UK: Weekly Tax Update - Tuesday 28 April

Last Updated: 1 May 2015
Article by Tina Riches


1.1 Bank Holiday

As next Monday is a Bank Holiday, the next issue of Tax Update will be in week commencing Monday 11 May 2015.

1.2 General election – parties' tax proposals

The last manifesto of the seven parties that participated in the first leaders'debate has been published, Smith & Williamson has updated its summary of the tax proposals made in the manifestos and this is available on our website. The summary highlights the focus that most of the parties have on anti-avoidance provisions and tackling evasion, together with a variety of other measures from the abolition of the non-dom status, imposition of a general wealth tax, an increase in the bank levy through to a new general anti-avoidance rule.

Whether any of these policies will see the light of day will depend upon not only the outcome of the election, but the make-up of the next government.

1.3 HMRC toolkits

HMRC has updated another batch of its toolkits for agents for the 2014/15 tax year. These include the toolkits on property rental, trust and estates, several capital gains topics and business topics. As highlighted on, the aim of these toolkits is to highlight errors which HMRC finds commonly occur and to help agents avoid inaccuracies in clients' returns that may otherwise lead to penalties.

HMRC also helpfully explicitly confirm that use of the toolkits remains entirely voluntary and that whether reasonable care has been taken in any particular case will be a question of fact and will not depend on whether a toolkit has or has not been used.


2.1 The amount paid wholly and exclusively for shares

The Upper Tribunal (UT) has rejected an appeal from the First-tier Tribunal's (FTT) decision in the case of Steven Price and others that a tax avoidance scheme designed to create capital losses off-settable against other income did not work.

The UT concluded there was no other case law that overturned the FTT's decision on the example considered. The FTT had concluded that the amount paid wholly and exclusively for the purchase of the shares was £600, an amount very close to their disposal price of £552, instead of the purported acquisition price of £6m. The basics of the scheme are set out below.

In reaching its decision the FTT had considered the shares were sold on arms-length terms, and therefore TCGA 1992 s.17, which substitutes market value consideration for disposals not made on arms-length terms, did not apply. This caused the FTT to consider the amount wholly and exclusively paid for the shares (TCGA 1992 s.38(1)(a)).

The appeal before the UT by the taxpayers was that the amount paid wholly and exclusively for the shares and deductible under TCGA 1992 s.38 should be £6m. However on the facts of the case the UT agreed with the FTT's conclusion and rejected the appeal. The UT did not need to consider the correctness of the FTT's decision on the non- application of TCGA 1992 s.17, and highlighted that their review of the case neither supported nor rejected the FTT's conclusion in that regard.

The basics of the scheme were as follows:

SHL was a profitable bathroom fitting company that annually turned over around £600k and made profits in the region of tens of thousands of pounds.

It entered into an agreement with a previously dormant plumbing company (Plumbing) whereby Plumbing had options to buy B shares in SHL for £10,002 per share. (They were worth a fraction of this price.) These options were sold to investors seeking the CGT loss. The investors would exercise the options using funds loaned to them from a life interest trust of which they were the beneficiary. The funds were lent to the trust from an intermediary. The funds would be used to subscribe for the SHL B shares.

The key point was that the options in question had been structured in such a way as to ensure, it was thought, that they would be employment related securities options, to which the market value rule did not apply even though the options were non- commercial.

The intermediary held 1p preference shares in SHL which could be redeemed at the option of the holder for £10,000 per share. Once the subscriptions for the B shares had been made, the intermediary gave notice calling for redemption of its preference shares. This returned the cash to the lender.

The terms of the loan to the life interest trust were such that once the loan had been used to purchase the SHL B shares, interest was due at 0.001% pa, payable on redemption in 79 years' time. In the case of one investor who subscribed £6m for SHL B shares, the life interest trust agreed with the intermediary that the loan would be settled before the 79 years' time period by the payment of £1,500. The trust would then waive the debt due from the life interest beneficiary.

The B shares were sold to a third party for a nominal amount (in the case of the investor who purchased £6m worth of shares, they were sold for just less than £600). A variant of the same scheme was that the B shares were turned into 'convertible securities' by deed poll of SHL on the same day that they were acquired by the investors.


3.1 Updated HMRC guidance on the diverted profits tax

HMRC has updated its guidance on the diverted profits tax as follows:

  • to add some factual description relating to partnerships to the bottom of page 10;
  • to correct an error in DPT 2010 on page 66 in the section on the duty to notify, so that the updated guidance reflects the updated legislation published on 24 March 2015.


Updated regulations on International Tax Compliance (SI 2015/878) were issued last week. These revoked the previous regulations defining reporting financial institutions under the UK/US IGA, so it had been unclear from a UK perspective what the precise definition was, bearing in mind there is no direct reading across from the US regulations. HMRC has informed us that in their view, the impact of the recent changes on the definition of the 'investment entity' category of reporting financial institution is as follows:


4.1 Authorised economic operator

HMRC has issued a note on revised procedures for review of applications for status as an 'authorised economic operator', indicating that for applications to be processed, they need to be correct at the time of submission.

The Authorised Economic Operator (AEO) certificate is an internationally recognised quality mark indicating that an operator's role in the international supply chain is secure, and that its customs controls and procedures are efficient and compliant. HMRC has 120 calendar days from receipt of a full and complete application to issue a decision on whether they will grant AEO status. There are options to extend this deadline by either the applicant or HMRC.

AEO status is not mandatory. It has commercial implications as it gives quicker access to certain simplified customs procedures and in some cases the right to 'fast-track' shipments through certain HMRC safety and security procedures.

In May 2016 Customs legislation will change and the Union Customs Code will take effect, along with a transitional period to implement the new requirements. The Union Customs Code (UCC) Council Regulation (EU) 952/13 requires all communication (including the submission of customs declarations) between customs authorities and economic operators, to be made electronically, except for specific exemptions. As a result HMRC expects an increase in the number of applications for AEO status.

HMRC will no longer accept incomplete or incorrect applications (which will include forms C117 and C118) and these will be returned to the business along with an explanatory letter.

Businesses that submit AEO applications indicating that they have the required evidence for HMRC auditors, but which:

  • cannot produce this information when visited; or
  • cannot provide evidence to show that these procedures are followed

will be advised to withdraw their application or it will be rejected. It should be noted that a rejection at this stage still allows a business to re-apply for AEO once these issues have been addressed.

4.2 Recoverability of input VAT on legal fees in a partnership dispute

In an anonymised case the First-tier Tribunal (FTT) has concluded that legal fees incurred in a dispute between partners of an accountancy partnership, were incurred by specific partners and not by or for the partnership. As a consequence the partnership could not recover the associated input VAT. The case is a useful reminder of the requirements for demonstrating entitlement to input VAT recovery in such situations.

A dispute arose in a partnership originally consisting of four partners, A, B C and D. D was retiring and alleged bad faith on A and B in not pursuing a sale of the partnership business. As a consequence D was pressing for the dissolution of the partnership leading to the potential sale of its assets, including goodwill. That would have entitled D to distribution of proceeds he would not otherwise have received. C was a relatively new partner. Legal proceedings were initiated and solicitors were engaged by A and B. Different solicitors were engaged by C. The dispute was resolved and the partnership continued as A, B and C. Invoices were submitted by partners A, B and C to the partnership for reimbursement to A and B, and also to C. The partnership reclaimed the input VAT, but this was denied by HMRC following a VAT inspection.

In order for the input VAT to be recoverable by the partnership, it had to show that the input VAT on services was:

  • attributable to the partnership's business;
  • on services supplied to the partnership;
  • evidenced on invoices addressed to the partnership.

The FTT concluded that as the invoices for legal services (and the engagements) were in respect of services for individual partners (A and B in one case, and C in the other); they were not for services to the partnership. For that reason it was impossible for the partnership to recover the input VAT. The FTT considered that the legal services were of benefit to the partnership of A, B and C, but as the invoices had not been addressed to the ABC partnership it was impossible for the ABC partnership to recover the input VAT. Indeed the matter was resolved prior to the retirement of D.

There was some discussion of the forthcoming appeal to the Supreme Court of the Airtours decision as follows:

'I note in passing that Airtours has been given leave to appeal to the Supreme Court. I do not consider that surprising because it seems likely that the company, contrary to what the Upper Tribunal and Court of Appeal said, did benefit from the professional services: having the report prepared was presumably the first step in trying to prevent the banks foreclosing on it. Nevertheless, in the meantime, the decision in Airtours is binding on this Tribunal but its relevance is limited because the conclusion of the Court was that the company did not benefit from the services.'

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 2015

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Tina Riches
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