UK: Weekly Tax Update: 31 July, 2013.

Last Updated: 1 August 2013
Article by Smith & Williamson

1 General news

1.1 GAAR Advisory Panel

A key element of the Government's proposals for the General Anti-Abuse Rule (GAAR) announced in 2012 was the creation of an independent Advisory Panel to approve HMRC's GAAR guidance, and to provide opinions on cases where HMRC considers the GAAR may apply. Interim appointments to the Advisory Panel were made to approve the guidance published with the Finance Bill.

The Commissioners for HMRC appointed Patrick Mears as Chair of the GAAR Advisory Panel on 15 April 2013.

Mr Mears led the process to recruit the members of the Advisory Panel and this has resulted in the Commissioners of HMRC appointing the following members of the Advisory Panel: Michael Hardwick, David Heaton, Brian Jackson, Sue Laing, Gary Shiels and Bob Wheatcroft.

1.2 Protocol for amending the double tax treaty on income tax and capital gains tax between the UK and India

The UK and India have entered into a new Protocol which amends the double tax treaty as regards income tax, CGT, corporation tax and Petroleum Revenue Tax (PRT).

The Protocol amends the Articles of the Convention relating to general definitions, fiscal domicile, dividends, partnerships, exchange of information, tax examinations abroad, assistance in the collection of taxes and limitation of benefits.

The Protocol will enter into force on the date of the later of the notifications by each country of the completion of its legislative procedures. It will take effect as follows:

a) in both States in the case of taxes withheld at source, in respect of amounts paid on or after the date on which the Protocol enters into force;

b) in the United Kingdom:

  • in respect of income tax and capital gains tax, for any year of assessment beginning on or after 6th April in the calendar year next following that in which the Protocol enters into force;
  • in respect of corporation tax, for any financial year beginning on or after 1st April in the calendar year next following that in which the Protocol enters into force;
  • in respect of PRT, for any chargeable period beginning on or after 1st January in the calendar year next following that in which the Protocol enters into force.

c) in India, in respect of taxes levied for fiscal years beginning on or after the date on which the Protocol enters into force. The date of entry into force will, in due course, be published in the London, Edinburgh and Belfast Gazettes.

www.legislation.gov.uk/ukdsi/2013/9780111101537/pdfs/ukdsi_9780111101537_en.pdf

2 IHT and trusts

2.1 Inheritance Tax guidance following Finance Act 2013

Following the Finance Bill 2013 receiving Royal Assent on 17 July 2013 HMRC Trusts & Estates has published guidance on the changes to the rules on Inheritance Tax:

" Restrictions to liabilities that can be deducted for IHT purposes

www.hmrc.gov.uk/inheritancetax/how-to-value-estate/ihtm28010-onwards.pdf

" Elections to be treated as domiciled in the UK by non-UK domiciled spouses and civil partners

www.hmrc.gov.uk/inheritancetax/how-to-value-estate/ihtm13040-onwards.pdf

This guidance will be incorporated in the Inheritance Tax Manual in due course.

3 PAYE and employment matters

3.1 Employee shareholder shares

The Statutory Instrument SI2013/1766 brings into force section 31 of the Growth and Infrastructure Act 2013 on 1st September 2013. That section amends the Employment Rights Act 1996 in order to create the new employment status of employee shareholder.

www.legislation.gov.uk/uksi/2013/1766/pdfs/uksi_20131766_en.pdf

4 Business tax

4.1 Consultation on conditions under which interest distributions from Authorised Investment Funds may be paid without deduction of tax

HMRC has issued a consultation document on conditions under which interest distributions from Authorised Investment Funds (AIFs) may be paid without deduction of tax, for comment by 16 September 2013.

AIFs can, in certain circumstances pay interest distributions instead of (or, in some cases, in addition to) dividend distributions. Such interest distributions are treated as deductible for the purposes of corporation tax but are taxed as interest in the hands of investors. In the case of UK resident investors within the charge to income tax, the AIF must deduct basic rate income tax from the payment and account for the amount deducted to HMRC. Individual investors must then meet any higher rate tax liability directly.

The origin of interest distributions paid by a UK domiciled fund could be from interest bearing investments anywhere in the world and, where such distributions are paid to non-resident investors, to deduct UK income tax may be considered to be inappropriate and it deters non-residents from holding investments in UK funds which have interest bearing investments.

Existing tax regulations therefore permit an interest distribution paid by an AIF to a non- resident investor to be paid without deduction of income tax, subject to certain conditions designed to ensure that the investor is actually non-resident.

This rule should, at least in theory, permit UK funds paying interest distributions ('bond' funds) to be freely available to foreign investors without deduction of UK basic rate income tax from interest distributions.

In practice however, because a holding in an investment fund is typically sold and maintained through an intermediary (a distributor), the fund administrator may have no direct knowledge of the investors holding units in the fund. A distributor based offshore may be unwilling to handle holdings of units in UK funds where that would require them to take on the administrative burden of establishing whether each of their clients is resident in the UK.

This has the effect of preventing UK domiciled bond funds from competing freely with similar non-UK based funds as offshore distributors which sell a range of funds to international investors will be less willing to market UK bond funds.

It is proposed to replace (or possibly provide an alternative to) the existing requirement for the AIF to have reasonable grounds for believing that the beneficial owner is not resident with a new requirement as follows:

  • the units/ shares of that class are marketed exclusively outside the UK with no marketing that is specifically targeted to investors resident in the UK,
  • the units are marketed and sold with clear information that:
    • no UK income tax will be deducted from interest distributions, and
    • if the investor is resident or becomes resident in the UK then they must account to HMRC for tax due on the full amount of any interest distributions received or accumulated while they are UK resident.

This could replace or be an alternative to the existing condition ("...that the legal owner has reasonable grounds for believing that the participant is not resident in the United Kingdom").

It is intended that this provision will apply equally to units marketed by UK or international distributors provided that the units are only marketed to investors not resident in the UK.

www.gov.uk/government/uploads/system/uploads/attachment_data/file/224393/HMRC_C ondoc-_Gross_payments_-_Final_Draft__2_.pdf

4.2 Restricted share scheme

The First-tier Tribunal has heard a lead case concerning a restricted share scheme operated in 2003/04 and 2004/05 and disclosed under DOTAS number 54003391. The lead case involved Tower Radio Ltd and Total Support Services Ltd. This was a tax-driven restricted share plan. These specific arrangements no longer work as a result of counteraction in 2005.

Instead of paying remuneration by way of bonus (for which there was no contractual entitlement), the scheme involved the making of an award to the employee of restricted shares in a special purpose vehicle company (SPV). The value of the SPV was eventually realised by liquidating the SPV and distributing its assets to the employee shareholder. The idea was to take advantage of the way the provisions in ITEPA Part 7 Ch 2 make no immediate charge to income tax or NICs for an award of 'restricted securities', and then realise the value in the shares in a way that fell outside the subsequent charging mechanism in the legislation.

The shares in the SPV were made to be "restricted securities" by including a clause in the SPV's articles of association which would require the employee who was awarded the shares to sell them to the employer if they were to leave the employer within a given period (otherwise than by reason of death). In such a case, they would receive 95% of the market value of the shares.

The Tribunal followed the approach taken in the recent Upper Tribunal cases involving UBS and Deutsche Bank:

" The entitlement issue. This was decided in favour of the appellants, i.e. that the employees were not entitled to be paid bonuses in money form.

" The ITEPA issue. This was also decided in favour of the appellants, i.e. that it was not possible to purposively read the legislation in such a way that the employees could be regarded as receiving a bonus paid in money.

" The Ramsay issue. The Upper Tribunal in the UBS case had concluded that they could not see how the transactions provided anything other than restricted securities to employees in a manner that fell squarely within the prescriptive requirements of chapter 2, and therefore fell out of the charge to income tax. They could only justify the argument for the Ramsay approach if on a realistic appraisal of the facts the scheme was one which provided money. However, money is explicitly excluded from the definition of "securities" for the purposes of ITEPA part 7 chapter 1 to 5 by s245(5)(b). On the facts of the UBS case however, they concluded that what was received by the employees was conclusively "securities". They commented:

"The problems for HMRC are compounded by the fact that Chapter 2 contains a very detailed and prescriptive code for dealing with restricted securities, in the context of a Part which had as one of its main objectives the countering of tax avoidance. Experience has shown that advantage can sometimes be taken of detailed statutory codes of this general nature in a way that is resistant to a Ramsay analysis, with the result that even the most artificial of tax avoidance schemes may succeed in their object. For a recent example, which also involved a chargeable event regime although in the context of life insurance policies, see the decisions of Proudman J and the Court of Appeal in Mayes v Revenue & Customs Commissioners [2009] EWHC 2443(Ch), ..., affirmed at [2011] EWCA Civ 407, ...."

However the FTT distinguished this case from the UBS case by concluding that the differences between the remuneration arrangements of a sophisticated multinational financial service group and the arrangements typified by those companies involved in the present case (where there was a close identity between the employers and their respective employees, so that it was effectively the employees who made the decision to implement the scheme) were so different that it was possible to consider the arrangements as a 'money in, money out' type of arrangement, so that intermediary steps could be ignored under the Ramsay principle.

There was some discussion of how the result of the decision should be implemented (i.e. to operate PAYE and NIC on amounts which had been paid out through structures where it was not practical to operate PAYE and where the amounts involved had changed and borne other taxes), but the FTT considered that even though it was not their position to deal with those practical aspects, this did not prevent it being entitled to conclude the transactions should be re-characterised as remuneration subject to PAYE and NI.

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