefit Consultants] and other pensions consultants should therefore account for standard rated VAT on 'consultancy charges' and any separate fees charged to employers for these services.

We understand the future use of consultancy charging is still under review and the position could change going forwards. If, therefore, the nature of the services remunerated by consultancy charges changes in future and it can be demonstrated those services meet the conditions for VAT exemption outlined above, any charges made for the provision of those services will be VAT exempt.......

..... The VAT incurred on consultancy charges and other fees charged by EBCs and other pensions consultants in connection with the setting up and administration of corporate pension schemes will be recoverable as input tax by VAT registered employers that incur the costs in the course or furtherance of their business, subject to any necessary input tax restrictions.

If an employer makes exempt supplies, the amount of input tax that can be deducted may be restricted as, normally, input tax can only be deducted if it relates to taxable supplies."

4.5 Temporary removal of goods from a customs warehouse and temporary admission of works of art, collectors items and antiques

The UK policy of permitting goods to be entered to the customs warehousing arrangements and temporarily removed from the warehouse for the purpose of exhibition and similar activities has been a long established practice. However following discussions with the EU Commission and other Member States it has been confirmed that the correct customs procedure to be used is Temporary Admission (TA).

HMRC comment:

"From 30 June 2013 all goods imported for exhibition with a view to sale, possible sale, for sale by auction or similar activities, should be entered to TA, either directly at import or on removal from a customs warehouse if a period of storage is required. If you currently use the customs warehousing arrangements and temporarily remove goods for exhibition or similar activities you should note that from the 30 June 2013 temporary removal will no longer be authorised for these purposes, you should contact your Supervising Office, at the address below, so your customs warehouse authorisation can be amended, and this permission removed.

If you use the temporary removal arrangements from a customs warehouse solely for the purpose of viewing you may continue to use your current arrangements as detailed in your customs warehouse authorisation.

It should be noted that 'viewing' in the context of this paper [Customs Information Paper (13) 22] cannot be applied to items temporarily removed for display at a venue which allows public access for example fairs/galleries/exhibitions."

HMRC is aware that the use of 'Temporary Admission' may have a cost impact on businesses .To mitigate the potential cost impact on businesses it is going to offer a full guarantee waiver in respect of import VAT in the above scenarios where certain conditions are met (as described in the paper accessed via the link below).

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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