UK: Weekly Tax Update - Monday 12 August 2013

Last Updated: 14 August 2013
Article by Smith & Williamson


1.1 Other Non-Statutory Clearance Guidance

HMRC is merging the non-statutory business and non-business clearance regimes to become the heading of Other Non-Statutory Clearance Guidance.

This guidance sets out what the non-statutory clearance service offered by HMRC covers and how applications for clarification on guidance or legislation are to be made.

To help you decide what information is relevant to an application when writing to HMRC it provides a series of checklists:

  • Annex A for all transactions other than Business Investment Relief and Business Property Relief (see below) – letter to be headed 'Clearance service'
  • Annex B for advance assurance on Business Investment Relief for non-domiciled persons taxed on the remittance basis - letter to be headed 'Advance Assurance for Business Investment Relief'
  • Annex C for Inheritance Tax Business Property Relief clearances


2.1 Transfer of assets abroad

At Budget 2012 the Government announced a consultation on the transfer of assets abroad legislation. The consultation sought views on whether proposed amendments would ensure that the legislation remained compatible with European Union law, on certain clarification changes, and on whether any other changes were required. A new exemption and other changes were legislated in Finance Act 2013 although the proposed changes to the rules for calculating the amount to be charged in certain situations (the matching rules) were deferred to allow for further consultation.

HMRC published draft guidance on the transfer of assets abroad in support of this consultation on 2 August 2013.

2.2 Tax-free childcare scheme - consultation on design and operation

At Budget 2013 the government announced that it will introduce a new Tax-Free Childcare scheme for working families. Tax-Free Childcare will provide 20% of working families' childcare costs, up to £1,200 for each child.

The proposal is that under Tax-Free Childcare, parents will register with a voucher provider and open an online account. The Government will then 'top up' payments into this account at a rate of 20p for every 80p that families pay in, subject to the above limit.

Households in which all parents work but do not receive support through tax credits (or Universal Credit) will be eligible for Tax-Free Childcare, so long as neither parent is an additional rate taxpayer (where taxable income exceeds £150,000).

Households that receive tax credits or Universal Credit will get support through those systems.

2.3 Rental income – property owned jointly by husband and wife

The First-tier Tribunal has considered the case of Mr and Mr Koshal v HMRC. The appeal related to income from an investment property jointly owned by Mr and Mrs Koshal.

Mr and Mrs Koshal claimed that the rental income should be wholly assessable on Mrs Koshal on the basis that she undertook all work in relation to the investment properties and consequently was entitled to the income.

HMRC argued that the rents should be split equally between them as follows:

  • Where husband and wife jointly own properties, s.836 ITA 2007 states that the properties are held on a joint tenancy with each of them beneficially entitled to the property in equal shares. There was no evidence that this is not the case.
  • The fact that Mrs Koshal undertook administrative duties and managed the property portfolio was not a relevant consideration in determining how the rental income should be assessed.
  • The case of Kings v. Barker was not a relevant case since the circumstances were different and it related to cohabiting couples.

The Tribunal found in favour of HMRC as follows:

"14. The relevant provision dealing with jointly held property is found in s.836 ITA 2007 (previously s.282A ICTA 1988). These sections provide that where a husband and wife are living together they would be assessed on the income from jointly held property on a 50:50 basis. If the couple held the property or the income other than in equal shares they had the option to make a declaration of their beneficial interest in a specified asset and to have the income arising from that asset assessed in accordance with the respective proportions. The provision relating to the declaration is s.837 ITA 2007. The election is made on a Form 17 – declaration of beneficial interest in joint property and income – and cannot be backdated. It must be submitted to the Commissioners within 60 days of being made.

16. The Tribunal has seen no evidence of a declaration showing an unequal beneficial interest in the property.

17. The Appellants say that Mrs Koshal undertakes all administrative duties with regard to the managing of the rental properties and the rental income is paid into her bank account. The Tribunal finds that this is not evidence to rebut the 50:50 ownership of the jointly held properties.

18. In this case the parties did not complete a Form 17 which would provide evidence of the beneficial ownership of the properties being divided other than equally between the couple.

19. HMRC states the following in the Capital Gains Manual (CG 22020) with regard to the Form 17 declaration:

'If such a declaration has been made you should treat it as evidence of the existence of an express agreement concerning the ownership of the assets and you should follow that split in assessing the gains on disposal of the asset.'

20. The Appellant submits that the Capital Gains Manual recognises that an asset can be beneficially owned in different proportions. They also say that a couple cannot make a declaration where the split of ownership and income differ. This is not quite the position. The position is that the parties can make a declaration with regard to the beneficial ownership of an asset and the income. The declaration would be evidence of the split between the parties. In the absence of any factual evidence which determines the beneficial ownership, where there is joint legal title, a 50:50 ownership basis will apply towards income and capital gains.

21. The Appellant also say that making a declaration is not compulsory. It is correct to say that the parties are not obliged to make a declaration. A declaration need only be made on Form 17 where a couple hold an asset other than in equal shares and wish to have the income and gain assessed in accordance with the underlying ownership rather than a 50:50 split. The declaration would be a record of the beneficial entitlement of the spouses and would constitute a claim to have the income assessed in line with the declared underlying ownership. In the absence of such factual evidence to determine the beneficial ownership the Commissioners will apply the 50:50 Rule where property is jointly owned.

The judges distinguished the decision in the case of Kings v. King [2004] as follows:

"... Mr and Mrs King owned their home jointly but decided to move out and live elsewhere and to let the property given that they were experiencing financial difficulties. Mr King received all of the rental income in his own name which was paid into his personal bank account. The Tenancy Agreement was also in his name. The Special Commissioner said that Mrs King had signed over her rights to the rent and her partner should be taxed on the whole profit. Her partner was a higher rate taxpayer thus making the rental income liable to significantly more taxation. The Commissioner seemed to have based his decision on the fact that the person liable to tax is the person receiving or entitled to the profits. The Appellants relied on this case to make a similar submission – that Mrs Koshal had received all the rent and she should be taxed on those sums. It seems the reasoning has its origins in the fact that HMRC can collect tax from a person receiving the profits but it does not mean that it is that person's income. However, the King v. King case can be distinguished on the grounds that the circumstances are different in that the parties were unmarried. In our matter, the parties are married and living together and their situation is governed by statutory provisions. Those statutory provisions do not apply to unmarried couples. The provision is clear that there is a presumption that income arising from property held in the joint names of a husband and wife shall, for the purposes of income tax, be treated as income to which they are beneficially entitled to in equal shares."


3.1 Discounted Gift Schemes

HMRC has issued Brief 22/13 setting out its view on how to calculate the value that will be subject to IHT for a Discounted Gift Scheme held in a relevant property trust when the ten year anniversary charge arises for the trust. It also provides updated guidance on how the transfer value is to be calculated when a Discounted Gift Scheme is effected including providing clarification and revisions to the assumptions underlying the valuation.

The Brief is aimed at the trustees of a relevant property trust which holds a Discounted Gift Scheme and who are responsible for delivering an Inheritance Tax account for the ten year anniversary. It is also aimed at the providers of Discounted Gift Schemes who may wish to provide relevant values to their customers both when a Discounted Gift Scheme is effected and at subsequent Ten Year Anniversaries.

The intention is to provide certainty for taxpayers and Discounted Gift Scheme providers in that a valuation prepared in accordance with this brief will be acceptable to HMRC.


4.1 Offshore employment intermediaries - draft PAYE legislation

HMRC has published draft legislation for Finance Bill 2014, which will require offshore employers who supply UK workers to UK businesses to operate PAYE in respect of those workers. The corresponding NICs legislation was published in the draft National Insurance Contributions Bill on 17 July.

4.2 Review of employee benefits and expenses: Interim report by OTS

The Office of Tax Simplification has produced an interim report on its review of employee benefits and expenses.

The report sets out the key points emerging as follows:

  • the system has developed in a piecemeal fashion over the last 65 years. Many would say that it is ripe for a complete review although we recognise that this raises significant resource issues for both employers and HMRC in dealing with any new system. In an ideal world though we would recommend a full policy review of the whole benefits and expenses system to re-establish some general principles and ensure these are in line with current employment practices and government policies;
  • underlying much of the complexity are tensions and boundaries in the tax system which we have referred to before, such as the differing income tax and NICs rules and the differing rules for the taxation of employed and self-employed. We continue to maintain that these underlying structural issues cause significant problems within the tax system;
  • HMRC administration including the form P11D process and the issuing of tax codes is a major source of concern amongst employers. The process is resource intensive both for employers and HMRC and is often driven by complex and frequently misunderstood rules as to what should or should not be included. It should be a key priority for further work to identify what changes can be made to simplify the system;
  • the area about which we have received the most comment is that dealing with travel expenses and subsistence. This is an area which particularly highlights how the tax rules now fail to reflect normal commercial behaviour. It is an area we would recommend as another priority for further work in the next stage of this review;
  • the rules dealing with accommodation for employees and termination payments give rise to significant problems in practice, even though they affect fewer people; and
  • through our initial work, we have identified 43 "quick wins". These are items that could be changed quickly to useful effect; we may add to them as this project progresses.


5.1 Senior Accounting Officer Guidance (SAOG)

HMRC has issued Brief 19/13 highlighting changes to the Senior Accounting Officer Guidance (SAOG) manual and clarifying its position on other SAO-related policy issues which have arisen in the past year.

5.2 Income shifting

Following the House of Lords decision in the Arctic case the then Government published draft income shifting legislation. However those proposals were shelved in the November 2008 PBR because of the economic crisis, but with the proviso that the Government would "keep them under review".

A statement from the Treasury at the time said: "the Government firmly believes it is unfair to allow a minority of individuals to benefit financially from shifting part of their income to someone else who is subject to a lower rate of tax – known as Income Shifting. The Government has consulted on this issue, but given the current economic challenges is deferring action on income shifting and will not bring forward legislation at Finance Bill 2009. The Government will instead keep this issue under review".

Since then the matter has gone very quiet and interestingly didn't even get a mention in the OTS report into the taxation of small business.

However the Income Tax (Trading and Other Income) Act 2005 contains anti-avoidance rules designed to prevent income shifting in specified circumstances and those rules need to be borne in mind. Helpsheet 270 sets out HMRC's interpretation of that legislation in a variety of situations, including the following examples of transactions which do crop up in practice from time to time:

"Examples of keeping an interest in non-trust situations

Example 8 – shares with restricted rights

Ron is a director of, and owns all the shares in, RH Trading Ltd. He creates a new class of B shares – these carry no voting rights and no rights to any assets in the event that the company is wound up. The company then issues these B shares to Ron's wife Anita.

Any dividends voted on the B shares are taxable on Ron. There is a settlement as Anita has been given the shares for nothing. Ron has kept an interest in it because the income is paid to his wife. As the B shares entitle Anita to income only, the exemption for outright gifts between spouses clearly does not apply (read 'What is not treated as a settlement?' on page 2 of this helpsheet).

Ron should include the dividends on the B shares in box 9 on the Trusts etc. pages of his tax return and a brief explanation in box 25. Anita does not include the dividends in her tax return but a brief note in the 'Any other information' box, box 19 on page TR 7 would be helpful.

Example 9 – dividend waivers

Gill owns 80 ordinary shares in GT Co Ltd and her husband Frank owns the remaining 20. The company makes a profit of £25,000 in the year. Gill waives her right to any dividend and then the company declares a dividend of £1,000 per share. Frank receives £20,000.

Part of Frank's dividend payment is taxable on Gill. There is a settlement here as she has given away income which, in the absence of the waiver, would have gone to her – the company could not have paid £1,000 per share if Gill hadn't waived her right to a dividend as its profits were not large enough. So as a result Frank has received a larger dividend. Without Gill's waiver, Frank's share of the total dividend would have been £4,000 (£20,000 multiplied by 20/100) and so the balance of £16,000 is taxable on Gill.

Gill should include the £16,000 in box 9 on the Trusts etc. pages of her tax return and a brief explanation in box 25. Frank should include £4,000 in the 'Interest and dividends from UK banks, building societies etc.' section on page TR 3 of his tax return with a brief note in the 'Any other information' box, box 19, on page TR 7.

Example 10

The circumstances are the same as in Example 9 except that instead of 100 ordinary shares, Gill owns 80 A shares and Frank owns 20 B shares. The A and B shares are exactly the same in all respects. The company made profits of £25,000, a dividend of £20,000 is voted on the B shares while no dividend is voted on the A shares.

Once again, part of the dividend is taxable on Gill. There is a settlement here as the dividend on the B shares could only have been paid in that amount because none was declared on the A shares. The shares rank equally and so if £20,000 had been declared for all the shares, only £4,000 would have arisen on the B shares. Frank's taxable income is £4,000 and Gill's is £16,000.

5.3 HMRC's approach to SDLT group relief and asset transfers following corporate acquisitions

HMRC has published its summary of the key points arising out of a meeting between representative bodies (the British Property Federation, the Chartered Institute of Taxation, the Law Society and the Stamp Taxes Practitioners' Group) with HMRC Stamp Taxes on 3 July 2013.

The meeting arose out of uncertainty surrounding HMRC Stamp Taxes' current approach to the availability of SDLT group relief, and in particular the application of the TAAR in FA 2003 Sch 7 para 2(4A), in the context of intra-group asset transfers following corporate acquisitions. It follows on from the increased focus on SDLT compliance by HMRC adopting a risk-based methodology to identify where HMRC compliance activity needs to be directed. Group relief has been identified as a risk area and as a consequence a number of enquiries have been raised. The concern expressed by representative bodies is that, while wholly respecting the compliance process, genuine commercial transactions have stalled in the face of uncertainty over the application of the TAAR to certain common transaction patterns.

To promote greater certainty in HMRC Stamp Taxes approach in the application of Schedule 7 paragraph 2(4A) (b), HMRC Stamp Taxes confirmed the following, with the overriding caveat that the presence of steps in addition to those described below may indicate, when taken together, that there are arrangements of which the main purpose or one of the main purposes is avoidance of tax:

  • A business may choose to acquire a property-owning company as opposed to acquiring the property from that company. The purchaser may, after acquiring the company, transfer the property out of the company acquired and into a different company in the purchasing group. HMRC does not regard that of itself, and subject to the list of transactions mentioned above, as resulting in the avoidance of tax such that para 2(4A)(b) would be in point, even if the acquisition of the property-owning company and the subsequent intra-group transfer of the property formed part of the same arrangements.
  • The purchaser may, after acquiring the company and transferring the property intra- group, liquidate wind-up or strike-off the company acquired. HMRC does not regard that of itself as resulting in, or being evidence of, the avoidance of tax such that para 2(4A)(b) would be in point, even if the liquidation, winding-up or striking-off formed part of the same arrangements that also included the acquisition and the intra-group transfer.
  • In the scenarios described above, the para 2(4A)(b) analysis would be the same even if the purchaser only became a member of a group for SDLT purposes as a result of the acquisition of the property-owning company.

5.4 Whether payment under a Tomlin order was wholly and exclusively for the purposes of the trade

The First-tier Tribunal has considered the case of Philip McMahon.

On 8 August 2007 Mr McMahon signed a Tomlin order which compromised proceedings brought against him by Quantica plc. He had formerly been employed by Quantica plc in Quantica Search and Selection. Pursuant to the terms of the schedule to the Tomlin order the appellant agreed to pay Quantica £100,000 in full and final settlement of all claims brought against him, and of all claims arising out of his previous employment. He also incurred legal costs of £15,354 in connection with the proceedings.

Mr McMahon sought to deduct both the payment of £100,000 and the legal costs from the trading income from his business as a recruitment consultant which he commenced on leaving Quantica.

It was contended on behalf of Mr McMahon that, as in McKnight v Sheppard, the only reason why the appellant paid the sum of £100,000 was to preserve his business and allow him to continue trading. The fact that the appellant was also released from the restrictive covenants in his contract of employment was merely the incidental effect of the Tomlin order.

HMRC argued that, as in Knight v Parry, the purpose of the expenditure was twofold:

  • To defend the claim for damages; and
  • To maintain customers for the business.

The Tribunal found in favour of HMRC saying:

"The payment of £100,000 and the legal costs incurred by the appellant had two purposes. One to preserve the business which, on its own, would have been wholly and exclusively for the purposes of the trade. The other to defend and settle the proceedings including the claim for damages for breach of contract and breach of fiduciary duty. Those claims arose out of the appellant's contract of employment. We do not consider that on any view this second purpose could be described as merely an effect of preserving the business. It was part of the reason the expenditure was incurred."


6.1 Consultation on the withdrawal of the VAT exemption for research

The UK received notification from the European Commission that its exemption for business supplies of research between eligible bodies does not comply with European legislation. The Government accepted that this is the case and plans to withdraw the exemption from 1 August 2013.

HMRC launched a consultation on 20 December 2012 requesting details of research that is currently underway or planned in order to assess the impact that the withdrawal of the exemption will have and seeking views on whether there are any possible options to mitigate the impact of the withdrawal.

The consultation closed on 14 March 2013 and a summary of responses published.


NTBN278 - Tax Rate Comparisons 2013/14

This briefing note contains comparisons of the rates of tax affecting two types of business structure for a typical UK trading or professional business with UK resident owners and employees.

NTBN277 - IHT: Business Property Relief

Client overview of IHT business property relief and the key qualifying elements and common pitfalls.

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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