UK: Weekly Tax Update – Monday 23 September 2013

Last Updated: 26 September 2013
Article by Smith & Williamson

1 GENERAL NEWS

1.1 Beware latest email scams - Do not open them, just delete them

The following note was sent to us by the ICAEW Tax Faculty.

We publish news items from time to time warning of new scams as a reminder to our readers to remain vigilant.

We are aware of two new scams – as always ignore them and delete them – do not click on the attachment or any links.

Scam 1 - An email from landregistry.gsi.gov.uk with an attachment called 'Report_mail.zip'. The Land Registry contact details on the email are correct and it looks credible, but it is a scam.

Scam 2 - An email from hmrc.co.uk about tax notices being issued with an attachment called 'Certification.htm and a disclaimer from Quality Solicitors Punch Robson. The solicitors are genuine, but they have confirmed it is a scam and have no idea why their details have been used.

In both cases the contact details are correct, this is presumably to add authenticity to the email and encourage the recipient to click on the attachment.

These are just two we have heard of, but many others continue to circulate. Please be vigilant, keep your virus software up to date and notify us of any new scams so that we can pass it on to fellow members.

A further recent example concerns VAT. The email title is VAT - successful receipt of online submission, but it is an email scam thanking customers for sending a VAT Return online. The email contains an attachment which should not be opened. Do not respond to the email and delete it immediately.

1.2 Withholding of repayment claims in avoidance cases

HMRC has issued Brief 28/13 indicating that in appropriate circumstances it will withhold income tax repayments where the claims which produce them constitute (in their opinion) tax avoidance, and where they are challenging or considering challenging those claims.

Avoidance cases – what happens to repayment claims?

Purpose of this brief

The purpose of this brief is to set out HM Revenue & Customs' (HMRC) policy on withholding repayment claims in avoidance cases. HMRC aims to stop tax avoiders from acquiring an advantage, even a temporary advantage, over the majority of taxpayers who don't try to get around the rules.

Who needs to read this?

Anyone involved in tax avoidance that leads to a tax repayment claim.

Background

In the year ended 31 March 2013, there were 32 decisions in the Tribunals and Courts in tax avoidance cases. HMRC won in 26 of those cases (82%) with over £1bn protected. This excellent result reflects the intensive investigations we conduct into the tax returns of people who use avoidance schemes. Our thorough approach means that it can take some years for our enquiries to be resolved, particularly if we have to litigate.

The small minority who engage in tax avoidance should not gain a tax advantage during the period from the tax due date to the time when we complete our enquiries and resolve any dispute. It is important that anyone who is considering using a tax avoidance scheme should be aware of the steps we will take to make sure that they will not benefit from it. Not only do we challenge the permanent tax result that the avoidance scheme claims to produce, but we also look to deny interim or temporary 'cash flow' benefits from engaging in avoidance, particularly where a scheme claims to give rise to a tax repayment or some other form of personal tax relief.

Withholding of repayment claims

In appropriate circumstances, we withhold income tax repayments where the claims which produce them constitute (in our opinion) tax avoidance, and where we are challenging or considering challenging those claims by enquiry. If we are satisfied that a claim for repayment does not depend (or does not wholly depend) on tax avoidance, we do of course work with customers and their agents with a view to making an appropriate provisional repayment. Accordingly, if the repayment included (say) £100k in respect of a scheme and £50k in respect of other transactions, we would expect to repay the £50k quickly (unless of course there was some specific reason for us to doubt that it was correctly claimed). Similarly, if in our view the effect of a scheme is to inflate or accelerate a claim to relief artificially, we would work with customers and their agents with a view to making an appropriate provisional repayment to reflect the portion of the relief which was not in dispute.

Where possible in law, we also withhold giving effect to claims to other forms of personal tax relief which constitute (in our opinion) tax avoidance, and where we are challenging or considering challenging those claims by enquiry. We are not referring to National Insurance Contributions, where claims for repayment do not normally arise as a result of avoidance schemes. We are referring rather to examples such as claims made outside of tax returns, where we may enforce payment of a tax debt where the claim would otherwise have been given effect by discharge or set-off. Pending the Supreme Court's determination of HMRC's appeal against the Court of Appeal's decision in the Cotter case (Maurice David Cotter [2012] EWCA Civ 81), we will not enforce debts which are on all fours with it without recourse to the Tax Tribunal. If we are satisfied that a claim for discharge or set-off does not depend (or does not wholly depend) on tax avoidance, we will work with customers and their agents with a view to giving appropriate provisional effect to the claim.

Where we withhold repayment claims or withhold giving effect to claims to other forms of personal tax relief, the tax avoidance scheme in question will be subject to HMRC's anti-avoidance governance process under which the Anti-Avoidance Board (made up of senior officials from across HMRC) approves strategies for challenging avoidance schemes. This ensures consistency in handling similar (or apparently similar) avoidance risks.

If we withhold a repayment in any income tax case, our guidance makes it clear that there should be no undue delay in opening an enquiry. In some instances (for example mass marketed tax avoidance schemes) we may need to make use of the full enquiry window to ensure all enquiries and linked enquiries are opened into returns and claims made by users of the scheme. However, if the scheme user so wishes and they (or their agent) contact us before we open an enquiry into their relevant return or claim, we will confirm whether we have withheld a repayment or other personal tax relief because we believe it relates to a tax avoidance scheme which we are challenging or considering challenging.

www.hmrc.gov.uk/briefs/income-tax/brief2813.htm

1.3 Tax free childcare

The Government has issued a consultation on the design and implementation of a new system of providing for tax free childcare. The consultation was issued in 5 August 2013 and closes on 14 October 2013. 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 a limit of £1,200 of top up payments.

It will be phased in from autumn 2015. From the first year of operation, all children up to age five – and disabled children under the age of 17 – will be eligible. The scheme will then build up over time to include children under 12. 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. Households that receive tax credits or Universal Credit will get support through those systems.

www.gov.uk/government/uploads/system/uploads/attachment_data/file/226460/tax-free_childcare_consultation_on_design_and_operation.pdf

www.gov.uk/government/consultations/tax-free-childcare

1.4 HMRC task force on avoidance

HMRC has announced a new taskforce aimed at tackling tax avoidance by security guards, bouncers and their employers which will focus on workers in London and the South East.

HMRC has seen an increased risk of fraudulent VAT repayment claims being submitted by the private security industry and the taskforce is expected to recover £10 million.

Other taskforces being launched to tackle tax evasion will target:

  • the construction industry in London – set to bring in £3 million;
  • hidden wealth in the Midlands – including people with offshore accounts and those living lifestyles beyond their obvious means through assets from undeclared income. This will recover over £3 million;
  • the hidden economy in the second-hand motor trade in the Midlands – which will recover over £3 million.

www.gov.uk/government/news/tax-crackdown-for-security-industry

2 PRIVATE CLIENT

2.1 Tax issues for UK Vodafone shareholders

A reminder of the UK tax implications for UK residents with shares in a US company following the announced sale by Vodafone of its stake in an American mobile phone network, Verizon Wireless.

It is anticipated that Vodafone shareholders will receive shares in Verizon Communications, Verizon Wireless's parent (with the CGT base cost split between the two holdings) as well as a special dividend. The special dividend will be taxable in the UK, unless the investment is held within an ISA or pension fund.

As a result of this the Vodafone shareholder will continue to hold Vodafone shares, whose value will have reduced, and a holding in Verizon Communications, a US company.

Dividend payments from the US are subject to a default withholding tax rate of 30%, subject to a claim made by the beneficial owner under a double tax agreement. Under the UK/US convention, the withholding tax rate is 15% for individuals and 0% in respect of qualifying pension schemes. In each case claims have to made and the appropriate paperwork filed.

It should be noted that the UK's ISA tax advantaged investment holding arrangement is not given any recognition under the convention and does not qualify for a 0% rate in the same way as a holding within a pension fund.

2.2 SRT - Exceptional circumstances

David Gauke gave the following response in the course of the Public Bill Committee debate on the Finance Bill clauses on the Statutory Residence Test and the scope of 'exceptional circumstance' in relation to adverse weather conditions.

"A question was asked about aeroplane delays or travel disruption of some sort and whether there was any flexibility within the regime. There is flexibility in exceptional circumstances, but whether a situation constitutes an exceptional circumstance will depend on the facts and the circumstances of each. The event in question must be both beyond control and exceptional, and the individual would need to be able to demonstrate that they made every possible effort to get out of the United Kingdom by any means. Adverse weather conditions that tend to happen frequently in winter will not usually fall under the definition, but it is at least in theory possible for them to apply".

www.publications.parliament.uk/pa/cm201314/cmpublic/financeno2/130618/pm/130618s01.htm

3 PAYE AND EMPLOYMENT MATTERS

3.1 Relaxations to the reporting requirements for RTI

SI 2013/2300 relaxes the RTI reporting requirement for an employer which as at 6th October 2013 employs no more than 49 employees. For the period beginning on 6th October 2013 and ending on 5th April 2014 it provides that such employers must deliver the required information by the end of the tax month in which the payment is made. A tax month runs from 6th of one month to 5th of the next month.

SI 2013/2301 makes further provisions in this regard, including associated amendments to the penalty provisions for end of year returns for the 2013/14 tax year.

www.legislation.gov.uk/uksi/2013/2300/pdfs/uksi_20132300_en.pdf

www.legislation.gov.uk/uksi/2013/2301/pdfs/uksi_20132301_en.pdf

www.hmrc.gov.uk/news/rti-small-businesses.htm

3.2 Checklist for contractors in the construction industry scheme seeking repayment claims

HMRC has issued a checklist for contractors in the construction industry scheme seeking repayment claims.

www.hmrc.gov.uk/cis/cis_top_ten_tips.pdf

4 BUSINESS TAX

4.1 Compensating adjustments

Some years ago HMRC introduced a mandatory transfer pricing rule that required a market value price to be applied to transactions between large businesses and connected parties. SMEs were also able to opt in to that rule.

As a result of this rule it was possible for individuals to lend money to a company in which they were a shareholder, at a substantial rate of interest. For tax purposes it was then necessary to substitute a much lower rate of interest using the market value principle.

This meant that an individual might receive interest of 30% from the company, but only pay tax on say 4%. The company would only get tax relief on the 4% deemed interest, and the difference of 26% would be taxed on the company at corporate tax rates, usually substantially lower than the individual's income tax rates.

The transfer pricing rule also applied to charges made by a service company to a connected partnership. This meant that the company became liable to corporation tax on a deemed profit whilst the partnership received an equivalent deduction. As a consequence of the differing tax rates for companies and partnerships, the amount of tax relief obtained by the partnership would usually exceed the amount of tax paid by the company.

In his speech to the Lib Dem conference Danny Alexander, the Chief Secretary to the Treasury, described this by-product of the UK taxing system as a "loophole" that he intended to close.

HMRC subsequently published the following discussion paper which proposes that the compensating adjustments mechanism will be removed for taxpayers within the charge to income tax where the counter party to the transaction is a company. This will apply in relation to amounts arising on or after the date the legislation takes effect.

"Technical Summary

  1. As announced by the Chief Secretary to the Treasury, the Government proposes to take action to restrict the use of the compensating adjustments mechanism in the transfer pricing legislation where it generates income tax advantages. This is in response to tax advantages that can arise where such adjustments are claimed by individuals for transactions entered into with connected companies subject to a lower corporate tax rate. The following is a technical summary providing background to the announcement and the Government's proposals.
  2. HMRC has become aware of two main arrangements that exploit the rules in order to generate the tax advantage:

    1. Interest receipts that arise to individuals from debt in excessively leveraged companies and/or excessive rates of interest.
    2. Companies that are under remunerated by partnerships for the services that they provide.
  3. It is proposed that the compensating adjustments mechanism will be removed for taxpayers within the charge to income tax where the counter party to the transaction is a company. This will apply in relation to amounts arising on or after the date the legislation takes effect.
  4. Additional detail on the transfer pricing rules, the compensating adjustment mechanism and the detail of the proposed changes are outlined within this technical summary.

Background to policy

The legislation

  1. The transfer pricing legislation concerns the prices charged in transactions between connected parties as, in such circumstances, the price charged may not necessarily be that which would have been charged if the parties had not been connected. The legislation imposes a price that would have occurred had that connection not existed, referred to as an "arm's length price".
  2. The rules are mainly designed to ensure that the right prices are charged for goods and services between connected parties on international transactions but they also apply to transactions within the UK. Within the UK, if the transfer pricing rules adjust prices to increase one side's profit, a claim can be made to reflect the same price for the other side. This adjustment is known as a 'Compensating Adjustment'.

The "Schemes"

First Scheme: Professional Partnerships

  1. Large partnerships often employ their staff through a separate service company, which the partnership owns. This arrangement can be used for a number of reasons not related to tax. However, by choosing not to pay an appropriate fee to the company for providing this service, the partnership can activate the tax rules to gain an advantage. HMRC is aware that the structure has been promoted as a method to reduce tax liability for smaller partnerships.

Example

  1. If a company is operating as a service provider to third parties and the total staff payroll is £100m, we would expect companies operating at arm's length to apply a mark up to the labour costs to reflect, among other things, the functions performed. Assume for this example an appropriate mark-up might be around 5%, so £5m on a £100m payroll.
  2. Because the partners effectively own the service company the transfer pricing legislation will substitute an arm's length price where the actual provision is not at arm's length. So if payment only covers the costs of the staff wages to the service company of £100m, the transfer pricing rules will replace it with £105m for the purposes of calculating the taxable profit of the company. Following the numerical example this will mean substituting a price of £105m thereby increasing the taxable profits of the company by £5m. No cash payment is required by the partners to make good the shortfall and so the £5m remains within the partnership where it can be drawn by the partners.
  3. The partners may make a claim for a compensating adjustment that replaces the £100m cost with a cost of £105m reducing their taxable share of partnership profits by £5m. The partners will however still receive their share of the accounting profit providing a tax benefit to the partners of the difference between the income tax and NIC on the £5m and the corporate tax rate.

Second Scheme: Excessive leveraging of companies by individuals.

  1. Individuals participating in a company are exploiting the rules by making loans that are not on arm's length terms. Typically the lending will result in the company being excessively leveraged with debt.
  2. The UK transfer pricing rules apply where companies are overly indebted due to the fact that borrowing has been provided that would not have occurred at arm's length but for the relationship that exists between the lender and borrower. The legislation restricts interest deductions arising from this "non arm's length" debt calculating the taxable profit as if arm's length arrangements had been entered into rather than the actual arrangements. A compensating adjustment may be claimed by the lender so that its position mirrors that of the borrower. This effectively removes an amount of interest equal to the excess over the arm's length amount from the charge to income tax in their hands.
  3. This has the effect of enabling the lenders to extract money from the company without paying income tax. The lenders' involvement in the company means that they are often taking a return on loans in place of a profit distribution.
  4. The affected businesses will include private equity financing but this measure is not targeted at the private equity industry. The scheme is being used in a range of private companies and it is the misuse of the legislation that is the target.

Example

  1. A company that is wholly owned by one individual has Equity of £100m and other third party debt totalling £100m. Assume in the particular circumstances of the case the 1:1 debt to equity ratio (taking account of other factors) is the maximum the company is able to raise from a third party financial institution. The owner of the company then lends £100m to the company at a rate of interest of say 15%pa. Ordinarily, the interest receipt of £15m will be taxed at 45% (current higher rate), so there will be income tax payable of £6.75m.
  2. However the transfer pricing rules mean that the actual arrangements are replaced by the arm's length arrangements for the purposes of calculating the taxable profits.
  3. The effect of the transfer pricing adjustment on the company is an increase in profits of £15m. To the extent that there are profits in the company that cannot be relieved there will be additional CT of £3m (assuming a rate of 20%). The individual may claim a compensating adjustment that will remove the £15m from the charge to income tax saving £3.75m.

Policy proposals

  1. The Government proposes to withdraw the ability of individuals to claim compensating adjustments where the counterparty to the transaction is a company. This will apply to amounts arising on or after the date the legislation comes into effect. So where either of the schemes is used no compensating adjustments will be possible in respect of amounts of service fee income or interest arising to individuals on or after the effective date.
  2. As there is no intention that these changes should adversely affect commercial arrangements, there will be a short opportunity for discussion on the policy proposals before the legislation comes into effect."

www.hmrc.gov.uk/drafts/comp-adj-technote.pdf

It appears there will now be a short period of informal consultation, but it is not yet clear when the proposed rules will take effect.

With regard to service companies the proposals as drafted would create a one-sided adjustment in favour of HMRC by service companies paying corporation tax on the transfer pricing adjustment with no corresponding deduction in the partnership - in other words a totally unfair outcome.

As such, partnerships using service companies could be worse off than if they did not have a service company at all with the removal of the tax benefit and the continuation of the corporation tax cost.

All partnerships using service companies will therefore need to review their existing arrangements.

4.2 ATED return guidance

HMRC has issued guidance on completing ATED returns. Some points coming from this guidance (using the guidance reference numbers) are as follows:

14.1 This section indicates that the tax is rounded down to the nearest pound; however, there is no other guidance for rounding when calculating the daily amount. HMRC have indicated to us that until further guidance is released, the figure for the daily amount should calculated exactly.

15.4 This section reiterates the requirement to provide a valuation for each property where the same relief is being claimed.

19.1 This section indicates there is no requirement to provide a value at acquisition and this compulsory box can be completed by entering 0 if there is no information on this.

24.1 The additional information (to be provided by pdf attachment) can include any information which is relevant to the return; hence this will be in the nature of a white space disclosure facility.

www.hmrc.gov.uk/ated/ated-return-notice.pdf

4.3 Whether a building was a 'commercial' building for the purposes of an initial allowance for industrial buildings

Industrial buildings allowances ceased to be available for accounting periods beginning on or after 1 or 6 April 2011. The industrial buildings allowance legislation provided for 100% initial allowance on expenditure incurred on a "commercial building" (one used for the purpose of a trade, profession or vocation that was not a dwelling) in a designated enterprise zone. 100% first year allowances for expenditure on plant or machinery has been available for expenditure incurred on or after 1 April 2012 by companies within the charge to corporation tax, where that expenditure is used for the purpose of a trade or for mines, transport undertakings and other activities specified in CTA09 s39(4). However it is only available in a designated area within an enterprise zone.

A recent case has considered the definition of a "commercial building" for the purpose of industrial buildings' initial allowances, and while not directly relevant to the current requirements for first year allowances, did contain some interesting discussion on to what extent a building could be a commercial building where it was used by an entity not within the charge to tax. It concerned a claim by an individual in a syndicate for the initial allowance for a laundry building operated by one NHS trust for its and two other NHS Trusts' laundry requirements. HMRC contended the laundry business was not a trade (as the NHS trusts were not within the charge to tax) and therefore the allowance should not be available. The Tribunal concluded the laundry business did fall within the definition of a trade and therefore the allowances should be permitted.

www.bailii.org/uk/cases/UKFTT/TC/2013/TC02858.html

4.4 FII group litigation

The Supreme Court's judgement in the FII group litigation case included the need for a reference to the CJEU on whether there should be a choice of remedy under Woolwich or DMG claim.

Woolwich claims can arise as a result of tax unlawfully demanded and to which a six year time limit applies from the date of unlawful demand. DMG (Deutsche Morgan Grenfell) claims can arise where tax is mistakenly paid. DMG claims are subject to an extended limitation period under the Limitation Act 1980 s32(1), where an unrestricted claim may be made within six years of the time when a mistake was discovered or a claimant could with reasonable diligence have discovered the mistake.

The issue on which the Supreme Court was divided (and for which clarification from the EU was sought) was whether s320 of FA04 was compatible with EU law. That section excluded the extended period for bringing an action in a case of mistake under s32 of the Limitation Act 1980 for actions in relation to a mistake of law relating to tax within HMRC's care and management for claims made on or after 8 September 2003. This was the date of the claim made under the FII group litigation (the instance considered by the Court was that of Aegis Group).

The questions referred were:

  1. Where under the law of a Member State a taxpayer can choose between two alternative causes of action in order to claim restitution of taxes levied contrary to Articles 49 and 63 TFEU and one of those causes of action benefits from a longer limitation period, is it compatible with the principles of effectiveness, legal certainty and legitimate expectations for that Member State to enact legislation curtailing that longer limitation period without notice and retrospectively to the date of the public announcement of the proposed new legislation?

Advocate General Wathelet recommended that such an action by the UK should be regarded as incompatible with the principles of effectiveness, legal certainty and legitimate expectations.

  1. Does it make any difference to the answer to Question 1 that, at the moment when the taxpayer issued its claim using the cause of action which benefited from the longer limitation period, the availability of the cause of action under national law had only been recognised (i) recently and (ii) by a lower court and was not definitively confirmed by the highest judicial authority until later?'

The clarity being sought here was whether the answer to Question 1 is in any way affected by the fact that, when the companies belonging to the Aegis group lodged their Kleinwort Benson claim on 8 September 2003, that cause of action had only been recognised recently (by the DMG judgment) and by a lower court (the High Court of Justice (England & Wales), Chancery Division), and was not definitively confirmed by the highest judicial authority until later (on 25 October 2006 by the House of Lords).

The Advocate General recommended that the answer to question 1 should not be affected by these circumstances.

If the Court adopts the Advocate General's opinion, this will be a victory for the taxpayer. Concerning the amounts at stake in this aspect of the case, the opinion highlights HMRC's point that: "the reimbursement sought by the companies belonging to the Aegis group amounts to at least 2 billion pounds sterling and that the financial consequences for the tax authorities with regard to other claimants will amount to several billion pounds sterling. In its view, this raises a question of the protection of the public interest in preventing the disruption of public finances."

http://curia.europa.eu/juris/document/document.jsf?text=&docid=140622&pageIndex=0&doclang=EN&mode=lst&dir=&occ=first∂=1&cid=2122296

4.5 Financial Transaction Tax

The Legal Service of the EU has concluded that the proposal for implementing the Financial Transaction Tax exceeds Member State's jurisdiction for tax within the EU, is not compatible with the EU principle of respecting the protected rights of non-participating Member States, and is discriminatory and likely to lead to distortion of competition to the detriment of non-participating Member States.

http://daskapital.nl/images/other/RvE-transactietaks-oordeel.pdf

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This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

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.

Mail-A-Friend

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.

Security

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 webmaster@mondaq.com.

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 EditorialAdvisor@mondaq.com.

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 enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.