UK: Weekly Tax Update - Monday 3 June 2013

Last Updated: 12 June 2013
Article by Smith & Williamson

1 General news

1.1 HMRC organisation

Information has been published on HMRC's organisation structure as at 30 September 2012 and 31 March 2013 including remuneration information.

2 Private client

2.1 Collective investment schemes and switches between funds

Currently a 'switch' of units within the same sub-fund of a collective investment scheme can be made without triggering a capital gains tax event if certain conditions apply.

One of the occasions is where an investor switches between different classes of units in the same sub-fund of an authorised unit trust umbrella should both the old units and the new units provide rights to participate in the same separately pooled part of the scheme property. This is referred to in the HMRC manual at CG57701 with a cross reference to an article in Tax Bulletin 28, published in April 1997, which set out the general background and legislative history to this area.

There are two practical issues in how this is applied when the conditions are likely to be in point. The industry use the terms 'transfers' and 'switches' to cover both 'switches' between units in the same fund/sub-fund and transfers between different funds/sub- funds. Added to this is the complication that where units within the same fund/sub-fund could be 'switched' without a CGT event, the fund manager often process switches and transfers in the same way with a disposal and reacquisition going through their books. This means that although a non-CGT triggering 'switch' might be possible the fund manager might not be able to deal with a 'switch' and even if they can they might still process it as a transfer.

As part of the ongoing consultation on a new tax-transparent vehicle to facilitate the new pooled 'master funds' structure under the UCITS IV Directive, the Government has been looking at introducing changes to clarify the CGT position for investors in collective investment schemes under the TCGA 1992. In particular changes are being introduced to ensure that no gain will arise on an exchange of shares where the property subject to the scheme, and the rights of participants to share in the capital and income in relation to that property, remain the same both before and after the event. This is to apply to switches/conversions of share class within the same fund (not from one fund to another). It will not apply to switches from one fund to a different fund (or to a different sub-fund). The amended legislation will appear as a new s103F TCGA 1992.

A complication with switches and the internal accounting is with equalisation. The proposed regulations recognise this so that where section s103F applies then any part of the next distribution, or amount of reported income, that is paid out or reported as an equalisation amount in respect of the new holding of units (or converted units) shall be treated for the purposes of the participant's tax, not as a repayment of capital, but as a distribution of income.

2.2 SEIS frequently asked questions

HMRC has published a list of frequently asked questions concerning the Seed Enterprise Investment Scheme (SEIS).

One of the questions and answers listed is:

Q: So people who lend money to my company won't get tax relief?

A: No, they won't

It is not clear what this question is aimed at. Making a loan to an SEIS company does not on its own preclude the lender from subscribing for SEIS qualifying shares and getting relief. Nor should an individual be denied tax relief for interest on a loan used to lend on to an SEIS company (subject to the cap on income reliefs), provided the individual is either involved for the greater part of his time in working for the company, or has a material interest in the company (more than 5% of the ordinary share capital). However an employee of an SEIS company is not entitled to SEIS relief unless they are a director and do not possess (nor are entitled to acquire) more than 30% of the company (ordinary share capital, voting power or issued share capital).

2.3 High income child benefit matters

A form has been issued enabling taxpayers to authorise a tax adviser to act for them in relation to high income child benefit matters.

2.4 Statutory residence test - HMRC indicator tool

HMRC has issued a pilot version of its tax residence indicator (TRI) on the HMRC website. Once information has been entered into the tool, it will indicate a residence status at the end, and it will also give the option to print off the details entered so that a record can be kept.

Care should be taken when using the TRI in this pilot state, as the legislation upon which the TRI is built does not become law until it is given Royal Assent (expected Summer 2013). If the legislation is not passed by Parliament or there are substantial changes to the legislation, the results provided may not be accurate, even if the information entered is accurate. If the TRI is used before Royal Assent is given, then HMRC advise that you should not rely on the results to determine an individual's residence status.

HMRC further warns that, as a pilot version of the TRI, it may contain inaccuracies. An updated version of the indicator will be issued later in 2013 taking it out of pilot status.

3 IHT and trusts

3.1 Consultation on simplifying IHT charges on trusts

HMRC has issued a consultation for comment by 23 August 2013 on simplifying the IHT charges on trusts and has identified the following areas for simplification:

  • Simplifying the calculation of IHT trust charges including the consideration of charges on certain 'death in service' pension schemes. The consultation re-examines the calculation of IHT charges under the current relevant property regime and proposes various ways in which the calculations can be simplified and made less onerous. It outlines proposals for ignoring historical information and non-relevant property to reduce the complexity involved in arriving at the tax due. HMRC proposes splitting the nil-rate band (NRB) between the number of settlements created by the settlor and using a rate of 6% for periodic and exit charges;
  • Standardising the treatment of accumulated income. Where the trustees have not formally accumulated income arising in the trust, but that income has been retained for a long period, it can sometimes be difficult to agree whether or not the income has been accumulated. The consultation proposes a way in which the rules can be clarified; and
  • Aligning filing and payment dates for ten yearly and exit charges with the Self Assessment framework. A common filing and payment date would ease the administrative burden on trustees and their advisers. Alignment would only apply to IHT periodic and exit charges. Aligning the reporting and payment dates with the Self Assessment regime may provide a suitable solution.

4 PAYE and employment matters

4.1 Offshore employment intermediaries

At Budget 2013 the Chancellor announced the Government would consult on proposals to strengthen obligations to ensure the correct income tax and NICs are paid by offshore employment intermediaries.

This consultation has now been published and sets out the Government's plans to create an income tax and NIC charge on offshore intermediaries employing workers in the UK and if the employer fails to pay, moving this charge to an onshore engager of the labour, in specified circumstances.

The second part of the consultation relates to requirements to keep records and file returns with HMRC.

The consultation seeks views on the detailed design, operation and impacts of these proposals with the intention that the new policy comes into effect from April 2014.

4.2 RTI pilot update

HMRC has issued an update on RTI matters for those who took part in the RTI pilot for 2012/13. Included within the update is the following note:

This is a reminder that - as explained in HM Revenue & Customs' (HMRC's) April 2013 Employer Bulletinand What's New article of 29 April 2013 - the 2012/13 Return of Class 1A National Insurance contributions, forms P11D(b) and payslips, which we usually send out in April, will be delayed for RTI pilot employers.

These will now be dispatched around 2 July 2013. So some pilot employers may not receive the form in time to complete and return it by the filing deadline of 6 July 2013.

If you want to file a P11D(b) before the deadline, you do not have to wait until you receive it. Instead, you can download a copy from the HMRC website. If exceptionally you are unable to do this, please call the Employer Orderline.

Please note that RTI pilot employers will not be charged late filing penalties if HMRC receives the 2012/13 P11D(b) by 19 July 2013.

4.3 RTI basic PAYE tool

HMRC issued an updated version of its basic PAYE tool for RTI on 30 May 2013. The updated version introduces functionality to complete and submit an Earlier Year Update (EYU) and to produce and print certain forms, including P45.

5 Business tax

5.1 Correcting unintended consequences of HMRC Brief 04/13 in respect of rebates to offshore investors

Following the written ministerial statement issued by HM Treasury, the Government has now published two short statutory instruments amending the Authorised Investment Funds (Tax) Regulations 2006 and also The Offshore Funds (Tax) Regulations 2009 and a TIIN. These aim to remove the duty to withhold tax from 'rebates' of the Annual Management Charge in most cases where these payments are made to investors who are not UK resident for tax purposes.

The regulations relating to investors in Authorised Investment Funds will come into force 21 days after they are made.

The regulations relating to investors in offshore funds will be in force retrospectively from 6 April 2013.

5.2 Changes to HMRC's Double Taxation Treaty Passport Scheme

HM Revenue & Customs (HMRC) operates a Double Taxation Treaty Passport (DTTP) Scheme for overseas corporate lenders. The Scheme applies only to loans taken out on or after 1 September 2010.

From April 2013, the Scheme has been revised to improve the customer experience of its users and enhance the scheme's effectiveness. The changes are based on operational lessons learnt since the Scheme's inception and representations made.

There are two significant changes:

  • The removal of the requirement for the UK borrower company to send a completed form DTTP2 notification to HMRC within 30 working days of the start of the borrower's loan relationship with the lender. Instead, the borrower should send the form to HMRC at least 30 working days before the first interest payment is due on the loan.
  • HMRC will now in certain circumstances consider issuing a treaty passport to a US disregarded LLC or US S-Corporation.

5.3 Annual tax on enveloped dwellings (ATED) and the pre return banding check (PRBC)

The pre return banding check form is now available for those affected by ATED who would like to check that information on their dwellings is returned in a banding that accords with HMRC's and VOA's view. Such banding checks are available were the value of the property falls within the following limits:

  • £1.8 million - £2.2 million
  • £4.5 million - £5.5 million
  • £9 million - £11 million
  • £18 million - £22 million

5.4 Capital allowance anti-avoidance

On 29 May 2013, the government announced its intention to introduce legislation as an addition to Finance Bill 2013, which will have effect for claims made on or after that date, concerning the capital allowances rules applicable where one business contributes to another's capital expenditure on plant or machinery. The previous rules permitted a claim for plant or machinery allowances where the contribution conditions were met, for capital expenditure on assets (without specifying the contribution expenditure had to be on plant or machinery). The announcement comments:

The legislation protects the exchequer, by putting beyond any doubt that a business cannot claim capital allowances on capital expenditure on plant or machinery which is covered by a contribution from another business. This stops potential claims for substantial sums of historic expenditure for which businesses receiving contributions have not borne the economic cost and did not expect to obtain allowances. Also it prevents any double allowances for the same expenditure.

The legislation applies to capital allowances claims made on or after 29 May 2013 by a recipient of a contribution; and, in certain circumstances, to expenditure pooled previously. For a business making a contribution the legislation only applies in relation to future contributions.

Specifically, the legislation makes amendments to section 538 CAA to confirm that contribution allowances under Part 2 are available in relation to a contribution of a capital sum to capital expenditure on the provision of plant or machinery in the recipient's hands. In this case the contributor's capital contribution is treated as capital expenditure on the provision of plant or machinery for use in the contributor's business, and it is the contributor who can claim capital allowances, not the recipient.

In certain circumstances, if the recipient of a contribution has previously pooled expenditure which would be ineligible to be pooled under the legislation (as amended) and has not been subject to a claim, then the amount of the unrelieved portion of that expenditure is brought into account as a disposal value (where the expenditure was pooled after 1 January 2013 or if pooled before that date no claims for allowances have been made). expenditure-on-plant-or-machinery-draft-legislation tribution_allowances.pdf es_Explanatory_Note.pdf

5.5 Strengthening the code of practice on tax for banks

HMRC has published a consultation on further strengthening the code of practice on tax for banks. Comments are requested by 16 August 2013.

Currently the code aims to encourage banks, building societies and organisations providing banking services operating in the UK to adopt best practice in relation to their tax affairs and sets out that:

  • Banks should have strong governance around tax, which is integrated into their business decision making.
  • Banks should follow the spirit of the law in addition to the letter - this means banks can undertake tax planning to support their business operations, but this should not be used to achieve tax results that are contrary to the intentions of Parliament.
  • HMRC and the banks should work together to encourage mutually open and transparent relationships.

The consultation comments that although the Code is generally operating well, it lacks public transparency. There are also no obvious downsides for banks from not adopting the Code and no codified consequences for non-compliance with a bank's Code commitments. It also comments:

HMRC is also aware of concerns from some stakeholders that a small number of banks may be interpreting the Code differently from others.

These concerns do not reflect the reality of the situation as HMRC applies the operation of the Code consistently across the banking sector (subject to the present approach for "smaller banks" covered later in the document). Nonetheless such perceptions potentially undermine the operation of the Code.

Following consultation, the Government will introduce legislation in Finance Bill 2014 requiring HMRC to publish an annual report, beginning in 2015, on the operation of the Code.

The legislation will also provide that such a report may include the naming of any bank that HMRC considers has not complied with their Code commitments as well as a full list of all banks that have, or have not, adopted the Code.

This consultation focuses on:

  • the governance process around determining non-compliance;
  • the processes and criteria by which a decision to name a bank as being non-compliant will be made; and
  • the nature of the report to be published by HMRC.

It also considers the timescale for banks to adopt or reaffirm their adoption of their Code commitments in light of these strengthened features and seeks comments on the draft legislation giving effect to those features.

The consultation does not propose any changes to the content of the code, and the code will remain a voluntary commitment. The proposals are:

  • a requirement for any bank that wishes to continue to be subject to the strengthened Code, to unconditionally confirm or re-confirm their commitment to the obligations set out in the Code;
  • publication by HMRC at Autumn Statement 2013 of a list of all banks that have newly adopted or re-adopted the Code;
  • from 2015 onwards, the publication of an annual report on the operation of the code, which may include the naming of any bank that in HMRC's opinion is not complying with the Code. Each annual report will include an updated list of those banks that have adopted and those that have not.

Smaller banks choosing to adopt the code are only required to adopt section 1 of the code which covers governance and transparency. The consultation does however ask whether this remains a tenable strategy under a strengthening of the code.

HMRC intends to build in the requirement for the Tax Assurance Commissioner to take the final decision on whether to name a bank as non-compliant in a report, though three commissioners will be involved in the final decision of whether a bank is not compliant with the code.

The Protocol envisages that a conclusion that a bank is non-compliant will not automatically lead to the bank being named as non-compliant. This is reflected in the draft legislation that enables, but does not require HMRC to name such a bank.

HMRC envisages that in most cases a conclusion of non-compliance will lead to a bank being named. But the public naming of a bank is not an end in itself, but rather a means of ensuring that the Code remains effective in preventing tax avoidance activity by banks. On interaction with the GAAR, the consultation comments:

The GAAR will target abusive transactions, whereas the Code has a wider scope and is aimed at a wider range of avoidance transactions.

This document refers to any transaction that is potentially within the ambit of the GAAR as a 'potentially abusive transaction'. We propose that such a transaction is one where, in accordance with the GAAR provisions, a designated officer of HMRC has issued a notice of proposed counteraction of the tax advantage that has arisen from the transaction under the GAAR and having considered the representations from the bank (or no representations having been received) that the designated officer has referred the matter to the GAAR Advisory Panel.

The Governance Protocol envisages that such transactions will in most cases be sufficient on their own to lead to a conclusion of Code non-compliance. The only situation where this might not be the case is if the bank has undertaken the transaction on its own account and self assesses on the basis that it does not achieve the tax advantage sought under the transaction (i.e. counteracts the tax advantage itself) before reference to the GAAR Advisory Panel. for-banks Code_consultation_Docprint_version.pdf

5.6 Valuation of EMI shares

HMRC has updated its guidance on valuing EMI shares aimed at those with the most straightforward circumstances in low tax risk situations. The new guidance is found at section 2.2 on the HMRC page on 'valuation of assets'.

5.7 Deductibility of contributions to an employee benefit trust

The case of Scotts Atlantic Management Ltd and others concerned schemes that sought to circumvent the denial of a corporation tax deduction for contributions to an employee benefit trust (EBT) as implemented in FA03 Sch24 para 1 (prohibiting a deduction unless qualifying benefits or expenses were paid out of the EBT within nine months of the end of the accounting period in question). Those provisions were amended in FA07 with effect for contributions made on or after 21 March 2007 (and the re-written provisions which were amended after 2007 are now included in CTA09 s1290-1296).

The legislation prior to 21 March 2007 referred to an EBT contribution being the payment of money or transfer of an asset to another person who would then hold or use the money or assets in connection with the provision of benefits to employees. The scheme purportedly worked by the employing company subscribing for shares in a company which then granted an option to the EBT exercisable within ten years permitting it to subscribe for shares for a nominal amount but which would give entitlement to 99% of the value of shares held by the employing company. A second EBT would countersign the option agreement committing to ensure that no share issues or distributions would dilute the value of the option. By this means it was contended there had been no payment or contribution by the employing company to the EBT which would provide benefits to the employees.

The contributions involved in this case were £7.64m in April 2004 by one company and two contributions totalling £1.3m by another company in December 2003 and November 2004. Some features of the reasons behind the contributions were to prevent the assets of the company being available to its creditors. The case covers many points the main ones being:

  • whether the contributions were deductible for corporation tax on general principles;
  • whether the contributions were not deductible for corporation tax as not being wholly and exclusively incurred for the employer's business or for other reasons;
  • whether PAYE should have been accounted for on the contributions on the basis that the funds were effectively at the disposal of the directors for whom they were intended;
  • whether the mistakes in implementation caused all the taxpayer's contentions to fail.

The Tribunal rejected most of HMRC's contentions as to why the contributions should be prevented from being tax deductible, but concluded as follows:

  • £2.77m of the £7.65m contribution was subject to a charge to secure potential trade liabilities of the company, and so was not available for payment as remuneration until September 2005 and September 2006. The conclusion was that this element of the contribution failed as not being wholly and exclusively a revenue expense. It could potentially have been, but was not in the accounts for which a deduction was claimed.
  • The element of the contribution which sheltered corporation tax was a significant motivation behind the transactions which the Tribunal concluded was a main reason behind the contribution - to leave the company in a position whereby it could not meet HMRC's tax claims even if HMRC had been successful.
  • Because the transactions were structured in such an artificial manner to circumvent the Parliament's intention and exploit perceived shortcomings in the legislation, the Tribunal concluded there was a duality of purpose to the contributions which meant that the contributions were not deductible at all. There was no possibility of apportioning the contribution between an amount which was tax deductible and one which was not. Therefore the entire contributions of both companies were non- deductible for corporation tax.
  • If the conclusion in the above bullet point was incorrect, and the scheme had been properly implemented, the Tribunal agreed that the text of para 1 Sch24 FA03 was deficient and the scheme would have succeeded.

There were some minutes which the Tribunal concluded were prepared and signed during the hearing and were not accepted by the Tribunal as genuine. There was some question as to whether the options were validly in force. If the above contentions were wrong, there was some discussion of whether funds were made available by 5 April 2004 in part of the arrangements. The Tribunal concluded the funds were not so available, and that PAYE was not due as the funds were not unreservedly available to the employees. If PAYE had been due this would have arisen at a later point.


6.1 Colaingrove Ltd and apportionment of consideration for VAT

The cases of Colaingrove Ltd concerned (i) the apportionment of consideration between supplies of holiday accommodation and power by the operator of a holiday camp to customers taking short term holidays in static caravans or chalets; and (ii) the apportionment of consideration on the sale of a caravan between removable contents and the remainder of the caravan.

(i) Apportionment of consideration to reduced rate power supply

Different fees were charged for the supply of accommodation and the power - the charge for the power did not relate to the power consumed by the customer concerned (there was a fixed daily charge for the supply of power). The amounts at stake were a voluntary disclosure of £129,743, an output tax assessment of £941,650 and a VAT reclaim of £691,891.

HMRC contended the supplies were part of the standard rated supply of caravan holiday accommodation. The taxpayer contended the power supplies were reduced rate supplies (in accordance with VATA s29A and Sch7A) capable of separate identification. The Tribunal concluded that on the basis of European Commission v France (Case C- 94/09) the UK was entitled to legislate to provide for the reduced rate to apply to supplies of domestic fuel or power even in a case where such supplies formed merely an element in a large single complex supply which was not a supply of domestic fuel or power, provided the supply of domestic fuel or power was a concrete and specific aspect of the larger supply and such treatment did not infringe the principle of fiscal neutrality or distort competition. The Tribunal concluded that section 29A and Group 1, Schedule 7A, VATA made such provision and that the supplies of power in the instant case were accordingly taxable at the reduced rate. If they were wrong on that contention, they concluded there was a single supply on the application of the Card Protection Plan jurisprudence (Case C-349/96) which was taxable at the standard rate.

(ii) Apportionment of consideration to zero rated caravans and standard rated removable items

This case considered the different methods used to apportion consideration between the zero rated and standard rated items and concluded that a simple rough and ready measure based on the split identified by the manufacturer for new caravans was likely to be the most appropriate. In respect of the sale of second hand and used caravans, the Tribunal concluded the method agreed with HMRC in 1995 was appropriate, as adjusted for reconsideration of the values of the standard rated and zero rated amounts. It also concluded that the apportionment of installation and assembly costs should be split 50:50 between the caravan and the removable contents, subject to an allowance (a reduction) for the fact that some of the fittings were valued on the basis that they were old.

6.2 VAT treatment of refunds made by manufacturers

HMRC has issued a consultation on the VAT treatment of refunds made by manufacturers to final consumers (for example in the case of faulty or damaged goods, or customer dissatisfaction).

Currently where the goods are subject to VAT, the retailer is entitled to make an adjustment under regulation 38 of the VAT Regulations 1995 ("regulation 38") and reclaim the VAT declared to HMRC on the original transaction. A VAT registered purchaser must make a similar adjustment to any VAT reclaimed on the goods.

However, sometimes the purchaser seeks a refund of some, or all, of the price paid for the goods from the manufacturer and not from the retailer. This might happen, for example, when there is a major fault in the goods. Regulation 38 does not explicitly address this situation.

It is proposed that legislation will be introduced in 2014 to correct the situation. While the consultation contains no draft legislation, it seeks views on the following:

  • the extent to which manufacturers make such refunds;
  • the range of circumstances that may give rise to a refund;
  • how the change should be implemented;
  • what impact it may have and what administrative burdens it may give rise to. atment_of_refunds_made_by_manufacturers.pdf

6.3 Supply of water and accommodation

The Upper Tribunal has concluded the First-tier Tribunal erred in law when concluding there were separate supplies of accommodation and water in the case of The Honourable Society of Middle Temple, the property had been opted to tax and so there was a VAT advantage in treating the supply of water as a separate zero rated supply of water rather than as part of the overall supply of accommodation). The Upper Tribunal concluded:

It was agreed before the FTT that the tenants had no practical alternative to obtaining their supplies of water from the Middle Temple. It follows that the tenants could not choose to obtain water by way of a separate supply by a third party. There is no need to consider whether the tenants had a genuine freedom to choose which reflected the economic reality of the arrangements between the parties because the tenants had no freedom of choice at all. From the perspective of the tenants, the choice was to take a lease of the premises which included the provision of water by the Middle Temple or not to take any lease at all.

We conclude that the two elements are, therefore, not only inseparable but also indispensable in relation to the letting and use of the premises from the point of view of a typical tenant. Consequently, it is not possible to regard one element as the principal service and the other as the ancillary service. It follows from the fact that the premises and the water are inseparable and indispensable that those elements must be considered to be so closely linked that they form, objectively, a single indivisible economic supply which it would be artificial to split. That supply is a single supply of the leasing of immovable property which is chargeable to VAT by virtue of the Middle Temple's option to tax. ty_of_middle_temple.pdf

7 Tax publications

NTBN270 -Tax assault on LLPs and partnerships

There have been a number of recent announcements affecting the tax and NIC status of partnership interests (close company loan to participator rules, sleeping partners and NIC and employment status of LLP members and profit or loss allocation arrangements). This briefing note summarises the changes proposed on employment status of LLP members and profit or loss allocation arrangements.

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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Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

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.