UK: Weekly Tax Update - Monday 10 February 2014

Last Updated: 17 February 2014
Article by Smith & Williamson

1 GENERAL

1.1 HMRC draft guidance on implementation of international tax compliance (Crown Dependencies and Gibraltar) regulations 2014

On 3 February 2014 HMRC issued draft guidance on the implementation of international tax compliance with the agreements signed by the UK with the Crown Dependencies (the Isle of Man, Guernsey and Jersey). These agreements are based on the FATCA agreements that each jurisdiction has signed with the US and the guidance highlights for UK financial institutions the differences between the UK agreement with the Crown dependencies and Gibraltar and the UK/US agreement.

The guidance outlines all differences in the obligations of UK Financial Institutions under the International Tax Compliance (Crown Dependencies and Gibraltar) Regulations 2014 from those that United Kingdom Financial Institutions face under the International Tax Compliance (United States of America) Regulations 2013.

These include:

  • the classification of the Financial Institutions themselves;
  • the classification of the accounts maintained by UK Financial Institutions or the status of the account holders;
  • any differences in the due diligence and reporting obligations themselves.

The guidance also details where there is no difference in treatment, but the form of the definitions or obligations differ between the two agreements.

www.hmrc.gov.uk/fatca/int-tax-comp-regs.pdf

2 PRIVATE CLIENT

2.1 Penalties for negligence in participating in tax avoidance

In the case of Litman and Newall, the First-tier Tax Tribunal has reduced the penalties in respect of the 2004/05 tax year initially assessed by HMRC on two company directors in relation to their entering into a scheme to generate capital losses from capital redemption policies to cover gains they made on share disposals. Both individuals had taken tax advice from the promoter and a professional advisory firm and had included the scheme reference DOTAS number on their tax returns, but the Tribunal held that the directors own obligations to scrutinise the transactions had not been removed.

The FTT concluded that the level of due diligence required of a taxpayer in respect of the technical and legal aspects of such a scheme is low, when professional advisers are involved and the relevant areas of law are technical, as was the case in this instance. In that respect, the Taxpayers were not negligent in not understanding the details of the acquisition and disposal of the Capital Redemption Policies, the timing of the signing of the relevant documents or how the tax losses were actually being generated.

However the FTT did consider the taxpayers were negligent in signing their tax returns reflecting transactions which relied on significant levels of financing that they had no evidence had ever been advanced or repaid. Statements or advice from their professional advisers could not nor should not remove the obligation on a taxpayer to consider whether the proposed transactions stand up to some basic level of commercial scrutiny.

The penalty rates were reduced from 20% and 25% of the outstanding tax to 10% in each case.

www.bailii.org/uk/cases/UKFTT/TC/2014/TC03229.html

2.2 CGT enhancement expenditure

The First-tier Tribunal has concluded that a payment by a significant shareholder to get out of an obligation to assist a particular buyer in acquiring a company was deductible in computing the gain assessable on an eventual acquisition by another party, to the extent borne by the shareholder. The tribunal held that the expenditure was on the shares, that it was for the purpose of enhancing their value and that it was reflected particularly in the state rather than the nature of the shares.

Taylor Francis Group (TFG) had previously paid £1m to Mr Blackwell to assist them in the acquisition of Blackwell Publishing (Holdings) Limited (BPHL). It subsequently emerged that a US company, John Wiley & Sons Inc (Wiley), had become interested in BPHL and was prepared to make a very much higher offer. Mr Blackwell then obtained permission from BPHL to give TFG information about the new bid and Taylor and Francis offered to release him from their agreement in return for a payment of £25m, which would then enable him to vote in favour of the necessary resolutions to enable the new bid to go ahead. In negotiations it emerged that £7.5m of the £25m would in fact be paid to Taylor and Francis by Wiley rather than by Mr Blackwell himself (so that he bore £17.5m of the cost of this payment).

HMRC had argued that a payment of £25m by Mr Blackwell to release him from his obligation to assist TFG (now Informa plc) in acquiring BPHL was in fact a payment to get out of the obligation to TFG and should not be conflated with the shares. They also contended that the expenditure was not reflected in the nature or state of the shares, at the time they were sold, as a shareholder could have voted for the sale to Wiley regardless of the obligation to Taylor Francis.

The FTT concluded it was unrealistic to view Mr Blackwell's interest in BPHL's shares in isolation from the obligation in respect of those shares to Francis Taylor, in the sense of what might happen in the real world. They also considered whether the payment could be said to have been expenditure incurred "on" the shares, in the context of TCGA 1992 section 38(1)(b), this being expenditure wholly and exclusively incurred on the asset and reflected in the state or nature of the asset at the time of disposal. They concluded that:

"on" in that context, being a normal word without any special definition attached to it, should be given a normal meaning. In the context of the legislation and given what we have said about the approach to interpretation of the statute we hold that the expenditure was "on" the shares in the sense that it was incurred in respect of those shares.

We hold that the expenditure was on the shares, that it was for the purpose of enhancing their value and that it was reflected in the state or nature of the shares, the last point being that it is more accurate to say it was their state than their nature.

The conclusion was that Mr Blackwell was entitled to deduct £17.5m in computing the gain on disposal of his holding.

www.bailii.org/uk/cases/UKFTT/TC/2014/TC03243.html

2.3 Manufactured interest scheme

The Court of Appeal has agreed with the First-tier and Upper Tribunal decisions that a manufactured interest scheme failed in the case of Nicholas Barnes, one of 230 taxpayers who took part in the Corbiere scheme, which sought to generate an income tax deduction in relation to interest on gilts, without an economic loss to the individual participant.

www.bailii.org/ew/cases/EWCA/Civ/2014/31.html

2.4 Pensions: Individual Protection 2014

HMRC has published its updated guidance on the Individual Protection 2014 (IP 2014), which those with cumulative pension savings greater than £1.25m on 5 April, who do not have existing primary protection, can apply for. The applicable form becomes available after 6 April though to 5 April 2017. This is separate from Fixed Protection 2014 (FP 2014).

The lifetime allowance on tax advantaged pension savings is being reduced from £1.5m to £1.25m with effect from 6 April 2014. IP 2014 provides the opportunity for a personal protected lifetime allowance limit based on the value of pension savings entitlement held, and previously crystallised, as at 5 April 2014.

This contrasts with FP 2014, which has to be applied on or before 5 April 2014. FP 2014 enables the retention of the current £1.5m lifetime allowance, but with restrictions on the ability to accrue future benefits. Anyone with current pensions savings (including taking into account past benefit crystallisation events) above the reduced allowance, or with pensions savings likely to grow beyond it, needs to be considering their position and any need for FP 2014 before 5 April 2014.

IP2014 can be applied for in addition to FP2014 and might also be appropriate for someone who had applied for Fixed Protection 2012.

www.gov.uk/government/uploads/system/uploads/attachment_data/file/278154/pens-lifetime-allow-ip.pdf

3 PAYE AND EMPLOYMENT MATTERS

3.1 Employee shareholder shares

HMRC has issued an online form to enable businesses to apply for agreement to a share valuation in connection with an award of shares under an employee shareholder agreement

www.hmrc.gov.uk/employeeshareholder/val232.pdf

3.2 Employment allowance

HMRC has issued further guidance on eligibility, claiming, record keeping and penalties in connection with the £2,000 Class 1 NIC Employment Allowance available to certain employers from 6 April 2014.

The Employment Allowance will enable eligible employers to reduce their employer's Class 1 NICs by up to £2,000 each tax year. Eligible employers include a business or charity (including Community Amateur Sports Clubs) that pays employer Class 1 NICs on its employees' or directors' earnings.

Certain employers are excluded from claiming the allowance including those that:

  • employ someone for personal, household or domestic work, such as a nanny, au pair, chauffeur, gardener, care support worker;
  • already claim the allowance through a 'connected' company or charity (connected meaning where one person controls another, or two entities are under the control of another person);
  • are a public authority, this includes; local, district, town and parish councils;
  • carry out functions either wholly or mainly of a public nature (unless the employer has charitable status), for example:

    • NHS services;
    • General Practitioner services;
    • the managing of housing stock owned by or for a local council;
    • providing a meals on wheels service for a local council;
    • refuse collection for a local council;
    • prison services;
    • collecting debt for a government department.
    Functions are either wholly or mainly of a public nature, if you are carrying out more than 50% of your work in or for the public sector;
  • Personal and Managed Service Companies who pay contract fees instead of a wage or salary, may not be able to claim the Employment Allowance, as it is not possible to claim the allowance for any deemed payments of employment income.

The HMRC document provides some practical guidance including clarification that the recovery of statutory payments is after the Employment Allowance has been deducted.

www.gov.uk/government/uploads/system/uploads/attachment_data/file/277523/EA_Guidance.pdf

The basic guidance is at:

www.gov.uk/employment-allowance-up-to-2000-off-your-class-1-nics

3.3 HMRC's employment related securities forum

Minutes of the 9 December 2013 employment related securities forum are now available.

www.hmrc.gov.uk/consultations/ers-forum/minutes-09-12-2013.pdf

3.4 Interaction of the onshore employment intermediaries legislation with agency legislation (ITEPA 2003 sections 44-47)

HMRC has published a note setting out its view on the way the draft FB 2014 changes to the agency rules interact with the intermediaries legislation (commonly known as IR35) and confirming that the rules will not usually apply to workers engaged via a Personal Service Company (PSC).

The note states:

For the proposed new Agency legislation to apply to a worker providing their services through a PSC, all of the following qualifying conditions need to be met:

  • the worker personally provides, or is personally involved in the provision of, services to another person as a consequence of a contract between that person and a third person;
  • the manner in which the worker provides the services is subject to (or to the right of) supervision, direction or control by any person.
  • remuneration is received by the worker in consequence of providing the services; and
  • that remuneration does not constitute employment income apart from under the Agency legislation.

As is currently the case, the proposed Agency legislation will not generally apply where a worker is engaged via a PSC, as all the above criteria will not normally be met. This is because:

  1. As set out above, the legislation will only apply when remuneration is received by the worker as a consequence of providing the services. Therefore dividends paid to the worker as a genuine consequence of their shareholding in the PSC will not normally fall within the new Agency legislation.
  2. Similarly, the Agency legislation only applies when the worker receives remuneration which is not employment income before the provisions of that legislation are applied. Any salary paid to the worker by the PSC is already employment income so the new Agency legislation would not apply to that remuneration.
  3. Loans are made by reason of the employment with the PSC. Beneficial or written off loans are chargeable to tax/NICs as earnings but do not normally arise as a consequence of the worker providing the services. As such, they would not fall within the scope of the Agency legislation.

If neither the Agency legislation nor the Managed Service Company legislation applies then anyone working through a PSC needs to consider the Intermediaries legislation, more commonly known as IR35. This will continue to be the case under the proposed new legislation. IR35 applies where the relationship between the worker and the engager would be one of employment if the PSC and any other party in the contractual chain did not exist.

www.gov.uk/government/uploads/system/uploads/attachment_data/file/275993/Interaction_of_Personal_Service_Companies_with_the_Proposed_Changes_to_Chapter_7_S44-47_ITEPA_2003.pdf

3.5 Enactment of extra statutory concessions

Following the issue of a draft statutory instrument, SI 2014/211 has been enacted with effect from 5 February 2014. It covers:

  • 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;
  • 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.

www.legislation.gov.uk/uksi/2014/211/pdfs/uksi_20140211_en.pdf

3.6 National Minimum Wage: Penalties and shaming

HMRC has issued a note of changes to the national minimum wage regime, including the naming and shaming provisions introduced in 2013 and the planned changes to the penalties due to come in during 2014. Employers offering internships need to ensure they are compliant.

Naming and shaming

The Department for Business Innovation and Skills (BIS) has been able to 'name and shame' employers if they employed people who were paid below the minimum wage where the employer's behaviour met certain conditions. Only one employer has been named by BIS since the scheme started.

From October 2013, these conditions have been changed. Now every employer who receives a Notice of Underpayment from HMRC is considered for 'naming and shaming' even if their actions are unintentional. Employers are able to make representations to BIS against being named. BIS will consider whether naming would carry risk of personal harm to an individual or a family member, pose a national security threat or otherwise not be in the public interest but the expectation is that in most cases details will be published.

Higher Penalties

In addition to changes to the 'Naming and Shaming' scheme, the Prime Minister announced in November 2013 that the penalty would increase from the current 50% to 100% of the total underpayment and the cap on the existing penalty would be increased from £5,000 to £20,000. The 50% reduction for paying all arrears within 14 days will remain. This change is expected to come into effect for pay reference periods from early March 2014.

The Government also wants bring in primary legislation so that the £20,000 penalty will apply in respect of every under-paid employee. It is expected that this further change will be introduced towards the end of 2014.

The existing rules are set out at:

www.gov.uk/government/publications/enforcing-national-minimum-wage-law

The proposals are set out at:

www.gov.uk/government/news/national-minimum-wage-penalties-increased-on-rogue-employers

To read this Update in full, please click here.

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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