UK: Weekly tax update - Monday 20 January 2014

Last Updated: 23 January 2014
Article by Smith & Williamson

Recent posts include: Recognising the future relationship between agents and HMRC; Experience of working in a high street agent for HMRC trainees; Local Working Together; Tax Agent Strategy; HMRC's webinars.

Latest news items include: New VAT Statutory Instrument (SI) 2013 No. 2911; Stock transfer form delays; The Enactment of Extra-Statutory Concessions Order 2014; Statutory Instrument: The Enactment of Extra-Statutory Concessions Order 2014; HMRC Car and Car fuel Benefit Calculator.

2 Private client

2.1 Vodafone reorganisation and return of value

When Vodafone announced the sale of its US group to Verizon Communications Inc (Verizon) it indicated the intention to carry out a return of value to shareholders, partly in cash (Cash Entitlement) and partly in Verizon shares (Verizon Consideration Share Entitlement). Details of the proposals and the tax implications have now been published.

For Vodafone shareholders who are tax resident in the UK, Ireland or certain other jurisdictions there will be a choice in relation to how this 'value' is returned. The choice selected will lead to either a capital gains tax or income tax treatment. Other shareholders will go down the income route, which will be the default position for those eligible to make a choice, which means that those seeking CGT treatment will need to make the election.

Vodafone proposes allotting and issuing B Shares and C Shares to its ordinary shareholders. Those eligible for the 'capital return' can elect to be allotted B Shares. In all other cases the shareholder will receive C Shares and be subject to income tax treatment. There will also be consolidation of the Vodafone shares (New Ordinary Shares) as part of the process.

What then happens and the UK tax consequences are set out below.

Shareholders subject to the Income Option (C Shares)

A special dividend, which will become payable on each C Share, will be satisfied by:

  • Vodafone paying the Cash Entitlement; and
  • Verizon issuing and delivering the Verizon Consideration Share Entitlement

ie an income distribution comprising of cash and shares in lieu. The C Shares will then be converted to Deferred Shares of negligible value.

The special dividend on the C Shares will be taxed as income. The value attributed to the Verizon Consideration Share Entitlement will be treated as additional consideration for the holding as a whole.

The combined effect should be that the resultant holding of New Ordinary Shares, Deferred Shares and Verizon Consideration Shares should stand in place of the holding of Ordinary Shares held prior to the issue of the B Shares and C Shares. The historic base cost and additional consideration will then be apportioned between the new consolidated Vodafone shares, the Verizon shares and the (worthless) Deferred Shares, based on market values.

A subsequent sale of the Verizon shares will be a disposal of those shares taking into account the attributed increased base cost rather than a part disposal from the whole.

The sale of fractional entitlements to Verizon Consideration Shares should generally not constitute a part disposal for CGT purposes. Instead, the amount of any payment received by the Shareholder in respect of that sale will be deducted from the base cost of the Verizon Consideration Shares. If the amount of any payment received exceeds the base cost that will give rise to a part disposal. However, the Shareholder may elect (in effect) for the excess to be treated as a capital gain.

Shareholders electing for the Capital Option (B Shares)

Each B Share will be cancelled in consideration of which Vodafone will pay the Cash Entitlement and Verizon will issue and deliver the Verizon Consideration Share Entitlement, ie the B shares will be disposed of for cash and shares.

The combined effect should be that the resultant holding of New Ordinary Shares and Verizon Consideration Shares should be treated as the same asset, acquired at the same time and for the same consideration, as the holding of Ordinary Shares held prior to the issue of the B Shares and C Shares. This will be subject to an adjustment in respect of the cash received.

The cash received on the cancellation of the B Shares will be a part disposal and may produce a CGT gain or loss. The proportion of base cost to be allocated is in proportion to the amount of the cash received compared to the total value of the cash plus the market values of the New Shares plus Verizon Consideration Share Entitlement.

A subsequent sale of the Verizon shares will be a disposal of those shares taking into account the attributed revised base cost rather than a part disposal from the whole.

The sale of fractional entitlements to Verizon Consideration Shares should generally not constitute a part disposal for CGT purposes. Instead, the amount of any payment received by the Shareholder in respect of that sale will be deducted from the base cost of the Verizon Consideration Shares. If the amount of any payment received exceeds the base cost that will give rise to a part disposal. However, the Shareholder may elect (in effect) for the excess to be treated as a capital gain.

Further details, including some examples, are available at: questions-and-answers.yes.html

2.2 Is property letting a business for the purposes of CGT roll-over?

HMRC has indicated that it will not appeal against the Upper Tribunal's (UT) decision in the case of Elizabeth Moyne Ramsay. Although the decision gives uncertainty as to where the dividing line is, it does recognise that some property letting activities can be of a sufficient nature to be a business for CGT roll-over relief purposes.

The question of whether a property letting and the receipt of rents constitutes a business is considered differently for income tax, CGT and IHT. The income tax legislation refers to a 'property business' but for the capital taxes there is a distinction between what are considered business assets and those held as an investment, which might however require some activity to maintain.

The case of Elizabeth Moyne Ramsay v HMRC [TC01871], heard in 2011 by the First-tier Tribunal (FTT), was the first to consider the application of TCGA 1992 section 162 and CGT roll-over relief on the transfer of a property letting 'business' to a company in exchange for shares.

Mrs and Mrs Ramsay owned a building divided into 10 flats, of which five were occupied at the relevant time. On 16 September 2004, they transferred the property, subject to an existing bank loan, to a company in exchange for shares.

The FTT decided that what was transferred was not a 'business' for the purposes of section 162, and that accordingly the transfer did not qualify for relief. Mrs Ramsay appealed to the UT.

The question before the UT was whether what was transferred by a Mrs Ramsay was a business. Although this was a question of fact, the UT considered that the FTT had come to its finding based on an error of law.

In the decision, the Judge says "in my judgment the word 'business' in the context of s162 TCGA should be afforded a broad meaning. Regard should be had to the factors referred to in Lord Fisher, which in my view (with the exception of the specific references to taxable supplies, which are relevant to VAT) are of general application to the question whether the circumstances describe a business. Thus, it falls to be considered whether Mrs Ramsay's activities were a 'serious undertaking earnestly pursued' or a 'serious occupation', whether the activity was an occupation or function actively pursued with reasonable or recognisable continuity, whether the activity had a certain amount of substance in terms of turnover, whether the activity was conducted in a regular manner and on sound and recognised business principles, and whether the activities were of a kind which, subject to differences of detail, are commonly made by those who seek to profit by them."

Although finding that the activities of Mrs Ramsay as a whole satisfied these tests the UT pointed out that there remained the question of degree. The UT did not try to set the boundary but found that the degree of activity in this case outweighed what might normally be expected to be carried out by a mere passive property investor. MRC.pdf

3 PAYE and employment matters

3.1 Artificial use of dual contracts by non-domiciles

Draft legislation has been published for comment by 16 February 2014, for taking the following out of the scope of the remittance basis for UK resident non-domiciles:

  • certain overseas earnings;
  • " income relating to employment-related securities; and
  • securities options and employment income provided through third parties.

This will apply to income in respect of employment where:

  • An individual has both a UK employment and one or more "relevant" (i.e. foreign) employments;
  • The UK employer and the relevant employer are "associated" with each other;
  • The UK employment and the relevant employment are "related"; and
  • The foreign tax rate that applies to income in respect of a relevant employment, calculated in accordance with the amount of foreign tax credit relief, which would be allowed against income tax if the income were not taxed on the remittance basis, is less than 75% of the UK's additional rate of tax (currently 45%).

The measure will have effect in respect of income arising on and after 6 April 2014. ntracts_pack.pdf

3.2 PAYE real time submissions changes for before and after April 2014

HMRC has updated its guidance on reporting PAYE information in real time.

The updates include:

  • a 'Late reporting reason' that can be entered on a Full Payment Submission (FPS) that's late;
  • being able to make your first 2014-15 PAYE submission any time after 6 March 2014;
  • providing bank account details on an Employer Payment Summary (EPS) to get quicker repayments;
  • new fields on an Earlier Year Update (EYU) for 2013-14;
  • a new late payment online appeals facility being introduced in 2014-15;
  • more about what counts as a reasonable excuse if you don't report on time;
  • updated guidance for employers exempt from filing or unable to file online;

The CIOT website includes links to the individual changes at:

4 Business tax

4.1 Input received by the OECD in its review of the tax challenges faced by the digital economy

The OECD has published the responses it received from its request for input on the tax challenges faced by the digital economy.

The report includes the CIOT comments, which suggested that the digital economy is not at a point that demands a rewrite of the tax system and that specific issues around permanent establishment and profit attribution can be resolved by existing law and principle.

The response from Deloitte discussed the issues in relation to three business models, each posing different challenges: high frequency trading, cloud computing services and advertising models.

4.2 FATCA – do you need to register?

This briefing provides an update for UK trusts, partnerships and companies that may be affected by the Foreign Account Tax Compliance Act (FATCA) and may need to register in due course with the US Internal Revenue Service (IRS).

On 13 January the IRS published a procedure note (effective 1 January 2014) covering guidance for foreign financial institutions (FFIs), who are not subject to a model 1 IGA agreement, entering into an FFI agreement with the Internal Revenue Service. The UK has a model 1 IGA agreement. In addition to noting the latest IRS publication, this note discusses some aspects of FATCA registration created by the UK's agreement based on HMRC's existing guidance. This is an evolving area and updated HMRC guidance may be issued shortly so further information will be issued accordingly.

The IRS procedure note contains the final text of the FFI agreement, and indicates that the date the agreement is effective is the date on which the IRS issues a global intermediary identification number (GIIN) to the FFI or branch. For a participating FFI that receives a GIIN prior to 30 June 2014, the effective date of the FFI agreement is 30 June 2014.

The agreement also defines a reporting model 1 FFI as follows: "Reporting Model 1 FFI" means an FFI or branch of an FFI that is treated as a reporting financial institution under an applicable Model 1 IGA and that has registered with the IRS to obtain a GIIN. However the FFI agreement published by the IRS does not apply to FFIs required to report under a Model 1 IGA such as that agreed between the UK and the US.

HMRC's website includes the text of the IGA agreement between the UK and the US dated 12 September 2012, and the June 2013 annex updating that agreement that removed certain entities from reporting obligations under the agreement. Final UK regulations were laid on 7 August 2013 and guidance on implementing the UK/US IGA was published on 14 August 2013.

It appears that those entities deemed to be reporting UK financial institutions will be required to obtain a GIIN directly from the IRS. HMRC's current guidance contains the following extract:

11. Registration

Each Reporting UK Financial Institution and any entity that is Registered Deemed Compliant Entity will be required to register and obtain a Global Intermediary Identification Number (GIIN) from the IRS.

The registration service is expected to be available from August 2013 and GIINs will be assigned to registered entities from the January 2014. The IRS will publish guidance regarding the registration process.

Financial Institutions in a Model 1 jurisdiction are not required to provide a GIIN to in order to establish their FATCA status prior to 1 January 2015. Before that date Model 1 Financial Institutions can confirm their status by either:

  • providing a Withholding Certificate;
  • providing a pre FATCA W-8 with an oral or written confirmation that the Entity is a Model 1 Financial Institution; or
  • informing the withholding agent that they are a Model 1 Financial Institution.

The following types of entity are not required to register and should not seek to do so:

  • Non-Reporting UK Financial Institutions.
  • Deemed Compliant UK Financial Institutions (unless they are Registered Deemed Compliant).
  • Active and Passive NFFEs. 1

Where a Financial Institution with a Local Client Base has a reporting obligation, because it has some US Reportable Accounts, a GIIN will be required. Entities that are Reporting Financial Institutions and also acting as a sponsor for other entities will need to register separately for each of these roles.

The IRS has indicated:

As registrations are finalised and approved in 2014, registering FIs will receive a notice of registration acceptance and will be issued a global intermediary identification number (GIIN). The IRS will electronically post the first IRS Foreign Financial Institution (FFI) List by June 2, 2014, and will update the list on a monthly basis thereafter. To ensure inclusion in the June 2014 IRS FFI List, an FI will need to finalize its registration by April 25, 2014.

The extract from section 11 of the current HMRC guidance, set out above, seems to indicate that the deadline for obtaining a GIIN for certain financial institutions may be 31 December 2014 (although many UK financial institutions subject to the IGA may decide to register well before that, or may have already done so).

It is understood that HMRC has been in discussions with representatives from the financial service sector. HMRC is expected to issue updated guidance clarifying certain aspects of its August 2013 guidance, which may be available by the end of January 2014.

The existing HMRC guidance indicates circumstances where trusts, partnerships and private investment companies could be regarded as financial institutions and would be required to register (see sections 2.36, 2.37 and 2.39 of the guidance respectively). A summary of some aspects to consider follows:

To determine if a trust, company or partnership is a UK resident financial institution that is an investment entity, the following aspects will need to be considered:

  • Residence:
    • If all the trustees are resident in the UK for tax purposes then the trust is UK resident. Where some of the trustees, but not all are UK tax resident, then the trust is to be treated as UK resident if the settlor is both resident and domiciled in the UK for tax purposes;
    • If companies are incorporated in the UK or centrally managed and controlled in the UK, they will be regarded as resident in the UK. A non-UK incorporated company trading in the UK through a permanent establishment and subject to UK corporation tax will be regarded as UK resident;
    • A partnership whose business is controlled and managed in the UK will be regarded as UK resident;
    • If an entity is dual resident, such that it is resident in the UK and also in another country, it will still need to apply the UK legislation in respect of any Reportable Accounts maintained in the UK;
    • Subsidiaries and branches of UK tax resident Financial Institutions that are not located in the UK are excluded from the scope of the UK Agreement and will not be regarded as UK Financial Institutions.
  • Investment entity:
    • The trust, company or partnership will be an investment entity if (amongst other things) it conducts as a business, or is managed by an entity that conducts as a business for or on behalf of customers:
      • individual and collective portfolio management;
      • otherwise investing, administering or managing funds or money on behalf of other persons.

Certain entities are exempt from the GIIN registration requirements, including the following examples:

  • Charities and pensions are outside of the scope of FATCA and their trustees will not be required to register. Unapproved pension schemes such as FURBS however will be required to register.
  • If at least one of the trustees is a trust company or corporation, that company will itself register as a financial institution and the trust will not have to undertake separate registration. The corporate trustee will submit a global report covering all of its appointments.
  • If all of the trustees are individuals and the trust is invested entirely in land or a private property holding company, there will be no requirement to register.
  • If a trust is managed by an individual the managed entity will not be an Investment Entity because an individual cannot be an Investment Entity.
  • If the trust, company or partnership has a contractual arrangement for its due diligence and reporting responsibilities to be carried out by a sponsoring entity, it will not itself be required to register and report. However its sponsor will be required to register the trust's funds as a sponsored entity.
  • A trust company or partnership that is registered with an owner documented financial institution that has agreed to report on its behalf. This is intended to apply to closely held passive investment vehicles that are investment entities, where meeting the obligations under the IGA would be onerous given the size of the entity.

If all of the trustees of a trust are individuals and the assets include a portfolio of managed investments managed by a financial institution (this includes investing, administering or managing funds), the trust will have to register.

In relation to groups, the following entities will be regarded as financial institutions (see 2.30 of the guidance):

  • Holding Company whose primary activity includes holding of (directly or indirectly) all or part of the outstanding stock of one or more related entities that are Financial Institutions.
  • A Treasury Centre whose primary activity includes entering into hedging and financing transactions with or for Related Entities that are Financial Institutions for one or more specified reasons.
  • A Holding Company or Treasury Centre that is formed in connection with or used by a collective investment vehicle, mutual fund, exchange traded fund, private equity fund, hedge fund, venture capital fund, leveraged buyout fund, or any similar investment vehicle established with an investment strategy of investing, reinvesting, or trading in financial assets.

4.3 Input received by the OECD in its review of the artificial avoidance of a permanent establishment

The OECD has published the only response it received into the alleged artificial avoidance of permanent establishment status. It discusses:

  • The use of warehouses.
  • Locating processing activities in another jurisdiction, and also selling goods will in transit.
  • Avoiding establishing an agency permanent establishment by (for example) managing the location of authority to draw up and enter into contracts.
  • Exploiting the 'independent agent' principles to avoid creating a permanent establishment.
  • The ability to provide services to customers in other jurisdictions without having a physical presence in the customer's jurisdiction.
  • The impact of transfer pricing decisions on the allocation of profits between jurisdictions. handulal-shah.pdf

4.4 Draft legislation for corporate debt and derivative contracts affecting partnerships with company members

On 17 January 2014 the government published draft legislation and supporting documents on modernising the taxation of corporate debt and derivatives contracts concerning:

(i) the treatment of loan interests held by company members of a partnership; And

(ii) the bond fund rules (holdings in OEICs, unit trusts and offshore funds). The draft legislation will be open for technical consultation until 14 February 2014.

Partnership interests

The June 2013 consultation highlighted a number of problem areas with the loan relationship & derivative contract rules concerning company interests in partnerships. These included:

  • a fundamental mismatch between the policy aim and the mechanism used to determine the debits and credits attributable to corporate partners in CTA 2009 section 381; and
  • a lack of specific provisions setting out the tax treatment of changes in partnership shares.

To deal with this, draft legislation has been issued (taking effect from the date of Royal Assent of Finance Bill 2014) that will:

  • insert a new CTA09 section 302(2A) to establish that a corporate partner in a firm is party to a loan relationship held by the firm, to the extent of its share of the firm's debts;
  • repeal the legislation in CTA 09 Part 5 Chapter 9 and replace it with new provisions. These provisions establish that for all purposes of Part 5 a corporate partner is treated as party to a firm's debts, and all other assets, liabilities, rights and powers of the firm, to the extent of the share of the firm's profits apportioned to it in accordance with the firm's profit sharing arrangements; and
  • repeal legislation in CTA 09 Part 5 Chapter 18 on connected persons, control and major interests that applies specifically to corporate members of partnerships.

Credits and debits from loan relationships are calculated as if each company partner, separately and in place of the firm, is party to the firm's debts. Any provision in CTA09 Part 5 which applies by reference to the accounts of a company, in so far as it applies to a corporate partner, is taken to refer to the accounts of the firm.

Bond Fund rules

Currently if a company invests in an Authorised Investment Fund (AIF), Unauthorised Unit Trust (UUT) or Offshore Fund (OF), more than 60% of whose investments are, at any time in an accounting period of the investor, "qualifying assets" as defined in CTA 2009 section 494 (essentially debt and derivative-type assets), then the investing company's holding is treated as if it were a creditor loan relationship of the company. An investment vehicle which exceeds the 60% limit is a bond fund.

The rules are complex. It can also be difficult for investors to know whether a fund in which they have invested has breached the 60% threshold in a period. The purpose of the rules is to counter tax avoidance. However, they have themselves been extensively exploited in avoidance schemes, often by groups in the financial sector and involving large amounts of tax.

A fund intended to invest in equities might move into bonds for a short period in response to market conditions. Corporation tax payers invested in the fund would then be subject to the loan relationships legislation for their entire accounting period, and the complex rules applying when a fund becomes or ceases to be a bond fund would then be engaged.

To deal with these issues the draft legislation (taking effect for accounting periods beginning on or after 1 April 2014 with accounting periods crossing this date being divided into two periods) proposes to:

  • amend the anti-avoidance provision in CTA09 section 492 to cover cases where arrangements are entered into by an Open Ended Investment Company (OEIC), UT or OF with a sole or a main purpose of seeking a tax advantage for a person; and
  • amend the definition of a 'qualifying holding' in section 495 so that the rule in section 490 cannot be sidestepped by holding debt-type assets through a series of funds; and
  • consolidate the changes made to section 490 by SI2012/519 regulation 8 into the section itself and extend them so that distributions from any fund (not just authorised investment funds) within section 490 will be taken into account in the calculation of loan relationship debits and credits, even where they would, apart from section 490, be treated as exempt dividends or annual payments.

Separately, HMRC will consult further on proposals to permit companies to make a claim that section 490 should not apply in certain prescribed circumstances, and to remove non-exempt unauthorised unit trusts from the scope of the bond fund rules. Any changes will be made in secondary legislation. Modernising_taxation.pdf


5.1 New HMRC cost sharing manual

HMRC has published a new VAT manual on the cost sharing exemption for the provision of certain shared services by charities and other organisations.

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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