UK: Weekly Tax Update - Monday 18 November 2013

Last Updated: 25 November 2013
Article by Smith & Williamson


1.1 Date of the Autumn Statement moved to 5 December 2013

The Autumn Statement has been pushed back a day to 5 December in order to accommodate the Prime Minister's recently announced trade delegation visit to China.


2.1 SEIS statistics

HM Treasury has released details of the number of investments made to date under the Seed Enterprise Incentive Scheme (SEIS), which was designed to help small early stage companies raise equity finance. The statistics indicate that over 1,100 companies have raised over £82 million of funding since the scheme was launched in 2012.

On average, £1.3 million of SEIS funding is raised by 19 companies every week through the scheme. The average amount of investment raised by a company is £72,000.

2.2 Private residence relief – demolition of house and construction of new one

The First-tier Tribunal has considered the case of Paul Gibson.

Mr Gibson purchased Moles House in February 2003. In 2004, he completely demolished the existing house that stood on that property, and constructed a new house on the same site. The new house was completed and put on the market and sold in early 2006. Mr Gibson's 2005/6 self-assessment tax return did not include any chargeable gain arising from that sale.

HMRC opened an enquiry into that return and subsequently issued a closure notice on the basis that principal private residence relief should be denied under s 224(3) TCGA as the expenditure subsequent to the planning application was incurred for the purpose of realising a gain from the disposal.

HMRC also issued a penalty of 60% of the tax charged in respect of the capital gains tax due, which was later reduced to 50%.

Mr Gibson appealed against the closure notice and the penalty. The HMRC review officer issued an opinion upholding the CGT charge, but for different reasons. The review decision concluded that the new house that was constructed by Mr Gibson was not the same house as the house that stood on the property at the time that the Appellant purchased it.

HMRC referred to the original house as Moles House One, and to the house constructed following its demolition as Moles House Two. The review decision concluded that Moles House Two was never the Appellant's main residence for purposes of private residence relief.

The Tribunal noted that the facts in this case were highly unusual, particularly as regards the financing of the properties.

HMRC had accepted that Moles House One was the Appellant's only or main residence and also appeared to accept that Mr Gibson's appeal would succeed if Moles House One and Moles House Two were the same dwelling house for purposes of s 222(1) TCGA. Therefore the question for determination by the Tribunal was whether the two houses were the same dwelling-house for this purpose.

HMRC argued that the houses were very different in size and layout and substantially different in appearance and value. The Tribunal was not persuaded by that argument, "for the simple reason that HMRC accepted that if an existing dwelling house was fundamentally remodelled and renovated, it could still be the same dwelling house. Following fundamental remodelling and renovation, a dwelling house may well have a very different size and layout to what it had before, as well as a very different appearance and value. This cannot therefore be determinative."

HMRC also argued that Moles House One was completely demolished, and none of the materials from Moles House One were used in the construction in Moles House Two.

The Tribunal considered the points below:

  • The Tribunal requested the parties to find any case law dealing with the application of s 222(1) TCGA in circumstances where a dwelling house is demolished in order for a new dwelling house to be immediately erected in the same place. Neither party was able to refer to any.
  • The Tribunal accepted that, as a matter of ordinary language, it would be said that the existing house had ceased to exist and an entirely new house had been erected in its place.
  • The Tribunal accepted that in order to create a house of a certain size and layout, it was cheaper to demolish the existing house and to rebuild it from scratch than to achieve the same end result by remodelling and renovating the existing house. The judges noted that it was arguable that there was no reason to ascribe different tax consequences to the end result, merely because different means were employed to achieve that same end result.
  • It may be difficult to determine whether a house has been remodelled and renovated, or whether one house has been demolished and a new one constructed in its place, if a house is razed to its foundations but the existing foundations are used in the reconstruction, or if some of the materials from the existing house are used in the reconstruction.
  • It might be unjust to apply a different tax treatment in cases where the demolition of the original house was not due to the owner's choice, such as where the original house was completely destroyed by fire.

Ultimately, the Tribunal was split on its opinion in relation to this question. The Tribunal judge took the view that Moles House One was a different property to Moles House Two and he exercised his casting vote as follows:

"The Tribunal Judge considers that the ordinary meaning of the words "dwelling house" refer to the building itself (and may include, as a secondary matter, the land upon which it is situated), rather than refer to the land (and, as a secondary matter, any building that may be situated upon it). If one house is completely demolished and a new house erected in the same location, then the new house is not the same "dwelling house" as the one that previously stood on that site. The considerations referred to above are not sufficient to justify a conclusion that the intention could not have been to use the words in their ordinary meaning. The Tribunal Judge therefore concludes that Moles House Two was not the same house as Moles House One."

In view of that decision it was then necessary for the Tribunal to consider whether Mr Gibson had occupied Moles House Two as his main or principal residence prior to its sale.

The Tribunal's decision on this second question was unanimous.

"The Tribunal finds that the Appellant has not discharged the burden of proving on a balance of probabilities that Moles House Two was ever his 'residence'. The Tribunal considers that 'camping' at Moles House Two for an unspecified period in the months before its sale, at a time before building works had been completed, in the knowledge that the property was to be sold upon completion, is not enough to amount to 'residence' for purposes of the applicable provisions of the TCGA.

The Tribunal therefore finds that the Appellant has not established that he is entitled to private residence relief in relation to the sale of Moles House Two."

The Tribunal accepted HMRC's calculation of the capital gain on the 'new' property and it upheld the penalty on the basis that guidance makes clear that it is necessary to live in a dwelling house for it to qualify, and ignorance of obligations as a taxpayer, is not of itself a reason for reducing the penalty.


3.1 Movement of pensioners to new PAYE schemes

HMRC has come across errors that have led to the issue of incorrect codes and forms when a pensioner is moved from one PAYE scheme reference to another, and has issued a reminder of the procedures that should be followed.



The IRS has issued Notice 2013-69 to provide guidance to foreign financial institutions (FFIs) entering into an FFI agreement with the Internal Revenue Service (IRS) under section 1471(b) of the Internal Revenue Code and § 1.1471-4 of the Treasury Regulations1 (the FFI agreement) to be treated as participating FFIs. The notice also provides guidance to FFIs and branches of FFIs treated as reporting financial institutions under an applicable Model 2 intergovernmental agreement (IGA) (reporting Model 2 FFIs) on complying with the terms of an FFI agreement, as modified by the IGA.

4.2 Landfill taxes

HMRC's September 2013 consultation on the draft updated guidance on landfill tax rules received such a response that they have had to delay their planned 11 November publication of the draft guidance.

In the meantime, its existing guidance applies (found at

4.3 Reporting of interest payments under the EU Savings Directive

The EU Savings Directive requires financial institutions to report to HMRC payments of interest they make to clients as set out below:

  • Payments of interest to clients who live in the UK or fully reportable countries (see HMRC's list 1) are reported under rules made under Sch 23 FA 2011. These are currently called type 17 and type 18 returns because they used to be made under s17 and s18 TMA 1970.
  • Payments of interest to clients with addresses in the EU and other prescribed territories (see HMRC's list 2) are reported under rules of the EUSD (2003/48/EC) (The Reporting of Savings Income Information Regulations (SI2003/3297)).

The information required under these two reporting systems is different in some ways. HMRC has reported that in some cases financial institutions may be using inappropriate criteria to decide which format they report payments in, for example, by determining the 'country of residence' as the issuing country of the passport of the customer rather than the country in which their current permanent address is situated. This has led to interest paid to a person with a UK address being reported to the fiscal authorities of other EU Member States instead of to the UK.

Accordingly those required to report should check that their data collection and reporting procedures are operating correctly.

4.4 Worldwide debt cap

Anti-avoidance provisions concerning the worldwide debt cap (chapter 6 (s305A to s312) of TIOPA Part 7) bring into the debt cap provisions arrangements which would otherwise be excluded where the, or a, main purpose of the arrangements is to fall outside the debt cap rules.

The provisions cover:

  • failure to meet the large group definition;
  • falling outside the provisions due to the gateway test;
  • avoidance of a disallowance due to computations of the tested income/expense and finance exemptions; and
  • schemes involving the manipulation of intragroup finance income.

When the provisions were introduced (in FA09 for accounting periods ending on or after 1 April 2010 for the majority of companies) it was always expected that regulations would be issued setting out arrangements that would be outside these anti-avoidance provisions. These have now been issued.

SI 2013/2892 specifies certain types of scheme that are excluded from the debt cap anti- avoidance provisions, and applies for schemes that are entered into on or after 4 December 2013. The following are now not caught by the anti-avoidance:

  • circumstances where a company becomes a member of another group and as a result TIOPA s348A applies;
  • repayment or release of a relevant liability, provided certain conditions are met (so that the gateway provisions exclude the group);
  • the following arrangements to avoid a disallowance under the computational aspects of the rules, provided they are not part of an arrangement notifiable under DOTAS:

    • repayment or release of a finance arrangement;
    • transfer to a group treasury company giving rise to a finance expense;
    • transfer of a finance arrangement to a group treasury company;
    • transfer of a financing arrangement so that whereas previously the net financing deduction of the relevant group company was small it is now not small.


5.1 Change to place of supply rules 1 January 2015

HMRC has issued a reminder that those involved in the telecommunications, broadcasting and e-service businesses should start preparing now for the 1 January 2015 change in the place of supply rules, if they have not already started.

The rules are changing so that the place of supply will be determined by the location of the customer.

5.2 Extent of jurisdiction to recover lost UK VAT from persons not within the charge to UK VAT

HMRC has succeeded in the European Court (CJEU case C-49/12) in maintaining its action to recover £40.4m from non-UK residents Sunico ApS, M & B Holding ApS and Mr Harwani (together 'Sunico'), in respect of assets situated in Denmark, was a civil or commercial matter rather than a revenue, customs or administration matter.

As a result a UK High Court action (an action for damages for loss caused by a tortious conspiracy to commit MTIC VAT fraud), will need to be recognised and enforced in Denmark if finalised in favour of HMRC.∂=1&cid=779404

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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