Weekly Tax Update – Monday 9 September 2013

1 GENERAL NEWS

1.1 Update on the Tax Agent Strategy

HMRC has issued the following briefing note on the Tax Agent Strategy.

Looking to the Future

• HMRC had intended to publish a consultation this summer to ask for views from agents and the public on the next steps for the Tax Agent Strategy. After careful consideration we have, however, decided that we can make progress and take the next steps without the need for a formal consultation at the present time.
• The Spending Review 2013, which details the Government's spending plans for 2015- 16, allocated more than £200m over the next three years to enable HMRC to become an increasingly digital business – offering customers a range of digital services which are so convenient and easy to use that anyone who can use them will choose to do so. We are building a number of initial services as models for other services (known as exemplar services).
• The first digital exemplar services (including Agent Online Self-Serve) are already being developed using the new "agile" method of IT development that is being widely rolled out across Government. This process allows us to build and test quickly, learn from feedback as we go, make changes and move incrementally towards a final system - rather than designing a system in full at the outset. The result is a system which allows the needs of users to be recognised and catered for as it develops, so the final system works better for everyone when it is implemented.
• We are working with the Government Digital Service (GDS) to build a single Digital Tax Platform that will operate across all HMRC Lines of Business/tax regimes and address the needs of customers and their agents. We are also committed to designing new digital services for customers which are capable of being used by agents on their clients' behalf provided a valid agent/client relationship can be verified. This important aspect now underpins all of our digital systems development.
• The work that we have done so far suggests that a formal public consultation document is neither necessary nor appropriate at this point. We are pleased to report that a number of volunteer agents are testing developments as we build them (see more below).
• We re-iterate that HMRC has no plans to regulate the tax agent profession. HMRC would like to reaffirm its view that agents have an essential role to play in making the tax system work and securing the tax base. HMRC wants to work with agents to support them in that role as we move towards an improved and more efficient tax system based on a digital platform.

What we will do

• We will continue work developing the new agent registration service under which agent firms will apply for a Unique Agent Reference (UAR).
• We will shortly begin developing an improved agent authorisation service which will make it easier for agents to let HMRC know when they are engaged by a new client.
• We also need to establish and test the process for transition, in particular the simple transfer of clients across to the new system.
• We will work with GDS and other colleagues to develop our 'digital' vision for the future. We want to be able to share this vision with agents and discuss the role of the agent in an increasingly digital world with you. This may take the form of a consultation at a later date and we will keep agents informed of our plans.
• We will set up a series of pilots to continue to test Agent and Client Statistics (A&CS brings together information held on HMRC systems about agents and the filing, payment and compliance histories of their clients) with the aim of identifying what 'good looks like' and how the best agents work.
• As part of this work we will test how best to manage compliance risk – both before and after tax returns have been submitted – and how HMRC can work with agents to lower these risks.
• We will continue to work closely with the agent representative bodies (through the Joint Tax Agent Strategy Steering Group, the Agent Engagement Group, the Agent Strategy Group and the Compliance Reform Forum) as work on the above areas progresses and we will consult on the pilots and any changes proposed at the various agent/HMRC consultative groups.

'User testing'

• We're pleased to say that the first 'user testing' session – covering registering to act as an agent under the new system – took place on 20 August. The session was successful and GDS and HMRC received some useful feedback on these very early screens. We'll continue the build-and-test approach to ensure we design a new system which works well for both agents and HMRC.
• We will continue testing developments for agents with agent firms of all sizes so that we can be sure that any new systems and processes will work for all.

2 PAYE AND EMPLOYMENT MATTERS

2.1 Employee shareholder shares

HMRC has issued guidance as set out below.

• The income tax rules and exemptions applying to awards of shares under the new employee shareholder status, available from 1 September 2013.

www.hmrc.gov.uk/employeeshareholder/guidance-it-ess.pdf

• The capital gains tax exemption applying to awards of shares under the new employee shareholder status, available from 1 September 2013.

www.hmrc.gov.uk/employeeshareholder/guidance-cgt-ess.pdf

3 BUSINESS TAX

3.1 The Castle Howard case

HMRC has informed us that it is taking the Lord Howard of Henderskelfe case (otherwise known as the Castle Howard case) to the Court of Appeal and in the meantime it does not agree that chattels are plant in 'stately home' businesses.

3.2 Data payment crackdown

HMRC has written to us as follows:

"Tax evasion and the hidden economy costs the taxpayer £9 billion every year. A new crackdown on tax evasion launched today will make information on all credit and debit card payments to UK businesses available to HMRC for the first time.

Under new powers which came into effect on 1 September, HMRC can now access information from the UK's merchant acquirers (the companies that process credit and debit card payment transactions) to find out the number and value of transactions completed by a specific trader. No personal data identifying the card owners or card numbers will be obtained, but this data will be used to ensure that traders have correctly accounted for all taxes due thereby levelling the playing field for all businesses.

We estimate that the information collected could help us to reduce tax evasion by more than £50 million per annum.

This week also sees the launch of our tax evasion advertising campaign, which works alongside existing compliance activity such as the information collected from merchant acquirers, to raise awareness among those breaking the rules that HMRC is closing in on undeclared income."

http://hmrc.presscentre.com/Press-Releases/Data-payment-crackdown-6925e.aspx

www.gov.uk/sortmytax

3.3 Currency to be used for calculation of corporation tax on chargeable gains

SI 2013/1815 appoints 1st September 2013 as the day on which the amendments made by s66 of FA13 come into force. It affects capital disposals made by companies on or after that date. The amendments require companies to use their functional currency, or in certain circumstances their designated currency, to compute any chargeable gains and losses on disposals of ships, aircraft, shares, or interests in shares not covered by the substantial shareholdings exemption.

www.legislation.gov.uk/uksi/2013/1815/pdfs/uksi_20131815_en.pdf

3.4 Creative sector tax relief

A Statutory Instrument (SI2013/1831) was published on 19 July 2013 that came into force on 13 August 2013 setting out the cultural tests to be met by High-end TV, giving separate tests for (i) drama and documentary and (ii) animation productions in order to meet the conditions for Finance Act 2013 creative sector tax relief. From a total of 31 marks the production must obtain at least 16 marks, subject to meeting certain minimum standards for setting, character and story.

www.legislation.gov.uk/uksi/2013/1831/pdfs/uksi_20131831_en.pdf

4 VAT

4.1 Value attributable to a self supply

Since 1978 General Motors UK Ltd (GMUK) accounted for the output and input VAT on cars it had manufactured when it took them into use for its own business (as demonstrator cars) using a figure of 2/3rds of the list price as an estimate for the cost. However it submitted that this estimate was too high and put forward a reclaim covering the period 1987 to 1996. The claim would have arisen because the self supply output tax would have been payable in full, while the self supply input tax will have been partially recoverable according to GMUK's partial exemption calculation. Thus if the basis on which the self supply figures were calculated was overstated, the difference between the output VAT payable and input VAT recoverable would have been greater than required.

GMUK contended that the price that should have been used for the self supply was lower than the 2/3rds estimate. After examining the evidence and calculations it was agreed that in the claim period from 1987 to 1993 the price used should have been the lower of 'purchase price' (that price GMUK could have bought the cars for at the time) and 'cost price' (the amount it would have cost GMUK to make them). For the claim period 1994 to 1996 the figure should have been by reference to 'purchase price'.

The First-tier Tribunal (FTT) concluded on particular methods of calculating 'purchase' and 'cost' price. It then concluded GMUK had actually accounted for VAT on the self supplies at 2/3rds of list price. It also concludedthat GMUK would succeed in its claim where it could show that if VAT had been accounted for using cost or purchase price in the claim periods, that amount would exceed [to make sense the FTT should presumably have meant "was lower than"] the VAT accounted for on 2/3rds of the list price.

The case was adjourned for the parties to agree the figures. The message to take from this case should be that where VAT is accounted for on self supplies and the rate of recovery on input VAT reduces input VAT recoverable on the self supply below the nominal value of the output VAT to be accounted for on the self supply, it may be worth examining if the value of the self supply has been overstated or not.

www.bailii.org/uk/cases/UKFTT/TC/2013/TC02835.html

4.2 Whether input VAT incurred on investment management fees for raising income used to support taxable and exempt University activity was residual input tax and partially recoverable.

The University of Cambridge has won an appeal against HMRC's refusal to take account of input VAT on investment management fees in the University's residual input VAT for calculating the amount of input VAT recoverable on such tax after partial exemption calculations.

The University's main activity, that of providing education, is an exempt supply. Its principle taxable activities relate to commercial research, sales of publications, consultancy and the hiring of facilities and equipment. Its associated Colleges generate taxable supplies through bars, external catering and provision of non term time accommodation. It therefore has a combination of both taxable and exempt supplies and is partially exempt. Input tax is accordingly attributed to taxable supplies where possible, leaving the balance as exempt input tax.

Its endowment fund generates income of over £40m per year which is used to support all the University's activities. Professional fund managers in the UK and US are used to manage the endowment fund.

HMRC refused to include the input VAT incurred on investment management fees, ultimately because in their opinion the input VAT was incurred on a non-business activity that was too large to be incidental and that the CJEU decisions on the recoverability of input VAT on finance activity costs (Kretstechnik (C-465/03) and Securitanta (C-437/06)) were irrelevant as they related to the issue of shares to obtain fresh finance rather than the broader purpose in the University's case of providing income and capital from existing funds. The VAT reclaim amounted to £182,501 for the period 1 May 2006 to 31 January 2009 (capped by the claim period limit then in force of three years, and an unspecified amount in relation to the period 1 April 1973 to 31 March 1997.

It was subsequently agreed that the operation of the endowment fund was not an economic activity in its own right and was therefore outside the scope of VAT. The University of Cambridge contended that the Kretztechnik case had wider application than just to issues of shares and that this was supported by the High Court's decision in the case of the Church of England Children's Society v HMRC [2005] STC1644.

The First-tier Tribunal agreed with the University on the wider application of the Kretztechnik case and that there was a clear link between the University's investment activity and its overall economic activity. They did not accept that overheads relating to a non-economic activity undertaken for the purchase of an economic activity should be regarded as irrecoverable because the non-economic activity could technically come within the definition of a 'supply' for VAT purposes.

www.bailii.org/uk/cases/UKFTT/TC/2013/TC02836.html

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.