UK: Weekly Tax Update - 29 April, 2013

Last Updated: 3 May 2013
Article by Smith & Williamson

1 General news

1.1 European Commission sets up a "Platform for Tax Good Governance"

As part of its concerted drive against tax evasion and avoidance, the European Commission has set up the new 'Platform for Tax Good Governance'. The Platform will monitor Member States' progress in tackling aggressive tax planning and clamping down on tax havens, in line with the recommendations presented by the Commission last year. The aim is to ensure that real and effective action is taken by Member States to address these problems, within a coordinated EU framework. The Platform will be comprised of a wide cross-section of interested parties - national tax authorities, European Parliament, businesses, academics, NGOs and other stakeholders. This will also facilitate dialogue and exchange of expertise, which can feed into a more coordinated and effective EU approach against tax evasion and avoidance.

Algirdas `emeta, Commissioner for Taxation, Customs, Statistics, Audit and Anti-Fraud, said: "In battling tax evasion, we are battling to protect the fairness of our tax systems, the competitiveness of our economies and the solidarity of our Member States. There is too much at stake for this battle to be lost. The renewed vigour amongst Member States to take up this fight is more than welcome. It must now be channelled into action. The Platform I am launching today will keep Member States on their toes. It will ensure results mirror expectations when it comes to fighting tax evasion."

The Platform will follow in particular the progress being made on two recommendations.

The first recommendation foresees a strong EU stance against tax havens, going beyond the current international measures. Using common criteria, Member States are encouraged to identify tax havens and place them on national blacklists.

The second recommendation is on aggressive tax planning. It sets out ways to block off opportunities exploited by companies to avoid paying their fair share of tax. These include reinforcing the anti-abuse provisions in bilateral tax treaties, national legislation and EU corporate legislation. Any artificial arrangement carried out for tax avoidance purposes would be ignored and companies would be taxed instead on the basis of actual economic substance.

The first meeting of the Platform is provisionally planned for 10 June 2013.

1.2 Prime Minister writes to EU regarding tax evasion and aggressive tax avoidance

The Prime Minister has written to Herman Van Rompuy, President of the European Council, setting out the case for radical global action to tackle tax evasion and aggressive tax avoidance

The letter, copied to leaders of all EU member states, sets out the PM's ambition that the May European Council will inject the political will to tackle the problem and restore confidence in the fairness and effectiveness of our tax system, and calls for action in four key areas:

  • a new global standard for multilateral information exchange;
  • action plans to increase transparency in beneficial ownership;
  • reform of global tax rules through the G20 and OECD, including where we could go further, eg greater country-by-country company reporting on the tax paid in their countries of operation;
  • improving the ability of developing countries to collect tax, building on the example of the government's new joint unit.

Battling tax evasion and avoidance is a priority for the G8 summit that the Prime Minister will host at Lough Erne in June.

1.3 HMRC's agent update April/May - issue 35

HMRC has issued Agent Update 35 for April/May.

2 Private client

2.1 Liability to tax on a UK civil service pension for an Irish resident

Mr Kenneth Percival, a former Inland Revenue officer, moved to the Irish Republic in 2004. In 2006 he began receiving a civil service pension. This was taxed in the UK, by virtue of Article 18(2) of the Double Taxation Agreement between the UK and the Irish Republic. In 2009 he appealed to the First tier Tribunal, contending that Article 18(2) was unfairly discriminatory, that this contravened EU law, and that his liability to UK tax should be restricted to the tax that would have been borne by an Irish citizen in his circumstances.

The tribunal rejected these contentions and dismissed his appeal. Judge Gammie observed that there was no double taxation, and that 'a Member State is not in breach of its Treaty obligations because it taxes differently and less favourably than some other Member State'.

2.2 Whether a compromise agreement payment included a return of investment in EMI options

Mr Johnson who was a sales director for his employer and who had purchased for £30,000 an option to receive EMI shares, received a payment (£75,700 in the 2007/08 tax year) under a compromise agreement on termination of his employment which was expressed as for the following purpose:

"You have accepted the severance payment in full and final settlement of any claims that you may have against R R Richardson Limited ... You were happy with the settlement and I advised you as to the content of the Agreement. You said that you had invested £30,000 into the Company which you would stand to lose if you left without signing the Compromise Agreement.

Your money under the Compromise Agreement includes payment in lieu of six months wages under your contract of employment. You have given the employer a tax indemnity although the first £30,000 should be tax free, the balance plus your benefits including pension, health, life and medical insurances are taxable."

He originally completed his tax return on the basis that £30,000 was exempt and the balance taxable. He then remembered his £30,000 investment in EMI options and contended his compromise agreement included that amount (reducing the amount subject to income tax by £30,000). Despite the employer company denying the compromise agreement payment included reimbursement of the EMI investment, the Tribunal contended on the balance of facts that it did.

3 IHT and trusts

3.1 Trusts & Estates newsletter for trusts and estates practitioners

HMRC has published the latest edition of the Trusts & Estates newsletter for trusts and estates practitioners.

In particular it includes HMRC's interpretation in relation to the IHT treatment of usufructs as follows:

Recently, there have been a number of exchanges on Internet forums about whether the creation of a usufruct (the right to the use and enjoyment of another's property) gives rise to a settlement under section 43(2) Inheritance Tax Act (IHTA)1984. Some of these exchanges have suggested that HMRC's treatment of a usufruct for Inheritance Tax purposes might be changing or has changed. HMRC does not agree with some of the views expressed – its treatment of usufructs has not changed.

HMRC has always been of the view that the definition of a settlement in section 43(2) IHTA 1984 means that a usufruct will more than likely fall to be treated as a settlement for Inheritance Tax purposes; although HMRC recognises that the arrangements differ between jurisdictions and the circumstances of each need to be considered. The effect is to treat a usufruct as giving rise to an interest in possession in the property concerned.

Prior to March 2006, the consequence of this was that a usufruct retained by the transferor did not give rise to a loss to their estate as the transferor remained beneficially entitled to the property under section 49(1) IHTA 1984. The property would continue to form part of the transferor's estate on death. If the usufruct was created in favour of another, the transaction would give rise to a potentially exempt transfer equal to the value of the property concerned and if in favour of the spouse/civil partner, exemption under section18 IHTA 1984 would be available. HMRC is not aware that this approach was ever challenged.

Post March 2006, the consequences are rather different and the creation of a usufruct will now give rise to an immediately chargeable transfer equivalent to the value of the property concerned and to relevant property. It may give rise to a reservation of benefit in the property. If the usufruct is in favour of the spouse/civil partner, exemption will no longer be available. These changes are the natural consequence of the changes made to the Inheritance Tax treatment of settled property in 2006.

Whilst the Inheritance Tax consequences of creating a usufruct over property are now much less favourable, HMRC remains of the view that, generally, a usufruct should be treated as giving rise to a settlement for Inheritance Tax purposes.

4 PAYE and employment matters

4.1 Basic PAYE tool error messages for RTI submissions

HMRC has set up a table of basic error messages that users have experienced when trying to submit information for RTI filing. The table gives the error message and also what to do to correct the problem.

4.2 PAYE for employees on short term business visits to UK

The CWG2 Further Guide to PAYE and NICS says that it may be possible to relax PAYE requirements for employees on short-term business visits to UK. These arrangements have been updated with effect from 6 April 2013.

4.3 Consultation on employee share based payments for private companies

The Financial Reporting Council (FRC) is conducting a research project to consider whether the recognition and measurement of equity-settled share-based payments provides useful information to the users of 'standalone'¹ private companies, focussing primarily on employee share options.

The points considered are:

  • Types of employee share option schemes and number of private companies that hold them.
  • Objective of employee share option schemes.
  • Recognition.
  • Measurement basis.
  • Disclosure.

Responses to various questions on these points are requested by 31 July 2013.

To view the complete update, please click here.

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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