UK: Weekly Tax Update – Monday, 27 October 2014

Last Updated: 29 October 2014
Article by Tina Riches


1.1 Meaning of 'my unused nil rate' in a Will

The Court of Appeal has held that the amount due to the residuary beneficiaries for a legacy described in the will of a Mrs Smith as 'my unused nil rate band (NRB) for IHT' included the increase available, under IHTA 1984 s.8A, for the unused percentage of her deceased spouse's remaining NRB. Charities seeking a bequest in a will may wish to point out to individuals considering a charitable bequest the impact of this case.

In The Woodland Trust v Loring & ORS [2014] EWCA Civ 1314 Lewison LJ considered that 'we have to look to the purposes and values which are expressed and implicit in the wording of the will in order to find the answer' of whether the NRB definition included the amount added by IHTA 1984 s.8A.

In his judgement, 'the implicit purpose of the will was to give as much as possible to Mrs Smith's family without incurring IHT and to give the rest to charity. As Lord Neuberger explained in RSPCA v Sharp [2010] EWCA Civ 1474;[2011] 1 WLR 980 at [44] the purpose of using the nil-rate band is usually to avoid paying IHT...... In my judgement that was also the implicit purpose of this will.' Therefore by electing under IHTA 1984 s.8A the executors were maximising the amount to be paid over without incurring IHT.

In considering Mrs Smith's intentions when she made the will, Lewison LJ points out that 'at the date of her will she could have no expectation that the residuary beneficiary would receive any particular amount. Indeed if the Chancellor were to increase the nil- rate band by more than inflation...... the residuary gift might diminish or fall away entirely'.

As there was no implicit direction as to how the unused NRB was to be interpreted, the increase of the NRB by an election under IHTA 1984 s.8A for Mrs Smith's late spouse's unused NRB would be no different than any other legislative change to the NRB after the will was created and as such the NRB legacy was £650,000 not £325,000.


2.1 Draft guidance on pension flexibility

HMRC has replaced its previously issued draft guidance on the new pension flexibility available from April 2015. The updated draft guidance contains four new chapters:

  • changes to the Bill following consultation (chapter 2);
  • death benefits (chapter 7);
  • reporting (chapter 8); and
  • overseas aspects (chapter 9).

2.2 Employment related securities - relevance of concessionary practice

Mr Bruce-Mitford acquired automatically convertible deferred shares in his employer in 2002 that were later converted to ordinary shares. HMRC chose not to apply its restricted concession not to apply legislation retrospectively on the conversion. On appeal to the First-tier tribunal (FTT) it was held that the FTT had no jurisdiction to overturn HMRC's decision.

Under the legislation applying at the time of acquisition, the later conversion of the shares, producing a substantial increase in value, did not give rise to a charge to income tax on the increase in value. This kind of tax-efficient arrangement was popularly known at the time as the 'Pizza Express' Scheme.

This treatment was effectively counteracted retrospectively by FA2003 for shares whenever acquired. At the time of the rule change, HMRC issued a concession that in some circumstances they would not seek to apply the new law for shares acquired before the change in law. In this case they did not seek to apply the concession. The tribunal found that the new tax rules had been correctly applied and that they had no jurisdiction to decide whether or not Mr Bruce-Mitford had a legitimate expectation under administrative law that HMRC would follow that practice.

It will be interesting to see whether or not Mr Bruce-Mitford seeks a judicial review of HMRC's failure to apply the concession, a judicial review being the usual route to follow in such circumstances, rather than an appeal to the FTT.


3.1 Designated stock exchanges

The Singapore Exchange Securities Trading Limited (SGX-ST) and the Singapore Exchange Derivatives Trading Limited (SGX-DT) markets have been designated as recognised stock exchanges.

3.2 Time limit for issuing a notice of enquiry

The First-tier Tribunal (FTT) has concluded that the 12 month period in which HMRC can issue a notice of enquiry to a corporation tax return filed within the time limit in FA 1998 Sch 18 para 24(2) ends on the anniversary of the filing date, not the day before. This is the general approach of the Courts to determining such a time limit as identified in the Court of Appeal in the case of Zoan v Rouamba [2000] 1 WLR 1509, [2000] 2 All ER 620.

The case concerned an appeal by Dock & Let: Ltd who had filed a return on 31 January 2012 on which HMRC had issued a notice of enquiry (delivered by hand) on 31 January 2013. The wording of FA 1998 Sch18 paras 24(3) – 24(6) were also found to support the contention that the twelve month period in para 24(2) did not include the date the return was filed and hence it ended on the anniversary of the filing date.

3.3 Opinion in CJEU M&S group loss relief case

Advocate General Kokott's opinion in the CJEU M&S group loss relief case (C-172/13) has been released, stating that the UK legislation under CTA 2010 s.119 is proportionate. The judgement of the court is now awaited.

The Commission had referred the UK to the Court over the practical impossibility in UK legislation of obtaining loss relief for losses incurred by a non-UK resident subsidiary. The opinion suggests that the principles outlined in the first M&S case (c-446/03, decided in December 2005) should be abandoned, and concludes that even a complete refusal of loss relief for a non-resident subsidiary satisfies the principle of proportionality.

CTA 2010 s.119(4) requires the determination of the extent to which the losses of the EEA subsidiary can be used in determining the level of profits chargeable to tax in that EEA territory, or relieved or credited against any future tax in that EEA territory. If they could be so applied they would in either case prohibit relief for that loss in the UK. Only if there is 'no possibility' of offset is group relief then available. The opinion was that this must be determined immediately after the end of the accounting period of the EEA company.

The Commission had contended this was too onerous to be effective considering EU principles.

Advocate General Kokott's opinion contrasts with the May 2013 decision of the Supreme Court that the assessment of the no possibilities test is to be made at the time of submission of the claim (∂=1&cid=470820


4.1 Amendments to UK legislation for 1 January 2015 changes to place of supply

SI 2014/2726 amends VATA Sch4A to reflect the fact that business to consumer supplies in respect of broadcasting, telecoms and electronic services will be treated as supplied at the location of the customer on and after 1 January 2015.

4.2 Output VAT refund claim via credit note in out of court settlement

The First-tier Tribunal (FTT) has concluded that UK VAT legislation apparently preventing HMRC from refunding output VAT as a result of a credit note issued by an insolvent or deregistered business is contrary to the principal VAT directive and should be ignored.

Barlin Associates Ltd (Barlin) issued a credit note as a result of an out of court settlement in respect of an unpaid debt. This resulted from an agreement to reduce the price of the original invoices for previous work done. The order of events was:

  • work was done in the period 2005 to 2010;
  • Barlin had ceased trading towards the end of 2011;
  • it deregistered from VAT with effect from January 2012;
  • the credit note was issued on 12 December 2012; and
  • the application for repayment of the £82,095.78 made to HMRC on 13 January 2013.

HMRC contended that the credit note did not entitle the supplier to recoverable output VAT, but that the amount was in reality a bad debt and any claim to recover overpaid output VAT arising from the bad debt was out of time. The FTT concluded there was a reduction in selling price of the original invoices, so the settlement did not give rise to a bad debt.

HMRC further contended that the claim to recover overpaid output VAT was out of time. If the credit note is issued more than 4 years after the original invoice, on HMRC's view a taxpayer that is insolvent or unregistered as at the date the credit note is issued is unable to claim the refund (for example see HMRC guidance at INS12706 and VR7120). Yet under article 90 of the principal VAT Directive (In the case of cancellation, refusal or total or partial non-payment, or where the price is reduced after the supply takes place, the taxable amount shall be reduced accordingly under conditions which shall be determined by the Member State.) it has a directly effective right to do so. The FTT commented as follows:

'In any case where Reg 38(6) [of SI1995/2518] applies or the [VATA94] s.80(4) time limit applies because the taxpayer has deregistered, and the credit note is issued outside the s 80 time limit of four years, UK legislation makes it impossible for the taxpayer to exercise its directly effective Art 90 right to repayment, because the taxpayer is 'out of time' before the claim is eligible to be made. To that extent, s.38(6), and s.80(4) in so far as it applies to insolvent or deregistered taxpayers relying on Reg 38, is unlawful. I will disregard the time limit as I am required to do by the European Communities Act 1972 in order to apply European law.'

4.3 Applicability of VAT exemption to an insurance intermediary fails

The Upper Tribunal (UT) has agreed with the First-tier Tribunal (FTT) that Westinsure Group's activity of acting as an intermediary between insurance brokers and insurers (giving small brokers access to economies of scale and more favourable rates from insurers), was not sufficiently closely related to specific insurance transactions to be within the exemption for VAT on insurance activities.

The UT considered the following issues:

  • Was Westinsure an insurance intermediary? The UT concluded that an intermediary in an insurance transaction was not necessarily an insurance intermediary and that there was nothing new to overturn the FTT decision that Westinsure was an insurance intermediary within the meaning of the requirements for VAT exemption:
  • Did Westinsure provide insurance related services? The UT agreed with the FTT that Wesinsure's services were not sufficiently tied to particular insurance transactions to make them insurance related;
  • Were Westtinsure's services more than administrative support? The UT considered the FTT were entitled to find that Westinsure's services were akin to administrative support;
  • Is there any restriction on the type of related activities which qualify for exemption? The FTT contended (and the UT agreed) these needed to be activities of brokers or agents and concluded that Westinsure:

    • did not negotiate (or 'broker') the terms of any particular transaction;
    • did not act for a client seeking insurance; and
  • did not assess the needs of a client, nor did it find insurance suitable to those needs. Do commercial realities have any impact? The UT accepted that wherever the boundaries of an exemption (strictly construed) are drawn there will be activities which fall outside the boundary, but may not be very different in commercial or economic terms to those inside it. However it concluded Westinsure's activities fell the wrong side of the line.

The UT concluded that the FTT were entitled to reach the conclusion that Westinsure's activities did not amount to being an insurance intermediary.

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.

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Tina Riches
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