UK: Weekly Tax Update – Monday, 3 November 2014

Last Updated: 7 November 2014
Article by Tina Riches


1.1 High risk promoters

A draft statutory instrument has been published defining some of the terms used in the assessment of whether threshold conditions are met for the purpose of the high risk promoter legislation introduced in FA 2014 (s.234-283 and Sch 34-36).

It sets out prescribed misconduct, professional body actions and penalties for the purpose of FA 2014 Sch34 para 8. It also includes the CIOT and Chartered Accountants of Ireland in the list of professional bodies for which misconduct is relevant. The instrument also sets out prescribed sanctions by regulatory authorities (as opposed to professional bodies) that would trigger a threshold being met in relation to disciplinary action those authorities take.

The importance of this is that where a promoter meets a threshold condition HMRC can issue a conduct notice – if a requirement in a conduct notice is breached HMRC can issue a monitoring notice, which attracts publication, enhanced powers for HMRC and restrictions on the promoter.

1.2 Update to DOTAS numbers for which APN's may be issued

HMRC has updated the list of DOTAS numbers for which it may issue an accelerated payment notice. Changes to the July 2014 list are documented as follows for ease of reference:

Scheme reference numbers added: 42421916, 47012492 and 64445933. Scheme reference numbers removed: 05165552, 23987639, 43012032, 55604277, 65751876, 85858718, 86136302 and 95757285.

1.3 Guidance on tax relating to payments in respect of interest rate hedging products

HMRC has published a note on its website on dealing with the tax aspects of redress payments made by banks to individuals, partnerships and companies, concerning interest rate hedging products. However for further advice concerning particular circumstances please get in touch with your usual Smith & Williamson contact.

1.4 New tax summaries

HMRC has announced that tax summaries will be issued from 3 November 2014 to over 24 million taxpayers, setting out the income tax and NIC they paid in 2013/14 (of which HMRC is aware) and how the government spent that amount. 8 million in self assessment will be able to access the statements online (if they have a log in and have submitted the previous year's return) and the remaining 16 million will be posted to taxpayers, generally those who received codes from HMRC in the last year.


See copyright information:


2.1 Euro conversion clauses and CGT status of a corporate bond

The First-tier Tribunal (FTT) has agreed with Nicholas Trigg that the disposal of a sterling corporate bond that contained a euro conversion clause could be treated as a qualifying corporate bond (QCB) so that any gain on disposal would be exempt from capital gains tax. Those taxpayers who have relied on euro conversion clauses as causing a bond to be a non-QCB should urgently review their position.

In Nicholas M F Trigg v Revenue & Customs [2014] UKFTT 967 (TC), it was noted that the partnership of Tonnant LLP was established in around 2006 with a view to exploiting what it saw as an undervaluation by the market of certain bonds. With a view to profiting from this perceived undervaluation, the partnership bought a number of bonds on the secondary market at what it considered to be an undervalue, with a view to holding the bonds until they matured or could be sold at a profit.

Six bonds were later realised in whole or in part. All of these six bonds were issued, denominated and redeemable in sterling. Interest was payable in sterling.

The terms of all of the bonds identified risk factors associated with their purchase. Many risk factors were identified; one risk factor identified by most of the bonds was that the UK might adopt the euro before the redemption date of the bonds. The identified risk was that the bond would be redenominated in euros and in general that the bond market might be de-stabilised by the change of currency

Each of the six bonds contained one or other of two clauses (but not both) which HMRC considered meant that the bonds were not entitled to exemption as QCBs.

In summary, the two types of one euro conversion clause were:

1) The first clause (which made no specific reference to the euro other than in its heading) became operative:

'If at any time there is a change in the currency of the United Kingdom such that the Bank of England recognises a different currency or currency unit or more than one currency or currency unit as the lawful currency of the United Kingdom....'

When it became operative, its effect was:

'...references in, and obligations arising under, the Notes ....will be converted into, and/or any amount becoming payable under the Notes ....will be paid in, the currency or currency unit of the United Kingdom....'

It provided a rate at which conversion would occur:

'Any such conversion will be made at the official rate of exchange recognised for that purpose by the Bank of England.'

Further provisions permitted the terms of the Bonds to be amended by the issuer to put all parties in the same position as if no change in currency had occurred and such changes could be retrospective.

2) The second type of euro conversion clause was worded differently. It came into effect 'after the date (if any) on which the United Kingdom becomes a Participating Member State'. A participating member state was defined as any member state of the European Union which has adopted the euro as its lawful currency in accordance with the Treaty establishing the European Union.

Once the UK had adopted the euro as its lawful currency, this enabled the issuer of the bond (on 30 days' notice) to designate a 'Redenomination Date' as long as that date fell on a Note payment date. The effect of the issuer giving such notice was that on the specified Redenomination Date, the notes would be deemed to be redenominated in euros at the conversion rate established by the Council of the European Union, and coupons and interest would be re-issued or paid in euros.

In conclusion, the FTT found that the legislation permitted sterling bonds to remain QCB's even if redeemed in another currency, as there was no variation of the amount received by reference to another currency, and because the legislation permitted this.

HMRC had written to us in 2009 (see item 1.1 of Tax Update 7 December 2009) in response to our conclusion that euro conversion clauses did not disqualify a sterling bond from being a QCB. Their settled view has been that a security is not a qualifying corporate bond, if that security provides for redenomination into, and repayment in, euro in the event that the UK becomes one of the countries participating in the third stage of economic and monetary union (ie that the UK adopts the euro in place of sterling). This HMRC view is now called into question and it will be interesting to see HMRC's response to the Nicholas Trigg decision.


3.1 HMRC guidance IHT113 has incorrect dates

HMRC has advised that the filing and payment dates noted in the IHT113 booklet are incorrect as they do not reflect changes in FA 2014. All chargeable events arising on relevant property trusts after 6 April 2014 now have a return filing and tax payment date 6 months from the end of the month in which the charge arose. HMRC's guidance will be revised as soon as possible to rectify the position.


4.1 R35 business entity tests

HMRC has accepted the recommendation of the IR35 forum to remove from its website the business entity tests (BETs - intended for taxpayers to use in determining whether they were subject to IR35). The forum found that the BETs were rarely used and were not fulfilling their intended purpose.

4.2 PAYE coding out of tax debts

The Statutory Instrument amending the PAYE regulations, including those in respect of the recovery of debts, were laid before Parliament in October. As a result, HMRC has issued advance notice that the level of tax debt it will be able to include in an employee's PAYE code will increase for PAYE codes for 2015/16, depending on the level of salary. A tax or tax credit debt of up to £3,000 can be included for those with PAYE earnings of up to £29.999. The limit increases in steps for higher salaries, with debts of up to £17,000 being recoverable for those with PAYE earnings of £90,000 or more.

4.3 Taxation of pensions bill briefing note

HMRC has produced a briefing note summarising the contents of the 'Taxation of Pensions Bill' which received its second reading in the House of Commons on 29 October 2014.


5.1 Success in removing hobby farming loss restriction

The First-tier Tribunal (FTT) has allowed the appeal of Mr and Mrs French and so stop the limitation of sideways loss relief after five years of losses under ITA 2007 s.67. The farmers were classed as ceasing one farming trade (dairy), then for three years letting the land to a neighbour with some maintenance of hedges etc and then recommencing a trade as an arable farmer. This re-set the five year clock. The farmers could also claim sideways relief beyond five years under ITA 2007 s.68 (3).

As 'a competent person carrying on activities in the current year would reasonably expect future profits' albeit losses might continue beyond five years.

CJ and MA French v HMRC TC04053 provides a helpful summary of how the five year clock is established and when a farm trade ceases or continues in order to re-set the clock.

Despite some maintenance the tenant was actively farming the land to convert it to arable, hence the appellants ceased trading as soon as the land was let and commenced a new arable trade when the let ceased, starting a new five year clock. Maintenance carried out by a retained longstanding employee was pre-trading expenditure for the new trade or could be offset against letting income.

The tribunal decision also considered the application of ITA2007 s.68 (3) and whether additional sideways loss relief can be claimed where there are more than five years of continuous losses arising. The tribunal considered that the objective of ITA2007 s.68(3) was to preclude a farmer from enjoying sideways loss relief in excess of five years continuous losses if the actual farmer has been slower in achieving profit than a 'notional competent farmer', denying relief to an 'incompetent farmer'

Based on the facts, it was agreed that the period for loss relief was to be ten years for a notional competent farmer to make profits being made up of the seven years for the current farmer and the three years the tenant farmer helped the land return to arable land.

In this case, the test in ITA2007 s.66, under which the trade has to be conducted on a commercial basis and with a reasonable expectation of profit, was not in dispute.

Interestingly, the Tribunal, which wrestled with the interpretation of s.68, demonstrated again how the courts may fairly strain the legislation to fit the facts in support of the taxpayer in non-avoidance cases. It said: 'We accordingly consider that our interpretation is a perfectly natural interpretation, and not just a slightly strained interpretation, still justified because it avoids what we would regard as an unjust and ridiculous result.'

5.2 Capital allowances and end of transitional period for expensive cars

The balance of capital allowance written down values in a single asset pool (SAP) for 'expensive cars' (costing ≥ £12,000), purchased prior to 6 April 2009 (income tax) or 1 April 2009 (corporation tax) require attention.

Transitional provisions in FA 2009 Sch 11, para 31 usually require that any balance in the SAP in the first business accounting period ending after 5 April 2014 (income tax) or after 1 April 2014 (corporation tax) is transferred to the main pool at the end of that accounting period. This applies unless other capital allowance provisions contained in CAA 2001 part 2 dictate that the balance should remain in the SAP.

5.3 Unauthorised unit trusts and CT

HMRC has set out a note of the changes that arise from FA 2013 concerning the tax treatment of exempt and non-exempt unauthorised unit trusts.

FA 2013 introduced new rules for the taxation of unauthorised unit trusts with UK resident trustees, and SI 2013/2819 set out the detail of the new rules. The new rules introduced particular requirements for classification as an exempt unauthorised unit trust (EUUT), and changed the treatment of non-exempt unauthorised unit trusts (NEUUT) to that of a company and brought within the charge to the main rate of Corporation Tax and potentially Quarterly Instalment Payments if it is large. Unit holders will be treated as having shares in a company and will no longer be deemed to receive distributions of income. Actual distributions from NEUUTs will be treated in the same way as corporate dividends.

The 2013/14 tax year was a transition year for EUUTs, and NEUUTs were brought within the charge to CT from 6 April 2014. Mixed UUTs remain subject to the rules that existed prior to the FA 2013 changes.

5.4 Double tax treaty passport scheme

If a company is registered for the Double Taxation Treaty Passport Scheme, its details will be made publicly available on the new scheme register - to help borrowers verify a passport holder's status.

The scheme provides for Double Taxation Relief on UK loan interest payments made by a UK corporate borrower to overseas corporate lenders.

Details of who can apply to join the scheme, and how to register, are at:

The new register can be found at:

5.5 Loan relationships and deemed loans

The First-tier Tribunal (FTT) has dismissed the appeal and concluded that there was no mismatch in the treatment of the difference between the sale and repurchase price of shares between Biffa (Jersey) Limited, the issuing company, and the counterparty company (both members of the Biffa group of companies). The case was the lead case concerning a financing arrangement where the taxpayer had contended that the £14m extra payable to it by the counterparty group member under an agreement for the sale and repurchase of the taxpayer company's own shares (originally issued for £200m) was not a taxable receipt of interest for the lender (a contention with which the tribunal disagreed).

HMRC had originally contended that the borrower in the arrangement was not entitled to a deduction for the £14m difference as interest, but subsequently HMRC agreed that it was deductible. HMRC also contended that if FA 2003 s.195 did frustrate the operation of ICTA 1988 s.730A for the 'lender' (or issuer), then the transaction would have been caught by the tax arbitrage rules (introduced in F(No2)A 2005, now in TIPOA 2010 part 6) applied to bring the amount into charge.

The FTT held that shares purchased by the issuing company and cancelled were 'transferred' for the purpose of the legislation applying for corporation tax in 2007/08 on the sale and repurchase of securities and that FA 2003 s.195 (which deems the issuing company's acquisition of its own share not to be the acquisition of an asset), did not mean the shares were 'not transferred'.

The legislation effective at the time of the transactions (between 26 September 2007 and 26 September 2008) was ICTA 1988 s.730A (treatment of the price differential on a sale and repurchase of securities) and FA 2003 s.195 (companies acquiring their own shares, which was introduced as a result of changes to company law permitting listed companies to acquire, hold and dispose of their own shares).

While FA 2003 s.195 remains in force, ICTA 1988 s.730A was repealed by FA 2007 and replaced (so far as it concerns the transaction under consideration) by what is now included in CTA 2009 s.542 to 559.

While ICTA 1988 s.730A referred to there being a transfer of shares in relation to sale and repurchase agreement, the current legislation instead refers to reflection of the transaction as a financial asset or liability in the books of the lender or borrower (as appropriate) according to GAAP.

The FTT considered in detail whether the conditions for a receipt notice under the arbitrage rules were met (previously conditions A to E in F(No2A) 2005 s.26, now conditions A to D s.250 and also s.251 in TIOPA 2010).

The financing arrangement was routed through a group company, so that the borrowing company could only be regarded as contributing capital to the lending company by payments made via the intervening group company. The FTT considered that the requirements of condition B only provide for a direct contribution of capital to the issuer and that as this was routed through an intermediary company this condition was not satisfied.


6.1 European Commission proposals for reform of VAT

On 30 October 2014, the European Commission published what it considers to be five feasible alternative options on how to ensure a simpler, more effective and more fraud- proof VAT system. These are:

  • The supplier would be responsible for charging and paying the VAT, and supplies would be taxed according to where the goods are delivered.
  • The supplier would be responsible for charging and paying the VAT, and supplies would be taxed according to where the customer is established.
  • The customer – rather than the supplier – would be liable for the VAT, and taxation would take place where that customer is based (Reverse Charge).
  • The customer – rather than the supplier – would be liable for the VAT, and taxation would take place where the goods are delivered.
  • The status quo would be maintained, with some modifications.

The Commission is now undertaking an in-depth assessment to determine the impact of each of the options for businesses and for Member States. On the basis of its findings, it will present the possible way forward in Spring 2015.


NTBN304 - UK non-doms' loans and collateral

Summary of the August 2014 HMRC announcement on the taxation of using unremitted foreign income or gains as collateral for a loan enjoyed in the UK and subsequent discussions with HMRC.

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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