UK: Weekly Tax Update – Monday 14 October 2013

Last Updated: 21 October 2013
Article by Smith & Williamson


1.1 Autumn Statement to be given on 4 December 2013

The Chancellor of the Exchequer, George Osborne has announced that he will give his annual Autumn Statement to Parliament on 4 December 2013.


2.1 Use of Deeds of Variation

Deeds of Variation can be much more useful than one might imagine.

There is a popular misconception that a Deed of Variation must be accompanied by an IHT election under IHTA84 s142 and can in addition, but need not, be accompanied by a CGT election under TCGA 92 s62(6). However a Deed of Variation can be done without any tax elections and can be accompanied by an IHT election, a CGT election or both.

Having just a CGT election can be particularly useful if the value of the property has risen since death.

The effect of a variation is not to rewrite the will but to put in place a further transfer which takes place at the date of the variation, not at death. For instance, if spouse dies, leaving property to surviving spouse and this is varied so as to go to the children, it will be treated as a PET by the surviving spouse if no IHT election is done. However if a CGT election is done, the base cost to the children will be the probate value.

2.2 Points on shares acquired through EMI options

There are a range of tax issues affecting individuals acquiring shares through EMI options. Some points that are relevant to the improved tax position of such holdings since Finance Act 2013. FA2013 made available the 10% rate of CGT regardless of whether the 5% holding requirement (necessary for entrepreneurs' relief) is met, subject to (amongst other conditions), there being a period of at least 1 year between the option grant and the date of disposal for EMI shares acquired on or after 6 April 2013. Some points of interest in relation to these changes include:

  • There is a transitional provision for shares acquired in 2012/13 with a deadline of 31 January 2014 for making an election. It applies to EMI shares acquired between 6 April 2012 and 5 April 2013 where there was a disposal of other shares in the company in that tax year, such that any remaining EMI shares will be treated as subject to the FA13 rules, where the disposal date for those remaining EMI shares is on or after 6 April 2013.
  • The favourable 10% CGT rate can be forfeited where:

    • as a result of a take over the employee is forced into a share for share exchange. Forfeiture of the 10% rate can be avoided if an election is made for the share for share exchange provisions not to apply – TCGA s169Q;
    • there is a spousal transfer of the shares. The 10% CGT rate available for an EMI employee will be lost unless the spouse has held a 5% interest in the company for at least a year prior to disposal (the favourable entrepreneurs' relief provisions for EMI shares require the person disposing of the shares to have exercised the option and to have been an employee for the relevant period). However in determining whether a spousal transfer is worthwhile, it will be necessary to take account of any is unused CGT exemption available to the spouse;
    • a disqualifying event has occurred, such as starting a new job (where there must be a period of one year between the option grant and the disqualifying event). Here there doesn't seem to be much planning to be done in order to regain the availability of the 10% rate, so communication of the impact of the disqualification condition at the appropriate time would be relevant.

With respect to the decision of the relative merits of the different tax favoured share schemes now available, employee shareholder shares may in some circumstances be a viable alternative to EMI shares from the perspective of the individual. This could be the case where the CGT free status of ES shares acquired outweighs the loss of employment rights and the need for any upfront income tax charge (in contrast any income tax charge on EMI shares would arise on exercise and the 10% CGT rate would apply on a disposal, subject to conditions being met). However the choice of share scheme and whether it is taken up or not is dependent on considerations both by the company and the individual concerned. The interests of one party may outweigh the interests of the other party to influence the decision as to which type of scheme is most appropriate in any given situation.

For a further discussion of the relative merits of employee share incentive arrangements, whether from the perspective of the company or the individual concerned, please get in touch with a member of the Smith & Williamson employment tax team or your usual Smith & Williamson contact.

2.3 Discovery and the case of Mr Freeman

The First-tier Tribunal has concluded that documents supplied to HMRC concerning the status of a corporate bond and confirmation given by HMRC in 3 April 2000 that they were non-qualifying corporate bonds, prevented a discovery assessment being made in respect of the redemption of these bonds in the 2002/03 tax year. It had subsequently transpired that the bonds were not non-qualifying corporate bonds, such that the taper relief provisions applying in 2002/03 and applied to the gain realised as a result of the redemption, should not have applied.

However the Tribunal considered there was no question that the Loan Note and letter of 3 April 2000 were made available to the Respondents within the meaning of s.29 (6). The information provided in 2000 was information provided in writing to the Board on behalf of the taxpayer and had the hypothetical officer considered it, he could reasonably have been expected to become aware of the insufficiency to which it pointed before 31 October 2005.

An officer looking at the return in 2002/3 would know that the statement in the return that the Loan Notes was not a QCB was at odds with the instrument itself and that since the final redemption date fell in 2002/3 and that such an event had occurred in that year, there was likely to be an insufficiency of tax. This was despite the fact that there was no specific reference to the April 2000 correspondence on the 2002/03 tax return.


3.1 New election for non-dom spouse to be treated as domiciled

Assume Mr A is domiciled in UK, but his wife Mrs A is non-domiciled and not resident in UK. Mr A dies leaving his assets to Mrs A.

Even though she is not resident it appears that Mrs A can elect to be treated as domiciled in UK under S267ZA IHTA 1984 so that the estate passes to her free of IHT. S267ZA sets out the conditions for making the election – in simple terms the person must have had a spouse who was domiciled.

S267ZB (10) says: "If a person who made an election under section 267ZA(1) is not resident in the United Kingdom for the purposes of income tax for a period of four successive tax years beginning at any time after the election is made, the election ceases to have effect at the end of that period."

So provided Mrs A remains not resident for four complete tax years then the election will cease to have any effect and she will no longer be treated as domiciled in UK for IHT purposes.


4.1 Brief 29/13 HMRC position following Court of Appeal decision in ITV Services

HMRC has issued a brief setting out its views following the decision of the Court of Appeal in the case of ITV Services ([2013] EWCA Civ 867), concerning the employment status for National Insurance contributions purposes of actors engaged by ITV under specific contract types. Extracts from that brief follow:

By a decision handed down on 23 July 2013, the Court unanimously dismissed ITV's appeal and upheld the principal position maintained by HMRC throughout that whether or not the provisions of the Regulations apply is to be determined at the outset of an actor's engagement by reference to the terms of their specific contract.

In particular, the Court decided that where contracts between the engager and the entertainer incorporated the payment provisions of collective agreements (that is, national standard agreements negotiated between producers' representatives and Equity) the effect of such provisions would be to include payments 'by way of salary' as defined. Save for what was described as an 'All Rights Contract' (which HMRC had previously agreed was not within the Regulations), the two 'All Inclusive Fees Equity Agreements', the 'Weekly Equity Agreement' and the 'Option Equity Agreement', the Court found that the remuneration agreed to be paid under all other contracts presented to it included payments provided for in the collective agreements (for example production day and attendance day payments) and, therefore, included a payment by way of salary. Furthermore, except for the All Rights Contract, in all other contracts where the terms entitled the entertainer to receive payment on a contingent basis (for example on account of overage/overtime), that payment was a 'payment by way of salary'.

Although the specific contracts cited in the CoA judgment only concerned actors engaged by ITV, HMRC considers that the principles established in this and the previous decisions in the Tribunals below cover all 'entertainers' as statutorily defined in the Regulations - 'a person employed as an actor, singer, or musician or in any similar performing capacity'. HMRC now expects those in the industry engaging entertainers to comply with the Court's decision.

HMRC's position regarding retrospective liability is that set out in Revenue & Customs Brief 19/12 on 14 June 2012, following the UT decision. As such the extent to which HMRC will seek to apply the CoA decision retrospectively will be determined by a number of different factors.

Retrospective liability will depend on whether there was a previous written opinion provided by HMRC and the extent of that opinion. There are further details in the Brief. The brief also comments:

HMRC is mindful of the fact that it undertook a recent public consultation on options for amending the National Insurance treatment of entertainers at some point in the future and that its preferred option was to revoke those provisions of the Regulations that relate to entertainers with effect from 6 April 2014. If an amendment is made to the Regulations, such an amendment will only have prospective effect. The CoA judgment concerns the current and retrospective application of the relevant provisions in the Regulations and therefore will apply to any contracts entered into up until the point that any amendments to the current Regulations come into force. HMRC will be publishing a summary of the consultation responses and confirm the intended way forward later this year.


5.1 Office of tax simplification (OTS) review of partnership taxation

Minutes of the OTS's partnership taxation consultative committee meeting of 23 September 2013 have been published. The minutes set out suggestions by the committee for the main areas of complexity that should be subject to review.

5.2 OECD memorandum on transfer pricing and country by country reporting

Action 13 in the BEPS Action Plan calls on the OECD to develop requirements for taxpayers to report income, taxes paid, and indicators of economic activity to government according to a common template. The language of the BEPS Action Plan makes it clear that such country-by-country reporting to governments will be an essential element of transfer pricing documentation proposals developed by WP6. On 12 – 13 November, the OECD will hold a public consultation on various matters including its 30 July White Paper on Transfer Pricing Documentation and associated issues including country by country reporting under the BEPS Action Plan.

However in the meantime the OECD has summarised some important implementation questions it would like to resolve in the process. These include:

  • what information should be required?
  • what mechanisms should be developed for reporting and sharing country-by-country data?

5.3 Strengthening of the code of practice on tax for banks

HMT and HMRC have issued the following note on the code of practice on tax for banks:

Following a consultation over summer 2013, changes announced today (Friday 11 October) will be legislated for in Finance Bill 2014 and will ensure that on signing up to the Code, banks fully commit to the obligations it sets out.

The three key changes are:

  • more regular reporting from HM Revenue & Customs (HMRC) on banks' compliance with the code;
  • a new independent reviewer will be asked to consider potential breaches of the Code. HMRC commissioners will have to take account of their views before deciding whether there is a breach. Banks that do breach the code could be named;
  • any transaction that falls within the scope of the General Anti-Abuse Rule will be considered an automatic breach of the Code – resulting in the possible naming of the bank.

The Code already requires banks to:

  • adopt adequate governance to control the types of transactions they enter into;
  • not undertake tax planning that aims to achieve a tax result that is contrary to the intentions of Parliament;
  • comply fully with all their tax obligations;
  • maintain a transparent relationship with HMRC.

Exchequer Secretary to the Treasury, David Gauke, said:

The government is clear that aggressive tax avoidance is unacceptable and we have provided HMRC with the resources to clamp down on it.

The change we are making today will strengthen the Code and ensure the banking sector continue to carry out their tax obligations and act responsibly.

A list of those banks that have newly adopted or re-adopted the strengthened Code will be published in the autumn and from 2015, HMRC will publish an annual report on how the Code is operating.

This will include the names of any bank not complying with the Code, as well as an updated list of who has signed up to the Code and who has not.

Currently 262 banks have adopted the existing Code.

The response to the consultation is published alongside revised legislation and the HMRC Code Governance Protocol.

5.4 Competitive UK corporation tax

The Government has issued a note of some of the reforms it has introduced since its 2010 Corporate Tax Road Map was announced. It comments:

The UK now has a lower main rate of corporation tax than any other country in the G7. As part of our commitment to tax simplification, we will also unify the main rate and the small profits rate of corporation tax in 2015 so there is a single headline rate of 20%.

5.5 Suspension of aggregates levy exemptions, exclusions and reliefs during an investigation by the European Commission

HMRC has issued Brief 31/13 to update how the UK Government proposes to suspend certain exemptions, exclusions and reliefs contained within the aggregates levy.

The Government intends to make the following taxable from 1 April 2014, where the materials are subject to commercial exploitation (as defined in Finance Act 2001). We believe that taxing the materials that are currently being investigated by the Commission, as listed below, is the most appropriate way in which to give effect to the Government's obligations under Article 108(3) of TFEU:

  • material that consists wholly of the spoil from any process by which coal, lignite, slate or shale has been separated from other rock after being extracted or won with that other rock (section 17(3)(f)(i) Finance Act 2001);
  • material consisting wholly of the spoil, waste or other by-products, resulting from the extraction or other separation from any quantity of aggregate of any china clay or ball clay (section 17(3)(e) Finance Act 2001);
  • material that is wholly the spoil from the separation of any of the industrial minerals listed in section 18(3) of Finance Act 2001 from other rock with which the mineral was extracted or won (section 17(3)(f)(ii), 18(2)(b), 30(1)(b) Finance Act 2001);
  • where extracted for use as aggregates and used as such:

    • material that is wholly or mainly coal, lignite, slate or shale (section 17(4)(a) Finance Act 2001);
    • material that is wholly or mainly clay (section 17(4)(f) Finance Act 2001);
    • other industrial minerals, namely; anhydrite; ball clay; barites; china clay; feldspar; fireclay; fluorspar; fuller's earth; gems and semi-precious stones; gypsum; any metal or the ore of any metal; muscovite; perlite; potash; pumice; rock phosphates; sodium chloride; talc and vermiculite (section 18(3) Finance Act 2001);
  • where used as aggregate:

    • material that is mainly but not wholly the spoil, waste or other by-product of any industrial combustion process or the smelting or refining of metal (section 17(4)(c)(i) & (ii) Finance Act 2001);

5.6 Modernising the taxation of corporate debt and derivative contracts, minutes of working group 3 meeting September 2013

Minutes of a September meeting of working group three on the modernisation of corporate debt and derivative contract legislation have been published. They cover:

  • Perpetual; debt and regulatory capital.
  • Timings regarding transition to FRS101 and FRS102.
  • Proposals for only taxing amounts recognised in the profit & loss account.

An extracts from the minutes covering the transition timing issues includes the following:

2.3 An example of the type of issue which had been raised was the potential uncertainty over the effect of designating hedges on the adoption of FRS 102; it had been argued that this designation was prospective only, meaning that companies needed to rely on the Disregard Regulations in relation to transitional adjustments reflected in opening balances.

2.4 More generally it was felt by a number of the participants that the Disregard Regulations would continue to perform a useful function, although there was a widespread perception that they could be very difficult to understand for companies/advisers coming to them for the first time and it would therefore be helpful to take any available steps to mitigate this.

2.5 HMRC in particular noted the concern of how undesignated hedges are treated. HMRC confirmed [they were] not looking to move away from the current approach ahead of FB 2015. As such, they were not planning any significant changes in this area that would affect the transition across to FRS 101 or FRS 102 for the year ended 31 December 2015.

2.6 HMRC had suggested that they were considering whether it would be possible to amend the Disregard Regulations so that statutory references within the Regulations pointed to current legislation in CTA 2009 rather than the original legislation in FA 1996 and FA 2002; most people agreed that this would significantly aid the comprehensibility of the rules. There was also broad agreement that it was helpful to preserve the existing numbering of the Regulations, although a corollary of this was that a full rewrite would not be possible.

2.7 There was some interest in exploring the possibility of rewriting Regulation 6 as this had a reputation for being particularly unclear which the removal of spent legislation could address. HMRC were open to looking at this and other options for making the Regulations more usable, but noted that there was no appetite for a major exercise at the present time.

2.8 Returning to the question of transition, one of HMRC's proposals was to amend the [loan relationship] legislation to give s315 et seq. CTA 2009 [adjustments on a change of accounting policy] explicit priority over s308 CTA 2009 [amounts recognised in determining a company's profit or loss, that also refers to how prior period adjustments are taken into account] in cases of a change in accounting policy. It was felt that it would be helpful if some examples illustrating the problem that this proposal was intended to address could be provided, as the motivation for the change was not well understood.

2.9 More generally, simplification of the rules at s308 CTA 2009 and s315 et seq. CTA 2009 was felt to be worth exploring.


6.1 New partial exemption framework for higher education institutions

A new version of the Framework for Higher Education Institutions Partial Exemption Special Methods has been published. The document is agreed with the British Universities Finance Directors' Group, and the Higher Education Funding Council for England.

We have taken care to ensure the accuracy of this publication, which is based on material in the public domain at the time of issue. However, the publication is written in general terms for information purposes only and in no way constitutes specific advice. You are strongly recommended to seek specific advice before taking any action in relation to the matters referred to in this publication. No responsibility can be taken for any errors contained in the publication or for any loss arising from action taken or refrained from on the basis of this publication or its contents. © Smith & Williamson Holdings Limited 2013

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