1 GENERAL NEWS
1.1 Upper Tribunal (Tax and Chancery) has moved
The Upper Tribunal (UT) in London has moved from Bedford Square to the Rolls Building in Fetter Lane.
www.justice.gov.uk/contacts/hmcts/tribunals/tax-and-chancery-upper-tribunal
2 PRIVATE CLIENT
2.1 Distributions from non-UK resident companies
A First-tier Tribunal (FTT) has allowed a taxpayer's appeal that he is entitled to be treated, under ITTOIA 2005 s.399, as having paid income tax at the 10% dividend rate on distributions from non-UK resident companies. HMRC's view had been that such treatment only applied to distributions from UK resident companies.
In the case Philip Shirley v HMRC (TC/2012/11057), the Appellant's position was that the wording of the ITTOIA 2005 s.399 is clear and it applies to dividends received by UK resident individuals from non-UK resident companies. As such, he was entitled to be treated as having paid income tax equal to the ordinary dividend rate on distributions not qualifying for a 1/9 tax credit under s.397 (applicable to distributions from UK resident companies) nor, post FA 2008, the similar 1/9 tax credit under s.397A (for qualifying distributions from non-UK resident companies).
HMRC's position is that s.399 does not apply to UK resident individuals who receive distributions from non-UK resident companies. HMRC's view is that the alternative interpretation suggested would be against the overall purpose and rational of Chapter 3 and Part 4 of ITTOIA and that ITTOIA is a tax law rewrite statute and there was no intention to change the law.
In deciding the case the FTT looked at how legislation is to be interpreted and when and how antecedent legislation, ie that preceding the tax law re-write, can be referred to. The FTT found that the literal reading of the legislation is unambiguous and supported the Appellant's contention. In addition, as there is no difficulty in interpreting the literal words of the statute, and as there is no ambiguity, it could not consider antecedent legislation.
The impact of the decision will be less for the current in-date tax years than would have been the case prior to 2008/09, following the introduction of a 1/9 tax credit for qualifying distributions non-UK resident companies. However there are a number of unrelated open cases where EU law obligation questions have been raised regarding the restriction of the 1/9 tax credit under s.397 to only UK resident companies. It may be that the taxpayers in those cases might look to this as an acceptable fall-back position.
2.2 Updates to HMRC IHT manual
HMRC updated its IHT manual on 10 November to reflect:
- changes in the rules of intestacy from 1 October 2014 onwards;
- HMRC current thinking and practices on lifetime transfers. Out of date procedural; guidance has been removed; and
- current practices and correct small errors.
Some pages have been deleted, including all pages that begin with IHTM32, apart from IHTM32191
www.hmrc.gov.uk/manuals/ihtmanual/updates/ihtmupdate101114.htm
2.3 OTS review of penalties
The Office of Tax Simplification (OTS) has produced a report addressing inconsistencies and other issues in the application by HMRC of the tax penalty provisions introduced in Finance Acts 2007, 2008 and 2009. Its research revealed the regime itself was generally viewed as sound. Overall the OTS concluded that there needs to be the full post implementation review and assessment of where the regime could be simplified, together with a general review of whether the design features of the system are appropriate in an increasingly automated world. The OTS has made some 14 immediate recommendations, all aimed at improving the workings of the penalties system:
- To have a facility for excluding from automatic inclusion in self assessment (SA) those receiving overseas pensions who were consistently below the tax threshold;
- To have a reminder in the on-line SA form for income tax that despite actually completing the information and making the payment, the on-line procedure for submission needs to be completed to avoid a late filing penalty;
- Further training and helpsheets on late filing penalties be provided for HMRC contact call centre staff;
- If zero income SA returns are submitted for two or more consecutive years, it is recommended that an automated letter is generated asking if the taxpayer still needs to be on the SA register;
- Further information be included in the January SA reminder letter, covering penalties for late submission, that a submission of the current return is required, and how to notify HMRC if a return is no longer required in future;
- Explanatory letters should accompany the summary information sent out on tax, interest and penalties owed;
- Currently, if not in the PAYE system the only way to pay overdue PAYE/NICs is by cheque in UK sterling. It is recommended that HMRC set up a system for taxpayers to pay the tax due by an alternative method such as credit card or bank transfer;
- HMRC provide further training for managers to emphasise their role in how penalties are applied and to get more consistency amongst their staff;
- Further examples be provided to staff on how to avoid errors when discussing penalty suspension;
- HMRC carry out assurance work on suspension of penalties for carelessness, aimed at achieving greater consistency across HMRC;
- HMRC investigates alternative methods of publicising the behaviours and suspension criteria so that staff gain a better understanding of how to apply these;
- HMRC review their guidance on 'special reduction' and put more emphasis on training in this area;
- The VAT register be examined with the aim of de-registering those business which should no longer be there; and
- The VAT default surcharge regime should be brought into line with the late filing penalties in FA2009 Sch 55 & 56.
3 PAYE AND EMPLOYMENT MATTERS
3.1 Update to HMRC guidance on national insurance
HMRC has updated its National Insurance manuals on NIC avoidance. The changes consolidate and reorder parts of the existing guidance. NIM52000+ is a new section on Part 7A of ITEPA 2003, employment income provided by third parties, including trusts. The guidance is based on 2011 FAQs.
The guidance at NIM52700 confirms that where an application for income tax relief is made under ITEPA 2003 s.554Z14, where earmarking or provision of security is not followed by a further relevant step, such as the payment of a contribution or provision of a benefit, then if income tax relief is given under these rules, NICs relief is not given and the NICs paid remain properly paid. It is a long-standing principle of the NICs system that Class 1 NICs are not refunded unless they have been paid in error.
The new manual sections are: NIM42000 - NIM53550 and NIM58000 - NIM62000). New material is at: NIM52150, NIM52700 and NIM52750
www.hmrc.gov.uk/manuals/nimmanual/nim42000.htm
4 BUSINESS TAX
4.1 IR35 return and payment deadline 31.1.15
IR35 intermediaries who submitted a final2013/14 FPS 'return' with provisional or estimated figures and made payments based on those, need to submit any amendment with final figures by 31 January 2015 and pay any outstanding tax. No individual reminders will be issued.
Any adjustments should be notified to HMRC via an 'earlier year update (EYU)' under real time information (RTI). Commercial payroll software should generally have the facility to make EYU's under RTI but if it does not the HMRC 'basic PAYE tools (BPT)' software will
allow submission. Instructions on how to download the BPT software and make a submission are at:
HMRC has confirmed that where there is no change to the figures, unlike under the old paper system, it is not necessary to submit an EYU confirming the figures are final.
4.2 Joint statement with Germany on preferential IP regimes
The UK and Germany have issued a joint statement on their proposal for a 'modified nexus' approach to preferential IP regimes such as the UK's patent box. The proposal has been put together in the light of OECD action point 5, Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance.
The modified nexus approach seeks to ensure that substantial economic activities must be undertaken in the jurisdiction in which a preferential regime exists, by requiring tax benefits to be connected directly to R&D expenditures.
The statement also discusses the level of uplift for non-qualifying related party or outsourcing expenditure, indicating that acceptable regimes will be able to get a maximum 30% uplift of their qualifying expenditure (subject to a cap based on actual expenditure).
To manage the transition to the new regime it is proposed that:
- all existing regimes will be closed to new entrants (products and patents) in June 2016;
- existing regimes will be abolished by June 2021;
- those within the existing regimes retain their regime benefits until June 2021;
- the Forum on Harmful Tax Practices should work to reach agreement by June 2015 on a practical and proportionate tracking and tracing approach that can be implemented by companies and tax authorities, which includes transitional mechanisms for intellectual property from existing into new regimes, and special rules for previous expenditure.
It will be interesting to see how the proposal is received and how its final form in the UK differs from the existing UK regime. It appears there will be more restrictions on the UK regime, but companies and groups using (or considering using) the UK regime will need to review their own situation to determine how best to react to these developments.
www.gov.uk/government/uploads/system/uploads/attachment_data/file/373135/GERMANY_UK_STATEMENT.pdf
4.3 Recognised stock exchange
SI 2014/2942 specifies the market known as BX Swiss AG as a recognised foreign exchange and a recognised foreign options exchange for the purposes of stamp duty and stamp duty reserve tax relief. It comes into force on 2 December 2014. This brings the BX Swiss AG within the definition of a regulated market so that the sale to a person (or their nominee) who is a member of that exchange and acting as an intermediary, qualifies for relief from stamp duty.
www.legislation.gov.uk/uksi/2014/2942/pdfs/uksi_20142942_en.pdf
4.4 Social investment tax relief guidance - social impact contractor
The Cabinet office has published the requirements for accreditation as a 'Social Impact Contractor' (a Company Limited by Shares that has been accredited by the Minister). Under part 5B of the Income Tax Act 2007, and the Tax Relief for Social Investments (Accreditation of Social Impact Contractor) Regulations 2014, investments by individuals into a social impact contractor can be eligible for Social Investment Tax Relief (SITR). SITR will be in place for investments made, or capital gains arising, in the period from 6 April 2014 to 5 April 2019.
Broadly SITR will give individuals who invest in qualifying social organisations a reduction of 30% of that investment in their income tax bill for that year. The maximum annual investment an individual can make which qualifies for tax relief is £1 million. There's no minimum investment limit. If income tax relief has been given (and not withdrawn) on the cost of the investment, and it is disposed of after the individual has held it for at least 3 years, any gain made is free from capital gains tax.
It is also possible to defer payment of tax on a capital gain if the gain is reinvested in shares or debt investments that would also qualify for SITR Income Tax relief. The investor doesn't need to have made a claim for SITR Income Tax relief.
Eligible organisations (which will demonstrate their eligibility to investors by means of a compliance certificate) can receive up to €344,827 (around £290,000) over 3 years in tax-advantaged investment.
HMRC has further background information on SITR at: www.hmrc.gov.uk/sitr/index.htm.
www.gov.uk/government/publications/social-investment-tax-relief-accreditation-for-sib-contractors
4.5 EU discussion of a general anti abuse rule for the parent subsidiary directive
On 7 November 2014 the Council of the EU discussed (and agreed to take forward with the aim of achieving agreement at a Council meeting on 9 December 2014) a draft amendment to EU tax rules aimed at stopping tax avoidance and aggressive tax planning by corporate groups, by introducing a binding anti-abuse clause in the EU's parent-subsidiary directive.
The clause would prevent misuses of the directive and ensure greater consistency in its application in different member states. It would require governments to refrain from granting the benefits of the directive to an arrangement, or a series of arrangements, that are not 'genuine' and have been put in place to obtain a tax advantage, rather than for valid commercial reasons reflecting economic reality.
The draft anti-abuse clause is formulated as a common EU 'de minimis' rule. It would allow member states to apply stricter national rules, as long as they meet minimum EU requirements.
www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ecofin/145700.pdf
http://register.consilium.europa.eu/doc/srv?l=EN&f=ST%2014531%202014%20REV%201
4.6 Authorised Investment Trusts - proposed amendment to regulations
HMRC has issued a note on a proposed amendment to the Authorised Investment Trust (Tax) regulations (SI 2009/964) to deal with the problem faced by some funds wishing to pay out an interest distribution, rather than a dividend, when part of the income they had received was a property income distribution from a REIT.
SI 2009/964 Regulation 17(2) states that "Amounts chargeable to corporation tax in accordance with Part 4 of CTA 2009 must not be included in any amount of income allocated for distribution as yearly interest".
As an authorised fund is required distribute all its income, this rule has the effect that if even a small amount of income from land and buildings (property income) is received by a fund then it is unable to pay an interest distribution for that period; therefore any distribution must be a dividend distribution.
Normally a bond fund paying an interest distribution would not derive income directly from property. Following the introduction of real estate investment trusts and property authorised investment funds HMRC has been made aware that certain funds, which previously received dividends, may now receive property income distributions (PIDs), which are treated as income from a UK property rental business for tax purposes rather than as dividends.
Therefore, SI 2009/964 will be amended to permit interest distributions in such circumstances, but will be subject to corporation tax on any of its property income with no amounts being deductible against that income. Regulation 17(2) will then be deleted.
The changes will not be retrospective, however, while HMRC's view is that prior to this change some investment funds may have incorrectly paid out distributions as interest, but that the amount of tax at stake is small and administrative costs of correcting past errors are likely to outweigh any tax lost, so it will not expect such transactions to be unwound.
4.7 Compatibility with EU law of the UK attribution of gains rules
The CJEU has released its decision in case C-112/14 concerning the compatibility with EU law of the UK attribution of gains rules (TCGA 1992 s.13). The decision concerns the legislation as it was before the changes introduced by FA 2013. It concluded that the old rules were contrary to the EU principle of freedom of movement of capital.
Some commentators have indicated that even since the FA 2013 changes (which were only effective for computing gains made in 2013/14 or later tax years) there remains uncertainty that property investment companies and offshore retail funds may not fall within the definition of 'economically significant activities' (see TCGA 1992 s.13(5)(ca). Current HMRC guidance on 'economically significant activities and investment and holding companies can be found at CG57314 and CG57315.
For a further discussion of how the attribution of gains legislation affects your particular circumstances and the potential impact of this CJEU decision please get in touch with your usual Smith & Williamson contact.
5 VAT
5.1 Equestrian property denied relief under DIY builders' scheme
The Upper Tribunal (UT) allowed HMRC's appeal in HMRC v Roy Shields [2014] UKUT 0453 (TCC). They found that the terms of a planning condition specifying the occupant as the manager of the particular equestrian business carried on at the particular address, was also a restriction on the separate use or disposal of the property in the context of the limitation contained in VATA 1994 Sch 8 group 5 note 2(c). Input tax relief under the DIY builders' scheme was therefore denied.
Those looking to apply the VAT builder's DIY scheme need to be certain that they comply with the detailed rules including correctly assessing for VAT purposes the planning consent and any restrictions or covenants regarding use as residential property.
The UTT approach to considering whether VATA 1994 Sch 8 group 5 note 2(c) was applicable was that 'it is necessary to ascertain whether a term of any statutory planning consent.... prohibits the separate use or separate disposal of the dwelling', in this case basically separate from the rest of the business.
The condition at issue was drawn up as follows:
"The occupation of the dwelling shall be limited to a person solely employed by the equestrian business at 274 Bangor Road, Newtownards, and any resident dependants....."
The UT concluded that by referring to the particular business carried on at the particular address, the condition was more than a mere 'occupation condition', and (in contrast to the conclusion of the FTT) did amount to a restriction on the separate use or disposal of the property in question. The UT considered but distinguished several similar cases, hence providing a useful summary of the case law in this area.
It may be difficult to prevent the imposition of highly prescriptive planning permission clauses when building a residence. However an awareness of the scope of the restriction imposed by VATA 1994 Sch8 group 5 note 2(c) may be helpful in agreeing a planning condition that does not prohibit input VAT recovery on this point alone.
www.tribunals.gov.uk/financeandtax/Documents/decisions/HMRC-v-Shields.pdf
5.2 VAT exemption for catering services linked to education
HMRC has issued Brief 39/2014 concerning their interim position following the decision of the Court of Appeal to grant leave to appeal against the UT's decision in the case of Brockenhurst College. There is no change to HMRC policy that supplies in training college restaurants are outside the scope of the educational exemption, because they are enjoyed by third parties not in receipt of education. However, HMRC will consider claims and make repayments where the circumstances are the same as in Brockenhurst College, subject to protective assessments pending the outcome of the Court of Appeal hearing.
Both the First-tier Tribunal (FTT) and Upper Tribunals (UT) concluded that supplies from the College's restaurant used for training chefs, restaurant managers and hospitality students, and tickets for concerts and other live performances put on by students as part of their educational courses, were exempt supplies.
The UT considered the supplies were closely related to the exempt supplies of education because they enabled the students to enjoy better education. The requirement in the domestic law for the supplies to be for the direct use of the student was met because they were of direct benefit to him. HMRC disagreed with the conclusion on the basis that the supplies were outside the education exemption because the students were not the beneficiaries of the supplies in question, but only benefitted from making them.
The Court of Appeal hearing is expected to take place from 16 to 17 February 2015.
The Brief comments that the policy will not be reviewed until the Court of Appeal releases its judgment next year.
5.3 VAT appeal updates
HMRC has updated (as of 16 October 2014) its list of VAT cases that it has:
- lost at the First-tier Tribunal that could have a wider impact;
- lost in the Upper Tribunal or higher courts; or
- taken a decision about whether to appeal.
Concerning the case of Alexandra Countryside Investment Ltd and the conversion of mixed use to residential property, the note comments:
'HMRC decided not to appeal. We have recently commenced reviewing our existing policy of conversions of mixed use buildings to dwellings of which this case is an example. A Revenue and Customs Brief will be issued on conclusion of that review either confirming the existing policy or announcing any changes.'
www.gov.uk/government/publications/vat-appeal-updates
www.gov.uk/government/uploads/system/uploads/attachment_data/file/367571/VAT_appeal_updates.pdf
5.4 Economic activity for the purpose of zero rating
The Upper Tribunal (UT) has agreed with the First-tier Tribunal (FTT) that construction services supplied to Longridge on Thames to upgrade its training facilities should be zero rated as they related to supplies for a building that was intended for use solely for relevant charitable purposes (otherwise than in the course or furtherance of a business). The UT agreed with the FTT that taking all facts and circumstances into account Longridge was not carrying on an economic activity, despite charging fees – though the fees did not cover costs. The construction services supplied to it could therefore be treated as zero rated.
The objects of Longridge (a registered charity) include:
- To safeguard and promote Longridge as a centre of excellence for the advancement of education in water, outdoor and indoor activities for young people generally, and for purposes related thereto such as coaching, leadership and training in water and other activities; and
- To promote the development of young people in achieving their full physical, intellectual, social and spiritual potential as individuals, as responsible citizens and as members of their local, national and international communities.
A three tier pricing system was used to ensure the facilities were affordable for the young people for whom they were intended. The cost of providing the activity was higher than the charge to young people but may be lower than the charge to adults for particular activities. There was a small proportion of the adults whose participation was not subsidised by Longridge, but the FTT considered this did not taint the activity of Longridge to classify it as in the course or furtherance of a business.
HMRC contended that the FTT had erred in law by focusing on the prices that Longridge charged and that in most cases these did not cover the costs of providing the service. They contended that from a VAT perspective this incorrectly amounted to treating the activity as not being an economic activity because it is not profit-making and not designed to be profit-making.
However, the UT concluded it was for the FTT to decide, on the basis of all the facts before it, on which side of the line the instant case falls. They had considered the scale of the payments made, the way they were calculated and the way the finances of Longridge were dealt with in terms of donations and the use of volunteers and (in the opinion of the UT), their conclusion could not be overturned.
HMRC sought to rely on the existence of various VAT exemptions to show that charitable activities, which are not pursued for profit and which charge lower prices than commercial enterprises, are still to be regarded as economic activity.
Here the UT agreed with the FTT that the existence of the exemption shows that some non-profit supplies of educational or sports services to young people are economic activities and may therefore seek to rely on the exemption. But it does not mean that every organisation meeting that description is carrying on an economic activity.
http://clients.squareeye.net/uploads/pump/documents/Longridge11.11.14.pdf
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.
