UK: Weekly Tax Update - Monday 16 December 2013

Last Updated: 30 December 2013
Article by Smith & Williamson


1.1 Budget 2014 set for Wednesday 19 March

The Chancellor has announced that Budget 2014 will take place on Wednesday 19 March 2014.

1.2 Draft legislation for Finance Bill 2014

The Government has published draft legislation to be included in Finance Bill 2014, alongside responses to a group of consultations held since Budget 2013, including changes to the rules on mixed partnerships and the use of onshore employment intermediaries.

In a Written Ministerial Statement, the Exchequer Secretary to the Treasury (David Gauke) said:

The Government consulted on a number of tax policies, following their announcement at Budget 2013. Today, the Government is publishing responses to these consultations alongside draft legislation to be included in Finance Bill 2014. This fulfils our objective to confirm the majority of intended tax changes at least three months ahead of publication. Draft legislation will be open for technical consultation until 4 February 2014.

Details of the clauses published today are set out in the 'Overview of Legislation in Draft' document, which also includes Tax Information and Impact Notes for each measure. All publications will be available on the GOV.UK website.

The Government is publishing draft legislation on policies announced at Budget 2013 and earlier, including:

  • Completing the merger of the main corporation tax and small profits rates recommended by the Office of Tax Simplification.
  • An increase in the level of the income tax personal allowance to £10,000 from April 2014.
  • A package of measures to support employee ownership, including a capital gains tax relief and an annual exemption from income tax on bonus or equivalent payments paid to employees of those companies.
  • A remote gambling reform to move the taxation of remote gambling onto a 'place of consumption' basis.
  • A social investment tax relief to encourage individuals to invest in social enterprises.
  • Changes to make film tax relief available at a rate of 25% on the first £20 million of qualifying production expenditure, and 20% thereafter, for small and large budget films.
  • Countering the disguising of employment relationships through the use of Limited Liability Partnerships and the tax-motivated allocations of business profits where partners include both individuals and companies (mixed membership partnerships).
  • Abolishing the Stamp Duty Reserve Tax charge on unit trusts and open-ended investment companies in Schedule 19 to the Finance Act 1999, with effect from 30 March 2014.

The Government will also publish draft legislation on policies announced in the 2013 Autumn Statement. This includes draft legislation to:

  • Introduce a transferable tax allowance for married couples.
  • Ensure that the reliefs introduced to support employee ownership work in the way that is intended. The corporate tax legislation will be amended to ensure that the exemption from income tax does not disqualify companies from claiming corporation tax relief on payments which would otherwise have qualified. Transfers of shares and other assets to an employee ownership trust will also be exempt from inheritance tax providing certain conditions are met.
  • Increase the maximum annual value of shares that an employee can acquire with tax advantages under the Share Incentive Plans to £3,600 a year for 'free' shares and to £1,800 a year for 'partnership' shares.
  • Increase the rate of the bank levy set for 1 January 2014 to 0.156%, and make a number of changes to the bank levy's detailed design following a 2013 review.
  • Prevent employment intermediaries being used to avoid employment taxes by disguising employment as self-employment.
  • Reduce the capital gains tax private residence relief final period exemption from 36 months to 18 months.


2.1 Appeal against daily penalties for late filing of 2011/12 tax return

HMRC has written as follows to a client regarding their appeal against daily penalties for the late filing on their 2011/12 tax return.

"Appeal against daily penalties for late filing of 2011-12 tax return

I refer to previous correspondence on your appeal against the daily penalties we charged you for not filing your 2011-12 tax return on time.

Morgan and Donaldson v Commissioners of HMRC (TC/2012/8431 and TC/2012/9096) The First-tier Tribunal heard this case recently and the outcome could have a bearing on all daily penalties HMRC has charged for the late filing of tax returns from 2010/11 onwards.

The tribunal decided that the communications HMRC sent to Mr Morgan and Mr Donaldson could not be classed as 'notice of the date we would charge the penalty from', under paragraph 4 (1)(c) of Schedule 55 to the Finance Act 2009. The tribunal therefore concluded that HMRC could not charge daily penalties in these cases.

HMRC does not agree with the tribunal's decision and has appealed to the Upper Tribunal in the case of Mr Donaldson. We do not intend to appeal in Mr Morgan's case because the tribunal decided there were 'special circumstances' which meant the daily penalties would be reduced to zero, even if they found in HMRC's favour.

The tribunal also considered whether HMRC had complied with paragraph 4(1) (b) of Schedule 55 by automatically charging daily penalties by computer rather than an HMRC officer making this decision. They decided that HMRC had complied with the law in this respect.

Your appeal

Once we know the outcome of our appeal to the Upper Tribunal, we will write to you with our decision on your appeal. It could take many months for this to happen."

2.2 Transferable tax allowances for married couples and civil partners

The proposed draft Finance Bill 2014 clauses include further detail on the 'new transferable tax allowance for married couples'.

This measure, to apply from 2015/16, will allow a spouse or civil partner who is not liable to income tax above the basic rate (taking into account the reduction to their personal allowance) to transfer up to £1,000 of their personal allowance to their spouse or civil partner, provided that the recipient of the transfer is not liable to income tax above the basic rate. This will be achieved by one party electing to reduce their personal allowance and the other claiming a tax reduction at the basic rate of tax on the 'transferred' amount.

As well as the restriction based on levels of taxable income there are some others.

  • The recipient has to satisfy the residence conditions for claiming personal allowances in their own right.
  • Neither party makes a claim for married couple's allowance (MCA), which is available to married couples or civil partnerships where one or both spouses or civil partners were born before 6 April 1935.
  • A person who is not UK resident in the year but meets the wider conditions to qualify for a personal allowance, can only make a transfer if their 'hypothetical net income' is less than the personal allowance to which they are entitled.
  • A claim for a transferred allowance cannot apply where there has been a claim for the remittance basis to apply.

2.3 Capital gains tax private residence relief final period exemption

The proposed changes to the legislation, reducing private residence relief final period exemption, have been issued following the Autumn Statement announcement.

Where a person owns one or more properties that have been their main residence they are entitled to relief for the final period if they dispose of a property they are not currently living in. The measure will reduce the period of ownership for which this relief is available from 36 months to 18 months.

This measure will have effect where contracts for the sale of the property are exchanged on or after 6 April 2014. It will also affect contracts for the sale of the property are exchanged on or before 5 April 2014 but not completed by 5 April 2015.

In recognition that a person moving into care may take longer to decide to dispose of their former home, the draft legislation includes provision for the period to remain at 36 months for this group of people. The conditions for the longer period are that either:

  • the individual is a disabled person or a long-term resident in a care home, and does not have any other relevant right in relation to a private residence; or
  • the individual's spouse or civil partner is a disabled person or a long-term resident in a care home, and neither the individual nor the individual's spouse or civil partner has any other relevant right in relation to a private residence.

2.4 Deduction for mortgage arrangement fees

Loan arrangement fees have become a common feature of mortgages for investors and for individuals remortgaging their own homes.

Where the mortgage relates to a let property it should be possible for the individual to offset the arrangement fees against their rental income for income tax purposes.

Rather than paying the fees upfront, many borrowers choose to add the arrangement fee onto the loan. The question then arises as to the timing of the income tax deduction(s).

Income from property is taxed on the same basis as a trade, which means that the accounts should be prepared using UK GAAP.

The FRSSE says: "Where an arrangement fee is such as to represent a significant additional cost of finance when compared to the interest payable over the life of the instrument, the treatment set out in paragraph 12.2 shall be followed. Where this is not the case, it should be charged immediately to the profit and loss account."

Paragraph 12.2 says that finance costs of borrowings are to be allocated to periods over the life of the borrowings at a constant rate on the carrying amount. It also spells out that all finance costs are charged to the profit and loss account.

The determination of what is significant is very much a matter of judgement based on quantum of fee, loan and possibly the period of the loan.

2.5 Additional State Pension top up

At Autumn Statement 2013 the Government announced its intention to introduce a scheme to allow pensioners to top up their Additional State Pension by paying a new class of voluntary National Insurance contribution, to be known as Class 3A.

The scheme will open in October 2015 and will be available to all pensioners who reach State Pension age before the introduction of the single tier pension in April 2016.

The Department for Work and Pensions has now published a policy paper giving more detail.

The paper indicates that the Government has conducted some polling work on likely take-up which indicates that a small proportion of the seven million eligible pensioners may pay Class 3A.

2.6 Pension tax relief and individual protection from the lifetime allowance charge

The announcement at Autumn Statement 2012 included details of fixed protection 2014 ('FP14'). An individual who claims FP14 will benefit from a protected LTA of £1.5 million unless the protection is lost. FP14 will be lost if the individual makes additional pension savings or accrues further benefits on or after 6 April 2014.

Where FP14 is lost, the individual reverts to the standard LTA of £1.25 million and any tax relieved pension savings above £1.25 million are subject to the LTA charge. This means that individuals with FP14 are likely to need to opt out of active membership of all UK tax relieved pension schemes if they want to maintain this protection.

To offer individuals greater flexibility in protecting any pension savings they have built up before 6 April 2014 from the reduction in the LTA, the Government announced at Budget 2013 that it will offer individual protection 2014 ('IP14') in addition to FP14.

Individual protection ('IP14') will give individuals a personalised LTA based on the value of their pension savings at 5 April 2014 (up to £1.5 million). It will allow individuals to continue pension saving after 5 April 2014 whilst protecting tax relieved pension savings that have accrued up to that date, subject to an overall maximum of £1.5 million. Individuals will have three years from 6 April 2014 to apply for IP14.


3.1 Inheritance tax simplification of trust charges – next steps

Following consultation, draft legislation for inclusion in Finance Bill 2014 on the treatment of accumulated income and the alignment of payment and filing dates for trusts was published on 10 December for technical consultation, and the Government would welcome comments. If necessary they will review and amend that legislation once the consultation closes on 4 February 2014.

The Government will consult further in respect of consideration of the nil-rate band. Legislation on the nil-rate band and simplification of calculations will be included in Finance Bill 2015.


4.1 Relaxation of RTI reporting requirements

HMRC has announced that existing employers with nine or fewer employees who need more time to adapt will be able to report PAYE information on or before the last payday in the tax month until April 2016.

This is narrower than the current relaxation (for small businesses with fewer than fifty employees) which comes to an end in April 2014. The new relaxation will only apply to existing employers with nine or fewer employees.

All employers starting to operate PAYE after 6 April 2014, as well as existing employers with 10 or more employees, will need to report each time they pay their employees from April 2014. HMRC wants to encourage new employers to start off on the right foot and help them avoid the need to change their reporting processes at a later date.


5.1 Partnership taxation – draft Finance Bill provisions

Earlier this year HMRC became concerned that partnerships and LLPs were being used in ways that it didn't like and it launched a consultation focusing on two main areas of concern. The Government has now published detailed draft legislation effective from 6 April 2014 which will change the landscape considerably for many partnerships.

The first area of HMRC's concern involved the categorisation of individual members of an LLP between those who are self-employed and those who will in future be deemed to be employees for tax purposes.

There will be three tests relating to members. If a member meets all three tests they will be a "salaried member" and treated as employed.

  • The first test asks whether over 80% of the member's drawings is fixed, irrespective of the performance of the business.
  • The second test asks whether the member has significant influence over the management of the LLP. Taking the example of a large law firm with 100 members it is likely that there will be a relatively small group of members who sit on the management committee and it will only be those who can tick this box.
  • The third test is whether the member has contributed capital to the LLP equivalent to at least 25% of their expected fixed earnings. So if member A receives a salary of £120,000 then they would need to have introduced capital of £30,000 in order to tick this box.

A member will only be regarded as a salaried member if they fail all three tests. However any arrangements which are put in place specifically so that an individual will not be a salaried member (i.e. with the, or a main purpose of securing that the 'salaried member' provision doesn't apply) will be ignored. This anti-avoidance considers in particular structures where individuals hold their interest in an LLP through other non-individual entities. While there is nothing specific in the legislation, the guidance indicates that commercial arrangements put in place so that individuals fall outside at least one of the conditions to be regarded as 'salaried members' are not caught by anti-avoidance.

There are no special rules for new or retiring members, nor for dealing with overlap profit and all LLPs will need to review their existing arrangements as soon as practicably possible.

The second area of HMRC's concern involves the way in which profits and losses are allocated in a case where a partnership (LLP or general) has individual members/partners and non-individual (corporate) members. The main aspects of the basic profit allocation measures are covered below.

Where profit has been diverted from an individual member to the corporate member in specified circumstances, the profits of the LLP will be reallocated to the individual members and taxed on them.

The legislation applies where profits are allocated to a corporate member and one of two tests is met.

The first test asks whether "it is reasonable to suppose" that amounts representing an individual member's deferred profit are included in the corporate's profit share so that the individual's tax liability is lower than it would otherwise have been.

There are three aspects to the second test and all three must be met to be within the condition.

  • The corporate's profit share exceeds the commercial return on its capital contribution.
  • The individual member has the "power to enjoy" the profit allocated to the corporate member.
  • "It is reasonable to suppose" that the corporate member's profit share is attributable to the individual's member's power to enjoy" and the individual member's tax is consequently lower.

Some comfort may be drawn from HMRC's statement that "The legislation does not apply to mixed membership partnerships in which individual and non-individual partners are genuinely acting at arms' length".

Under the original proposals it appeared as though corporate only partnerships would not be covered by the new rules. However where it is reasonable to conclude that an individual would have been a member of the partnership but for the existence of the mixed membership rules, the new rules will apply as if the individual was actually a member.

Consequently all 'mixed' and corporate only partnerships will need to review their arrangements urgently.

There are other provisions to deal with remuneration deferred under the alternative investment fund management (AIFM) directive, for loss allocation arrangements and for transfers of assets and income streams using partnerships, that are covered in more detail in the documents released by the Government. The draft legislation for Finance Bill 2014 also contains revisions to the way partnerships are dealt with in the loan relationship and derivative contract legislation for those partnership interests subject to corporation tax.

5.2 Country by Country reporting

SI 2013/3118 has been issued coming in to force on 1 January 2014, along with finalised guidance from HM Treasury on meeting the country by country reporting obligations of EU Directive 2013/36/EU. Broadly speaking, reporting obligations are imposed on institutions in the United Kingdom within scope of CRD4 (Capital Requirements Directive 4 which implements the Basel III agreement into the EU legal framework).

5.3 Update of HMRC Business Income manual

HMRC has updated the whole of its Business Income Manual to take account of new UK GAAP (including FRS102).

5.4 Avoidance using total return swaps

A technical note has been published to accompany the 5 December 2013 announcement of anti-avoidance concerning total return swaps. The note includes the following comments (summarised):

The target of the anti-avoidance

Under a typical scheme, all or a significant proportion of the profits of a UK company are paid to an offshore company in the same group. The offshore company may return part of the profits to the UK, and guarantees to meet any losses made by the UK company. If losses are paid in this way, they are clawed back from later payments of profits.

Payments made under the total return swap are claimed to be allowable deductions in calculating the taxable profits of the UK company. The overall effect is that most of the profits escape the charge to corporation tax.

The view of HMRC is that contracts of this nature are not entered into between independent companies acting at arms' length. In many cases it would appear that a significant factor in entering into the total return swap is to reduce the UK tax due in respect of the business carried on in the UK. The payments under the total return swap are in substance distributions of profits, not expenses incurred in earning the profits, and so they should not be claimed as deductions from profits.

The schemes are being challenged by HMRC under various different provisions. However, to avoid delays and continuing uncertainty, the measure announced on 5 December 2013 closed down the schemes with immediate effect.

To summarise the main points - where two companies are in a group and enter into arrangements involving derivative contracts, and where payments are linked to profits of the business of one of the companies or another group company then no deduction is allowable for payments under the contracts.

What the legislation does not catch:

The legislation would not typically apply where, for example, a company uses derivatives to move risk from some specific assets or contracts to another group in the company, perhaps for regulatory reasons, as this would not amount to an in-substance transfer of the profits of a business.

Where a company routinely uses derivative contracts to move risk around within a group for genuine commercial reasons, and not for tax reasons, then this will not amount to a profit transfer subject to the anti-avoidance (examples are given in the technical note).

The legislation contains one exception - where a company enters into derivative contracts with third parties as part or all of its activities, then uses intra-group derivatives to hedge those contracts, for example, to move risk around within the group, then it is accepted that this does not amount to a profit transfer.

The exception is not intended to be exhaustive, so arrangements to hedge other assets or liabilities using derivatives may also not be caught by the clause. This will depend on whether they form part of arrangements to shift the net profits of a company.

The exemption will not be available when the hedging arrangements are entered into for avoidance purposes. HMRC will regard this as being likely to apply if a company formerly using an unacceptable scheme, with transfer of profits, attempts to move to a scheme using derivatives with third parties to continue to avoid tax in the same way.

5.5 Tax exemption for employer expenditure on health-related interventions

At Budget 2013 the Government announced the introduction of a tax relief for health- related interventions recommended by a new publicly-funded occupational health advice service. This relief will be implemented as a tax exemption and exempt up to £500 per employee per year paid by employers for recommended medical interventions from income tax and National Insurance contributions (NICs).

Following consultation on the implementation aspects, the Autumn Statement 2013 confirmed that the Government will introduce legislation for the tax exemption in Finance Bill 2014. In response to the consultation, the Government has decided that the exemption will be made available on medical treatments recommended by any employer-arranged occupational health service as well as by the Health and Work Service.

5.6 Supporting employee ownership

The summer 2013 consultation on supporting employee ownership focused on tax reliefs to support the indirect employee ownership sector, of which there is a much lower level of public awareness than that of the direct employee share ownership sector.

The outcome of the consultation has resulted in the following proposals:

  • from April 2014, disposals of shares that result in a controlling interest in a company being held by a qualifying trust will be relieved from capital gains tax.
  • From October 2014, bonus payments made to employees of companies which are controlled by a qualifying trust will be exempt from income tax, up to a cap of £3,600 per annum.
  • Proposals for further requirements in order for EBTs to be qualifying trusts for the purposes of the income tax exemption and capital gains tax relief. Such trusts are referred to in the consultation document as employee ownership trusts (EOTs).

5.7 Venture capital trusts and share buy-backs

Generally, respondents to the summer 2013 consultation agreed that Government is right to take action to limit or prevent the use of particular share buy-backs. There were some suggestions for more flexibility within the proposed changes to the rules, as well as some proposals for alternative approaches to the main option set out in the technical consultation document. The Government has considered these comments carefully and has made some amendments to the proposed approach to restrict the tax relief relating to particular buy-back arrangements.

Many respondents acknowledged that in some cases, the use of share premium accounts to return capital to investors could be damaging. This response document sets out further information about the Government's concerns about this practice, and potential options for legislative change. The Government will consult further to develop an appropriate proposal to address this issue.

The Government's intention is that these changes to the VCT regime should help to ensure that the regime continues to operate effectively, and that tax relief is used for genuine purposes where individuals are making risky investments into high-growth potential small and medium-companies.

As announced at Autumn Statement, to help to facilitate investment into VCTs, the scheme rules will now also be changed to allow investment via nominees.

Draft primary legislation on the changes to restrict particular share buy-backs, and to facilitate investment into a VCT via nominee arrangements was issued on 10 December 2013. There is a period of consultation on this draft legislation which will close on 4 February 2014.

5.8 Consultation on the REIT regime

Informal consultation on refining the REIT regime took place between 20 March and 14 June 2013. Having analysed the responses to the consultation and assessed the potential implications for tax receipts and the wider impact on the REIT regime, the Government considers that its proposal to include REITs in the class of 'institutional investor' will provide benefit to the REIT sector in terms of facilitating joint ventures and providing UK REITs access to more financing opportunities and has therefore decided to include REITs within the definition of "institutional investor". It thereby hopes to create a more competitive and efficient UK real estate and REIT sector.

5.9 Visual effects industry reliefs

Following the consultation into support for the UK visual effects industry, the Chancellor announced a series of measures at the Autumn Statement 2013 to support the creative sector, including film and visual effects production.

The Government will from April 2014:

  • increase the rate of film tax relief for large budget films from 20 per cent to 25 per cent for the first £20 million of qualifying production expenditure;
  • reduce the UK minimum spend threshold from 25 per cent to 10 per cent; and
  • make changes to modernise the film tax relief cultural test.

These changes are subject to state aid clearance. In addition, the Government intends to seek state aid clearance to increase the rate of relief to 25 per cent for all qualifying expenditure when re-notifying film tax relief in 2015.

5.10 Modernisation of the taxation of corporate debt and derivative contracts

Following the consultation on modernisation of corporate debt and derivative contracts there was widespread support for the aims of the review and the principles of simplicity, fairness and certainty were welcomed. However, general concerns were expressed about the potential for uncertainty arising from change beyond what is essential and about the timing of the proposed changes, particularly the interaction with new accounting standards expected to take effect in 2015.

In the light of consultation responses and subsequent discussion with stakeholders, measures for Finance Bill 2014 will now be restricted to those concerning, firstly, loan relationships and derivative contracts held by partnerships with corporate partners and, secondly, bond funds. In the case of bond funds, the legislation to be introduced will reflect an alternative approach to that presented in the consultation document.

Two measures will not be introduced in Finance Bill 2014 as originally intended. First, events since the consultation document was published have indicated that the rules on the taxation of index linked gilt-edged securities are sufficiently robust, and no changes are now planned in this area. Second, the "unallowable purpose" anti-avoidance rule will now be updated as part of the main changes in Finance Bill 2015.

On the timing of the introduction of changes relating to accounting issues many UK companies will be required to adopt one of EU-endorsed IFRS, FRS 101 or FRS 102 for periods commencing on or after 1 January 2015. Given the views expressed by respondents, the Government would expect the majority of changes proposed by this consultation to have effect in respect of periods commencing on or after 1 January 2016 at the earliest. This, together with transitional measures including appropriate grandfathering of existing instruments, should largely address the concerns expressed.

On connected party debt, the Government will continue to consider with stakeholders the desirable extent of reform of the rules governing the taxation of connected party debt. In the context of the late-paid interest rule, the Government believes in principle that the employment for tax planning of what is intended as an anti-avoidance rule is not appropriate. Because of this, and considering the now restricted scope of the rule, there remains a need for change as discussed in the consultation document. The Government will consider the detail of that change in consultation with stakeholders. Any case for measures to mitigate the perceived "trapping" of losses should stand on its own merits.

On intragroup transfers in the light of the views expressed by respondents, the Government does not intend to pursue change under either Option 2 or 3 of its consultation proposals. The Government will continue, in conjunction with other stakeholders, to develop its policy in line with Option 1, which is expected to be reflected in Finance Bill 2015. The consultation proposed a change to the degrouping provision, which currently operates to bring into account credits but not debits. The Government will continue to discuss this specific issue with interested parties, particularly in relation to financial sector restructurings.

On exchange gains and loss hedging the Government notes the concerns raised by respondents on these proposals, but remains of the view that there is substantial merit in reforming the existing rules in this area. The Government intends to continue discussions with stakeholders to explore further the difficulties identified by respondents and to consider how they can be addressed where necessary. There is, however, no intention to introduce any substantial change ahead of the accounting transition to new UK GAAP in 2015.

On debt restructuring the Government intends to continue discussions with stakeholders to understand the implications of the consultation document proposals, to explore difficulties identified by respondents and to consider how they can be addressed, where necessary.

5.11 OTS proposals for unapproved share schemes

Following consultation on the suggestions made by the Office of Tax Simplification (OTS) the Government has issued draft legislation as follows:

  • changing the basis of taxation of shares and options granted to internationally mobile employees;
  • introducing a new rollover relief for certain share exchange arrangements;
  • extending corporation tax relief for employee share acquisitions;
  • extending other simplifications to tax rules.

The corporation tax deductions for employee shares are going to be extended to cover overseas employees who work for a host employer in the UK (eg on secondment). In some circumstances, the employee is to be treated effectively as an employee of the UK host company for this purpose. The relief will be limited to the UK taxable part of the award and is scheduled to start for acquisitions after 1 September 2014.

5.12 Response to consultation on business premises renovation allowances

Following the publication of a Technical Note during the summer, legislation will be introduced with effect from April 2014 to clarify the scope of business premises renovation allowances (BPRA) to ensure that the relief is limited to building and renovation works, and associated services.

5.13 Reform of the close company loan to participator rules

Following consultation, the Government has decided not to proceed with broad reform of the close company 'loan to participator' rules. However, HMRC will continue to engage with interested parties with a view to making more targeted adjustments to the regime.


6.1 Validity of the imposition of the three year cap

The Upper Tribunal has rejected Leeds City Council's appeal that the three year cap on reclaims was incorrectly implemented in respect of VAT paid by mistake (VATA s80 claims).

6.2 Amount of consideration for VAT purposes where that consideration subject to restrictions

In a transaction similar (but not identical) to that in Tower McCashback, Cabvision Ltd sold software it had developed to an investment vehicle Taxi Technology LLP ("Taxi") for a sum and paid output tax on it. The price was set at £22,602,979 plus VAT. It received most of that sum from Taxi (£21,441,123.40).

Taxi's purpose was to attract investors who wished to benefit from an advantage in relation to the capital allowances legislation by boosting the investment with debt incurred to a bank. Taxi's purchase of the software was to be funded 25% by subscriptions from individual members and 75% by a loan that Taxi took out with Lloyds TSB Bank Plc, which was guaranteed by Bank of Scotland and which in turn was secured by a deposit (approximately £20m – the deposit guarantee) made by Cabvision out of the funds it had received from Taxi.

In the event Cabvision received around £1.7m cash (representing the £21m originally received, less the £20m deposit guarantee, plus £0.7 from a settlement agreement) , and claimed a VAT refund of £3.014m as a result of the final reduction in the selling price. HMRC denied this as the original sale consideration had been paid by Taxi to Cabvision and there was no agreement between the two as to the final reduction in sale price.

The issues considered were:

Issue 1 – What was the VAT due at the time of the agreed sale of the software rights? Was it the sum paid reduced by the amount of the sum which was security for a bank loan to Taxi, as Cabvision argued? Or, was it the total sum in fact paid to the Cabvision as HMRC contended? If Cabvision was successful on this issue then issue 3 was relevant.

Issue 2 – If Cabvision was unsuccessful on Issue 1, did the settlement between Taxi and Cabvision have the effect of reducing the price agreed for the sale? Cabvision argued it did because there was an agreement that Cabvision would pay the amount of the loan to Taxi in return for Taxi returning some of its licence rights to it. HMRC say there was no such agreement and no price reduction.

Issue 3 – assuming Cabvision was successful on issue 1 did it have, as it argued, a valid bad debt relief claim or an EU law right to make an adjustment for a price reduction?

The Tribunal concluded on issue 1 that the consideration was the net amount. The reality was that Cabvision was only able to get £21 million on the basis it would put a large part of what it received into a secured deposit account (the guarantee). It only had access to that money as and when the amounts owed by Taxi to Taxi's bankers were repaid and money was thereby released. The full amount of £20 million (used as the deposit guarantee) was not consideration obtained. The obligation to guarantee and the receipt of the price were all part of the same transaction and it was artificial to separate them out. The Tribunal was not persuaded that on this basis the amount to be charged was consideration at all as it was not received by Cabvision. Therefore output tax was not due on the amount which was received subject to restrictions.

If the Tribunal was wrong on issue 1 and it became necessary to consider issue 2 its conclusion was that there was an agreement to waive rights in relation to Taxi's licenses in return for the appellant paying Taxi's loan leading to a reduction in price. HMRC accepted that Cabvision could issue the credit note and exercise an EU law right to make an adjustment had there been a price reduction.

The Tribunal concluded that Cabvision would therefore succeed on issue 2. In view of the conclusions on issues 1 and 2, it was not necessary to make a determination on issue 3.

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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Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


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.


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.


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

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

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

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