UK: Weekly Tax Update - Monday 13 January 2014

Last Updated: 16 January 2014
Article by Smith & Williamson


1.1 Reasonable excuse case – with 'special circumstances'

The First-tier Tribunal has recently considered the case of Derren Urwin.

This case considered an appeal against a surcharge of £429.78 levied by HMRC for the late payment of income tax of £8,595.79 for the year ending 5 April 2010, which arose due to an unusual and unexpected PAYE underpayment. Interestingly, not only was the appeal allowed on the grounds of reasonable excuse because it was impossible for the taxpayer to pay on time, the tribunal stated that had they not overturned the case on these grounds then they would have overturned it on that basis that there were special circumstances. The tribunal commented that the law relating to the particular circumstances is complex and may be deficient.

As stated in the decision, paragraphs 15 to 17:

'15. In the Tribunal's view it was understandable that the appellant did not realise that the PAYE deductions by his employer had created a shortfall that could not be collected by adjustment of his tax code. In previous years it had always been possible to collect any shortfall by adjustment of his tax code. When he was sent a return to complete the deadline dates advised on it had already passed. The law on when payment is due in such circumstances is so complex that HMRC have quoted two different dates. In fact it may be that the law is deficient in not adequately covering the situation that the appellant was in. The appellant was thus in a position that it was impossible for him to pay on time. Therefore in the Tribunal's view the appellant has established that he had reasonable excuse for the late payment of the tax due.

16. For all the above reasons the appeal is allowed.

17. Paragraph 9 of Schedule 56 of the Finance Act 2009 (Special Reduction) provides HMRC with discretion to reduce any penalty if they think it right to do so because of special circumstances. On the information held in this case HMRC did not consider there were any special circumstances which would allow them to reduce the penalty. In the Tribunal's view had their not been other reasons by which the appeal was allowed they would have overturned that decision. The Tribunal considers that there were special circumstances that applied. A tax return was not issued to the appellant until 22 August 2012 which is well after the deadline date for payment of tax for the year ending 5 April 2010 and so the guidance in respect of deadline dates would not have assisted the appellant. In effect it was advising him that even if he was extraordinarily diligent and completed the return and sent it back by return he was already late. No alternative date was provided to him. The law is complex in this area and may be deficient in not making provision for the circumstances the appellant was in. Therefore the Tribunal considers that there were special circumstances in this case.'


2.1 Inheritance Tax BPR and LLPs

The CIOT, ICAEW and STEP have produced some guidance, agreed with HMRC, relating to the availability of IHT business property relief on:

  1. interests in partnerships and limited liability partnerships; and
  2. holdings of surplus cash by trading companies.

This is available on the CIOT website at the following link:

The guidance addresses the availability of BPR where company shares are held through a partnership or LLP, where relief would be available if held directly by an individual.

The possibility that BPR is not due, if correct, would appear to be at variance with the policy rationale behind the introduction of BPR, and ICAEW, CIOT and STEP consider that this issue should be addressed. It is assumed that this anomaly has arisen because BPR legislation has not yet been reviewed despite partnerships and LLPs becoming more widely accepted commercial alternatives to a corporation which was the main holding vehicle used when the Inheritance Tax Act was introduced.'


3.1 IHT and Excepted Estates Regulations

HMRC has published for information and external comment a draft Statutory Instrument making amendments to the Inheritance Tax (Delivery of Accounts) (Excepted Estates) Regulations 2004.

The changes in the draft Statutory Instrument make consequential amendments to the regulations to ensure that the treatment of liabilities is consistent with provisions introduced by FA 2013 which restrict the deduction of liabilities for Inheritance Tax purposes in some circumstances.

The FA 2013 provisions restrict the extent to which liabilities may be deducted in arriving at the value transferred in a number of circumstances. A deduction for a liability will be disallowed if the borrowed money has been used to acquire 'excluded property' (broadly, property which is situated outside the UK and which belongs to, or was settled by, a non- UK domiciled individual so is not chargeable to IHT), or if the liability has not been repaid out of the assets in the estate, unless certain conditions apply. In addition, restrictions apply where the debt has been incurred to acquire assets on which an IHT relief such as business, agricultural property and woodlands relief is due.

The Excepted Estates Regulations broadly exempt estates from having to deliver an IHT account where there is no IHT to pay because the gross value of the estate including certain specified transfers and exempt transfers does not exceed £1 million, and the net chargeable value of the estate after deducting liabilities and the exemption for transfers to a spouse, civil partner or charity does not exceed the IHT threshold. The regulations however contain a formula, which includes a reference to the total liabilities of the estate ('C' in Regulation 4), for calculating the amount which has to be below the threshold for the estate to qualify as an exempt estate.

To ensure that the treatment of liabilities for the purposes of the Excepted Estates Regulations is consistent with the provisions introduced by FA 2013, it is proposed that a liability should not be included in the total liabilities of the estate (amount 'C' in the formula in Regulation 4) to the extent that it is disallowed as a deduction by those new provisions.


4.1 HMRC's Employment Related Securities Bulletin

In addition to requesting input on the draft legislation for Finance Bill 2014 concerning various share scheme arrangements, HMRC's December 2013 Employment Related Securities Bulletin covers the following points:

  • Transition to self certification of SIP, CSOP and SAYE schemes

    Subject to Parliamentary approval, self certification of SIP, SAYE and CSOP schemes will be effective from 6 April 2014. HMRC will not provide formal approval of these schemes from that date.

    Where a scheme application is submitted to HMRC before 6 April 2014, but has not received formal approval by that date, HMRC will review the application and comment on whether the scheme rules meet the relevant legislative requirements (as these are expected to apply from 6 April 2014). Formal approval will not, however, be available.

    If an award under the scheme is made in the tax year 2014-15, companies must register and self-certify online that their scheme meets the relevant legislative requirements. This applies whether or not that scheme has received formal approval from HMRC. Registration and self certification must be completed by 7 July 2015 in order for tax advantages to apply for the tax year 2014-15.

    HMRC will not review applications received on or after 6 April 2014. Applicants will be advised that they need to register and self-certify the scheme. This must be completed by 7 July 2015 in order for tax advantages to apply for the tax year 2014- 15.
  • Amendment of annual share scheme return forms

    Annual employee share scheme return forms are specific to a tax year shown on the form. For example, the return for the year ended 5 April 2014 covers the period 6 April 2013 to 5 April 2014. Each annual return should only report events that occurred in the period covered by the form. If any errors or omissions in a form that has been submitted for a previous year are discovered, the following action should be taken:

    1. For annual return forms up to and including 2013-14 HMRC will accept late reporting of previous years events on a schedule in the format of the form along with an explanation of why the company is reporting the event(s) late.
    2. For annual return forms 2014-15 onwards if there has been a failure to report an event it will be necessary to submit an amended return in its entirety.

4.2 Draft Statutory Instrument to implement extra statutory concessions A4 and A10

A draft Statutory Instrument has been published that introduces legislation in ITEPA to replace the following extra statutory concessions:

  • ESC A4 - travel expenses relating to directors of not for profit organisations, travel expenses where a directorship is held as part of a trade or profession and travel expenses between locations for linked employment (new sections 241A, 241B and 340A). These new provisions will be effective for travel expenses incurred on or after 6 April 2014.
  • ESC A10, which provides relief from income tax for an employee where lump sum relevant benefits are paid under employer-financed retirement benefit schemes ("EFRBS") to the extent that the lump sum rights accrued in respect of foreign service as specified in ITEPA s413(1). The ESC also provides relief from income tax for an employee in respect of lump sum relevant benefits receivable under superannuation funds which meet the conditions set out in ICTA88 s615(6). ESC A10 was partially withdrawn in respect of lump sum relevant benefits paid on or after 6 April 2011.

    This statutory instrument will implement other aspects of ESCA10 concerned with full or partial tax relief for lump sums obtained from an EFRBs in respect of foreign service and provides an exception from the tax charge under ITEPA part 6 chapter 3 (payments and benefits on termination of employment etc) for lump sums paid under superannuation funds to which s615 of ICTA applies. This change will have effect in relation to lump sums that a person receives on or after the date on which this Order comes into force.

4.3 Whether discounted loan arrangements were outside the cheap or beneficial loan provisions

A recent case has discussed whether a discount can be treated as interest for tax purposes.

The First-tier Tribunal considered arrangements made under an employee benefit trust for the benefit of Mr Noble, Mr Connolly and Mr Watkiss, all of whom were either directors or employees of Leeds Design Innovation Centre Limited (the Company), and the Company's Class 1A national insurance obligations in respect of those arrangements.

Between 1998 and 1999 the company (advised by Mr Baxendale) established a Guernsey EBT which lent money via a BVI entity to the company's directors under discount loan arrangements (repayable within ten years) totalling £693,600. The £7,000 lent to Mr Watkiss was repaid in April 2012. The loan amounts and discount elements for the other two directors were refinanced in 2010 into two discount agreements, one for about £722,000, the other for about £784,000, both representing the amount of the original loan plus compound interest. No interest payments were due under the arrangements, with the discount being payable at redemption. The discount was calculated at LIBOR plus 2% compound annually for the period the amount was outstanding.

What is now ITEPA s175 charges as a benefit on employees any unpaid interest or interest that is lower than a commercial rate on employment related loans made to them. The nature of how this section works is that even when interest is paid there is no repayment of the NIC. This is a known bear trap but worth remembering. A measure of relief from the income tax charge can be obtained if the interest is subsequently paid through ITEPA s191. However a further bear trap is that a claim for relief made under s191 is subject to the time limit for making claims (TMA s43, now four years after the end of the year of assessment to which a claim relates).

The taxpayers contended the beneficial loan legislation was only intended to catch loans made available at uncommercial interest rates and that the discount on the loans in the case of Leeds Innovation Centre Ltd was in fact interest. HMRC argued that the payments were in fact discount and not interest, but if they were, interest could only be regarded as paid when the refinancing agreements were entered into in 2010 (for Mr Connolly and Mr Noble) and when the debt was fully repaid in 2012 (for Mr Watkiss). By that date it was too late to disturb the assessments for any of the years, the four year window for making a claim under s 160(4A) Taxes Act 1988 and s 191 ITEPA having passed by then.

Since 2005 ITTOIA s381 has made it explicit that discounts other than those on deeply discounted securities are to be treated as interest. The profit on a deeply discounted security is taxed according to ITTOIA Part 4 Chapter 8 (s427 onwards). However prior to that the commercial return represented by discount and interest were regarded as separate things for tax purposes. The case of Lomax v Dixon considered discount instruments to have a discount element, an interest rate element and a redemption premium.

In the case of Leeds Innovation Centre Ltd and others v HMRC, the First-tier Tribunal commented that while something may be described as a discount, that doesn't mean it is precluded from being treated as interest for tax purposes. The discount may represent an element of capital risk and revenue risk.

In a recent Upper Tribunal (Tax) (UTT) decision in the context of relevant discounted securities (under FA1996 Schedule 13), the court concluded in slightly different terms that discount was characterised by being, or including, a risk-based rather than a purely time-based return (Nicholas Pike v HMRC [2013] UKUT 225 (TCC)). In considering whether the payment made under loan notes was interest or discount the UTT considered a number of relevant factors:

  • The manner in which a payment was calculated. In that case the payment was calculated on a daily accruing basis by reference to a stipulated rate, suggesting that it was an interest return.
  • The components of the return were also relevant. In order to be discount a payment should include a "risk-based" component.
  • The time when payment of the return was made (at the end rather than during the life of the loan) was a neutral factor.
  • Finally, the overall commercial context of the lending should be considered. The Tribunal concluded that the labelling of a payment could not be determinative of its legal character.

In relation to the Leeds Innovation Centre Ltd case, the FTT concluded that the discount in the agreements was in fact interest, but that the 2010 refinancing could not amount to payment of the amounts accrued to that date, as there were in fact no payments made. Even if the refinancing could be treated as a repayment, the Tribunal considered that the tax rules permitting a claim for adjustment were available so that the rules were not such an absurd result that they should be ignored or overridden with some purposive interpretation. They therefore dismissed the appeals in respect of the employees' income tax charge and the Company's Class 1A national insurance contributions.


5.1 Franked Investment Income Group Litigation

In September 2012 the Supreme Court referred points to the CJEU concerning whether the retroactivity without notice under FA2004 s320 was compatible with the principles of effectiveness, legal certainty and the protection of legitimate expectations. The provision limited the application of extended periods for bringing claims to recover tax for claims made on or after 8 September 2003 in respect of the reimbursement of taxes paid under a mistake of law.

Following the decision in Metallgesellschaft and Others and that of the High Court in Deutsche Morgan Grenfell Plc v Inland Revenue Commissioners, Aegis introduced a claim for restitution on the basis of the Kleinwort Benson cause of action in order to reclaim the ACT paid (though not due) over the period from 1973 to 1999.

Under Limitation Act 1980 s32(1)(c), the limitation period applicable to that action began to run from discovery of the mistake of law giving rise to the payment of the tax. In the present case this is the date of delivery of the judgment in Metallgesellschaft and Others (8 March 2001).

The effect of FA2004 s320 is that the longer limitation period provided for in LA1980 s32(1)(c) does not apply to proceedings for the recovery of sums paid under a mistake of law when the action relates to a taxation matter under the care and management of the Commissioners. FA2004 s320, which was enacted on 24 June 2004, entered into force retroactively on 8 September 2003. 8 September 2003 was the date on which Aegis issued its proceedings.

In its appeal before the Supreme Court, Aegis, in essence, argued that it follows from the judgment in Case C-62/00 Marks & Spencer [2002] ECR I-6325 ('Marks & Spencer') that FA2004 s320 is contrary to the EU law principles of effectiveness, legal certainty and the protection of legitimate expectations.

According to Aegis, the breach of those principles arose because FA2004 s320 excluded, without notice and retroactively, the limitation period for the 'Kleinwort Benson cause of action' in relation to actions based on a mistake of law relating to a taxation matter under the care and management of the Commissioners. Therefore, the provision deprived it of the opportunity of making a claim which would otherwise have been made within the time-limits, thus rendering the exercise of the rights it derives under EU law excessively difficult or even impossible.

HMRC contended, in essence, that EU law requires only that there be an effective remedy for enforcing rights under EU law. That requirement is, in their view, satisfied by the Woolwich cause of action (a limitation period running for six years from the date of payment of the tax). They submitted that, provided that such a remedy remains available, it is immaterial that s320 curtailed the extended limitation period applicable to an alternative domestic remedy so as to bring it in line with the limitation period for the Woolwich cause of action.

On 12 December 2013 the CJEU concluded (in case C-362/12) that where taxpayers have a choice between two possible causes of action as regards the recovery of tax levied in breach of European Union law, one of which benefits from a longer limitation period, the principles of effectiveness, legal certainty and the protection of legitimate expectations preclude national legislation curtailing that limitation period without notice and retroactively.

Consequently FA04 s320 was incompatible with the EU treaty. It also made no difference that, at the time when the taxpayer issued its claim, the availability of the cause of action affording the longer limitation period had been recognised only recently by a lower court and was not definitively confirmed by the highest judicial authority until later.

This confirms the view of the majority of the Supreme Court, which will now have to consider the CJEU's conclusion.∂=1&cid=128776#ctx1

5.2 HMRC Customer Relationship Managers (CRM)

HMRC's website at: usefully sets out which businesses are allocated a CRM. It explains:

"Who gets a Customer Relationship Manager/Customer Co-ordinator?

All businesses in the Large Business Service (LBS) and the largest in Local Compliance (Large & Complex) (L&C) are allocated Customer Relationship Managers (CRMs). Overall around 2,000 of the large business population have been allocated CRMs. CRMs are generally allocated when a business' turnover exceeds £200 million.

However, certain other criteria are used including:

  • businesses that fall under the Senior Accounting Officer legislation;
  • businesses whose tax affairs are being dealt with under the High Risk Corporates or Managing Complex Risks Programmes;
  • a business where it has been agreed between HM Revenue & Customs (HMRC) and the business that the level of complexity/tax risk involved requires the appointment of a CRM;
  • partnerships with a turnover exceeding £60 million.

For the remaining 8,400 large businesses HMRC operates relationship management through Customer Co-ordinators (CCs) who act as a single point of contact between the customer and HMRC. They also enable a joined-up, holistic approach to risk.

A business will be allocated a CC if it has a turnover of between £30 million and £200 million or more than 250 employees.

L&C allocates CRMs or CCs to the largest partnerships with which it deals.


6.1 Whether a disposal of a business amounts to a transfer of a going concern

The First-tier Tribunal has dismissed the appeal concerning whether a transaction met the conditions to be a transfer of a going concern (TOGC), and therefore outside the scope of VAT in the Intelligent Managed Services Limited case.

SI 1995/1268 reg 5 provides (with certain conditions where an interest in land is involved) that where a business is transferred as a going concern such that the transferee uses the assets to carry on the same kind of business as that carried on by the transferor, and the transferee is already or immediately becomes VAT registered, then the transfer is neither a supply of goods nor services. VATA 1994 s44 provides that subject to certain exceptions where a business is transferred as a going concern to a member of a VAT group and the transfer is neither a supply of goods or services according to SI 1995/1268 reg 5, then the assets shall be treated as transferred to the representative member of the VAT group and used by that member in the course or furtherance of its business.

However VATA 1994 s43(1)(a) provides that supplies of goods or services between members of the same VAT group are disregarded for VAT purposes. This point is of importance in considering whether a transfer of a business to a VAT group is neither a supply of goods or services and it is necessary to consider whether the group is using the business for its own purpose or to generate sales to external customers. In business disposal transactions it is important to ensure that VAT is properly considered in the transaction documentation (whether the transaction price is inclusive or exclusive of VAT) and where a partially or fully exempt purchaser is involved, who is ultimately responsible for the output VAT on the transaction.

On 16 August 2010 Intelligent Managed Services Limited ("IMSL") transferred the "business of owning, maintaining, operating, using, developing and supporting an information technology infrastructure and know-how for supply to and use by others in the provision of banking support services in the United Kingdom" to Virgin Money Management Services Limited ("VMMSL") a member of the Virgin Money VAT group, for a purchase consideration of $6.676m. IMSL contended this was the transfer of a going concern ("TOGC") or a total transfer of business assets ("TTBA").

As further background in December 2009 IMSL's business had changed from a banking business to one of operating two primary products:

  • a decisioning service (a managed solution which permitted acceptance of clients via "Know your Customer" to a UK and European approved standard); and
  • a managed service for banks and financial institutions (a managed internet banking solution offering a full functional "bank in a box", which once contracted with IMSL, would enable the bank to offer savings and term deposits, ISAs, bank accounts, loans, and mortgages. The service could support website, branches, call centre channels, account opening, account, payment processing, general ledger, reconciliations, management information and reporting).

Some consultancy work had been performed by IMSL for Metrobank, but it had no customers at the accounts date of 31 December 2009. Between the accounts date and the sale to Virgin, it had had a single customer (Pasporte), but it had terminated that relationship on 11 June 2010, i.e. before the transfer took place.

Once the decision to sell the business to VMMSL had been taken, HMRC were informed that VMMSL would supply banking processing services to Virgin Money Bank Limited, who in turn would provide banking services to retail customers.

HMRC considered that the main asset in the transaction was a banking platform which was understood to be "a system to facilitate internet banking operations" VMMSL was buying an IT platform rather than a banking processing business. VATA 1994 s44 only applied where a business transferred is to be used in making supplies to outside the VAT group, and "there was nothing in legislation or case law to support a view that one can simply look through the VAT group to whichever member was making supplies outside of the group". HMRC contended there was VAT due of £960,638.

IMSL, contended that the test applied by HMRC is incorrect as the requirement in SI 1995/1268, that the transferee uses the assets for the "same kind of business" as the transferor, is not compatible with European Union ("EU") law which requires an intention by the transferee to "operate the business" transferred.

Alternatively they contended that the fiction of a VAT group as a single taxable person has to be given full effect and not interpreted restrictively by focussing on the intra-group transactions between VMMSL and VBL as this distorts the effect of the group and TOGC provisions.

The First-tier Tribunal did not focus on the fact that at the point of transfer the business had no customers, as it is accepted that a business capable of operation as a business can still be so regarded, notwithstanding it has no customers. In relation to IMSL's first point the Tribunal concluded that the words "operate the business" would inevitably be interpreted as the same kind of business as that previously carried on (with the emphasis on interpretation being 'operate the business'), so that UK law was not incompatible with EU law on this point. With respect to the second point the Tribunal could not get away from the fact that VATA 1994 s43 (and as article 19 of the principle VAT directive permits) disregards supplies for VAT purposes that are between members of the same VAT group, and the supplies made outside the group were not the same sort of supplies as those made by the business transferred.

6.2 Whether vouchers were 'face value' or 'single purpose' and the point at which output VAT was due

The First-tier Tribunal has allowed the appeal in the Skyview Ballooning Ltd case.

VATA 1994 s6 provides that where goods or services are provided after the issue of a VAT invoice or payment for the supplies, then the time of supply shall be regarded as the date of issue of invoice or the date of payment. However in the case of certain types of face value vouchers this provision is overridden so that the time of supply is deemed to be when the voucher is redeemed. This does not apply to face value vouchers that represent the right to receive goods or services of one type that are subject to a single rate of VAT.

Skyview Ballooning Ltd's basic business is to provide hot air balloon rides. It does sell certain items as well, in that it sells binoculars, T-shirts, children's T-shirts, mugs and other souvenirs and it offers the service of providing photographs during the flight. It issues vouchers for its business, the majority being issued around Christmas time that can be redeemed (if at least they are to be redeemed for balloon rides) only in the period from April to the end of October.

Many of the vouchers are sold in the expectation that they will be given away as presents, and in order to make the present look more special the vouchers do not show, on their face, the cash value of the vouchers. Nor indeed do they specify that the voucher is for a particular ride. While the voucher may well be purchased for an amount that enables the holder to pay for a particular chosen and intended balloon ride, the legal position is certainly not that the voucher confers a right just to what may, in the mind of the purchaser, be the envisaged use of the voucher. The legal position clear indicated on the voucher is that "The voucher entitles the holder to the experience of a lifetime, a hot air balloon flight with Kent Ballooning or alternative merchandising." One of the items of merchandise was a child's T-shirt, the supply of which would be zero-rated.

HMRC contended: firstly that the vouchers were really for specific balloon flights, and that those flights had simply been pre-paid; and secondly that, even if the vouchers were in reality for a given sum of money, no amount was printed on the vouchers, and more relevantly no amount was recorded in them, so that they fell outside the face value voucher definition in VATA 1994 Sch10A. On the facts of this case the First-tier Tribunal concluded the vouchers were face value vouchers (and not single purpose vouchers) on which output VAT was due when the vouchers were redeemed.

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 2014

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These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

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