UK: Weekly Tax Update - July 6, 2015

Last Updated: 9 July 2015
Article by Tina Riches


1.1 Publication of Finance Bill

The Finance Bill to be introduced by the Summer Budget on 8 July will be published on 15 July.

1.2 Supreme Court – Anson and UK tax treatment of income from US LLCs

The Supreme Court has overturned the Court of Appeal decision in Anson, with the result that Mr Anson will be entitled to double tax relief on his share of a US LLC's (Limited Liability Company) profits for the UK tax years running from 6 April 1997 to 5 April 2004. In the US, LLC partners are effectively treated as receiving taxed partnership profits (ie transparent for tax purposes), whereas in the UK the LLC is viewed as being opaque so that LLC members are treated as receiving dividend income from the LLC. Up to now double tax relief for UK individuals in receipt of US LLC profits already taxed in the US has been denied as what was received was deemed by HMRC to be a different source of income from the profits of the LLC (ie as a separate distribution from the capital interest in the LLC).

The implications of this case for the UK tax treatment of distributions from US LLCs received by UK taxable individuals and companies may, however, depend on the provisions of the US LLC agreement.

HMRC guidance at DT19853A on the application of relief for US taxes suffered treats US LLCs as taxable entities that are fiscally opaque rather than fiscally transparent; in other words, more like a company than a partnership. Under that guidance, a UK resident member is treated as receiving distributions of profits, similar to a dividend from a company, rather than being entitled to the income as it arises as in the case of a partnership. This guidance may now need updating.

The Supreme Court decision took significant note of the First-tier Tribunal's (FTT) findings of fact in assessing whether the LLC profit allocation was corporate or partnership in nature, with the outcome in this case that it was viewed as partnership profit.

It disagreed with the Upper Tribunal's comment that the US LLC's profits could not belong to the members as they had no proprietary rights in the assets. They preferred the view of the FTT that conceptually, profits and assets are different and that the combination of the application of Delaware law and the LLC agreement meant that the profits belonged to the members.

It also criticised the Court of Appeal's focus on whether Mr Anson had proprietary rights in the LLC profits, instead of determining whether the UK tax was computed by reference to the same profits or income by which US tax was computed.

The Supreme Court distinguished the Anson case from the decision in Memec (Memec plc v Inland Revenue Comrs [1998] STC 574) by distilling the issue to one of whether or not the LLC profit was income of its members. The Memec case considered whether or not there were proprietary rights to income of a German silent partnership that enjoyed distributions from third party companies. That case concluded Memec plc's rights in the partnership were a separate source for the purpose of the UK/German treaty, rather than Memec plc having proprietary rights in the subsidiaries of Memec gmbh or their dividends.

There was some discussion of the interpretation of 'same' in the context of the same profits. A pragmatic approach was considered appropriate, so that "profits on which foreign tax is computed and in respect of which relief can be claimed are not confined to those arising under UK tax principles in individual UK chargeable periods".

It will be interesting to see what wider impact this case has in other areas where there are differences in the way in which tax computations are carried out in different countries, for example where there are different matching rules for securities under CGT.


2.1 Scottish land reform bill

The Land Reform (Scotland) Bill was introduced to the Scottish parliament on 22 June 2015. Amongst the measures included in the bill is the requirement that shooting estates and deer forests are entered onto the valuation roll from April 2017, with the implication that rates will be payable on these land categories from that date.

Landowners of sporting estates stopped paying business rates in 1994 after being given an exemption by a previous government in the 1990's.

In addition to measures providing greater transparency around the individuals controlling land, if the Bill is enacted as drafted, Scottish Ministers will have the power to consent to the transfer of land to a community body, or a nominated third party, where the transfer is likely to deliver significant benefit, remove or prevent significant harm and enable further sustainable development.

The Bill is currently at stage 1, consisting of a Scottish parliamentary debate on whether the general principles should be agreed to. Stage 2 would be a detailed consideration of any amendments. Stage 3 considers further amendments and consists of a debate on whether to pass the Bill.

The main measures in the Bill and a copy of the Bill as introduced can be found at the following links:

2.2 Self Assessment documents to support loan and mortgage applications

With the move to a more digital based system, tax documents requested by lenders to support mortgagee applications and so on may not exist and have needed to be produced solely for that purpose. Mortgage lenders are now starting to accept downloaded versions of some forms to save having to request them from HMRC.

HMRC has been working with the Council of Mortgage Lenders to improve its online SA documents, in particular Tax Calculation (SA302) and Tax Year Overview, so that lenders can consider accepting them as evidence of income. Adding the Tax Year Overview as evidence addresses the Financial Conduct Authority's concerns about the robustness of the Tax Calculation.

The new process is still bedding in. Some lenders are accepting copies of the online documents while others will ask for original paper copies. HMRC recommends first checking with the lender what they accept to avoid any unnecessary delay or confusion.

If the lender accepts copies of online documents, the agent or taxpayer will be able to print them from the online account without having to contact HMRC.

If you send tax returns using:

  • HMRC software: both documents can be printed from HMRC Online Services;
  • Commercial software: the Tax Year Overview can be printed from HMRC Online Services, but the software package will need to be used to print the Tax Calculation.


3.1 Income tax due on exercise of share options

The First-tier Tribunal (FTT) has concluded that Alistair Norman was liable to income tax on his exercise of Qlick Technologies Inc. options, the gain from which he had declared as a capital gain on his 2010/11 tax return and on which HMRC had raised a discovery assessment. Neither the taxpayer, nor his tax agent, was held to have been careless in the submission of the original tax return.

It was held that because the taxpayer and agent were not deemed to be experts and had taken the view the options were not employment-related as they were not a term of the employment contract. As the taxpayer had not appealed the penalty that had been assessed when the discovery assessment was made, the FTT asked HMRC to honour an undertaking to cancel that penalty.

No enquiry had been made into the return before the normal enquiry deadline (1 February 2013), but a discovery assessment was made on 26 March 2014. A penalty based on careless submission of the tax return was raised on 24 April 2014.

The difference between the cost of exercise and the market value of the shares at the date of exercise of an employee's option is charged to employment income tax. In the circumstances of this case, however, the FTT held that the submission of the tax return, on the assumption that the gain was chargeable to CGT, was not careless.

Where it is clear from the documentation that share options are granted by a current or prospective employer, whether or not they arise from, or are in contemplation of, the employment, the provisions of ITEPA 2003 part 7 that tax option gains to employment income tax will apply and national insurance charges could also be due: the legislation is very wide.

3.2 Tax-Free Childcare to start early 2017

The decision in Edenred (Edenred (UK Group) Limited and another v HM Treasury and Others [2015] UKSC 45) clears the way for the introduction of the new scheme in 2017. Its introduction had been scheduled for autumn this year.

A legal challenge had been brought in the Edenred case by voucher providers against the Government and its decision to deliver the Tax-Free Childcare through HMRC and the Department of National Savings and Investments (NS&I). The case has been won by the Treasury in the Supreme Court and the scheme can now go ahead.

The current system of Employer-Supported Childcare through qualifying childcare vouchers are tax free under limited circumstances (see ITEPA 2003 s270A). The existing scheme will continue to accept new entrants until the new scheme commences. After that, the two systems will run together. Parents may wish to check whether it would be advantageous to join the current scheme before it is closed to new entrants.

The exact details of the rollout have not yet been announced.


4.1 Validity of retrospective SDLT legislation

In the case of APVCO 19 Ltd and others the Court of Appeal has rejected the taxpayers' EC Human Rights claim that retrospective legislation introduced in FA13, backdating the effect of the new subsale legislation to 21 March 2012, was incompatible with those rights.

The human rights issues were heard before any case had been taken to the FTT on whether the SDLT scheme (a deferred completion scheme devised by Blackfriars Tax Solutions LLP using options and the subsale provisions) was effective. It appears the scheme used by the appellants in this case was only disclosed under DOTAS on 22 April 2013.

The taxpayers argued that the money due for SDLT as a result of the legislative changes was a 'possession' that engaged human rights claims when the taxpayer's right to that money was deprived. However, in the Court of Appeal Lord Justice Vos concluded (as did the High Court previously) that this was not a possession as there was an arguable claim by HMRC that there was an obligation to pay SDLT, so the taxpayers could not be said to have been deprived of their money. Lord Justice Floyd concluded the amount due for SDLT was not a possession as the taxpayers had not yet proved their scheme worked.

The Court of Appeal considered the circumstances covered by the scheme fell squarely within the March 2011 Government protocol on the circumstances when new tax legislation could be expected to apply from a date earlier than the date of announcement. As a result, the retrospective measures could not be said to be unforeseeable and arbitrary.

4.2 Updating of cultural tests for TV programmes

The new statutory instrument SI 2015/1449 updates the cultural tests for drama and documentary television programmes, as well as introducing a new cultural test for children's programmes eligible for TV tax credits. It comes into force on 23 July 2015.

To be eligible for TV tax credits, programmes must be certified as British programmes. Prior to these new rules, programmes are required to accumulate 16 out of 31 points in the existing test to gain certification. The changes to the existing test are:

  • A new definition for heads of department involved in the production of children's television programmes. Heads of department are eligible to receive points under the new test for children's television programmes.
  • An increase in the number of points available from 4 to 6 for programmes with a high percentage of dialogue in English or another language recognised for official purposes in an EEA state.
  • An increase from 3 to 6 in the number of points available when a high percentage of specified production activities involved in the making of the programme take place in the United Kingdom.
  • A new cultural test for children's television programmes, based on the existing cultural tests for other types of television programmes. Points are awarded under the same categories (setting; origin of characters; story; language and cultural aspects of the programme, where certain work on the making of the programme is carried out, and the residence or nationality of the personnel involved in the making of the programme) as for the other categories of television programme.

As a result of the changes, programmes will need to accumulate 18 out of 35 points under the new test to be certified.

The changes will not apply if an application for certification is made prior to the entry into force of the regulations.

However, if principal photography or shooting for a programme has commenced before the entry into force of the regulations, but no application for certification has been made, the television production company may elect to not have the amendments applied to that programme. Where the election is made the programme will be assessed against the applicable rules for that programme as if amendments had not been made.


5.1 Cessation of a partner's responsibility for VAT

The First-tier Tribunal has considered that, on the evidence presented, Gordon Lye's letter of notification to HMRC that his partnership had ceased was sufficient notice to HMRC that the partnership had ceased for VAT purposes. The case is an illustration of the importance of the need to provide HMRC with notices of changes in a partnership, the retirement of any partner and the cessation of the partnership.

VATA 1994 s.45 provides that until the date on which a change in the partnership is notified to the Commissioners, a person who has ceased to be a member of a partnership shall be regarded as continuing to be a partner for the purposes of VAT. This applies, notwithstanding Partnership Act 1890 s.36, which provides that where a person deals with a firm after a change in its constitution he is entitled to treat all apparent members of the old firm as still being members of the firm until he has been given notice of the change.

Due to a breakdown in relations with the other partner and the practicalities of dealing with the cessation of the partnership business, HMRC and Mr Lye took different views of when the partnership had ceased.

HMRC contended VAT assessments were due for periods until 18 August 2010, the date of an agreement reached between Mr Lye and his former partner as to the termination of the partnership. That agreement provided for terms for the cessation of the partnership to be treated as dissolved on 1 May 2008.

Mr Lye maintained he had written to HMRC on 3 May 2008 indicating the partnership had ceased and produced a copy of that letter. HMRC maintained they had not received it, but could not produce evidence that the letter had not been received.

Fortunately for Mr Lye, the Tribunal accepted Mr Lye's letter and that the partnership ceased to be registered from 5 May 2008. Had the notification been treated as made in 2010, the partnership VAT assessments for periods to August 2010 would have stood and Mr Lye and the other partner would have remained jointly and severally liable for those assessments.

5.2 VAT treatment of fees - redemption of face value vouchers

The Upper Tribunal (UT) reconsiders face value vouchers in Secrets v HMRC [2015] UKUT 0343 (TCC) The Upper Tribunal has held that commission charged on redeeming vouchers was a taxable supply and not a VAT exempt supply in connection with the dealing of a security for money.

In the Secrets case, patrons of the club were charged a 20% fee to purchase in-house vouchers using their credit card, which they could give to dancers for services. The dancers could redeem the vouchers for a further 20% discount.

The commission, charged on redeeming vouchers by the dancers was held to be a charge for services supplied by the club to enable the dancers to increase their business activity, rather than a commission for dealing in security for money. This is in contrast to an earlier High Court decision (Kingfisher plc v Commissioners of Customs and Excise [2000] STC 992), but it was clear in that case that the charge was more closely related to the supply of credit than the supply of taxable services. The amount of VAT at stake in the Secrets case was £549,258 in 2009 in respect of five companies.

In the Kingfisher case, Prudential issued vouchers on credit to individuals. Retailers who were part of the Prudential scheme could redeem the voucher for 90% of its face value. Kingfisher tried to argue the commission was a taxable supply of advertising as it increased their sales. Kingfisher accounted for output VAT on its sale based on the full voucher price, and presumably were seeking to limit the cost to them of the commission service by treating the commission as taxable.

The Kingfisher case was distinguished from the Elida Gibbs case (Elida Gibbs Ltd v C & E Commissioners CJEC Case C-317/94; [1996] STC 1387), where the retailer was only required to account for output VAT on its sale on the amount of cash it received. In Kingfisher, it was a third party who had issued the voucher to be used for any purchase, in contrast to Elida Gibbs where a manufacturer issued a voucher for use in purchasing the manufacturer's goods from a retailer for a discounted price.

The taxpayer, 'Secrets', argued that the commission charged for the redemption of the vouchers fell within the scope of VAT exemption as a dealing in security for money (VATA94 Sch9 Group 5 item 1. However both the First-tier Tribunal and UT concluded that the commission charged to the redeemer of the voucher was a taxable supply, as the use of the voucher enabled the redeemer to conduct their business of dancing and companionship services provided at tables in the clubs and increase their sales.

The commission club patrons were charged for the issue of the voucher was agreed by both HMRC and the taxpayer to be a supply of services connected with a retailer voucher and was therefore taxable, as the voucher could be redeemed for a taxable supply (of dancing and companionship services). This is in accordance with VATA94 Sch10A paras 2 and 4, which applies for face value vouchers issued on or after 9 April 2003.

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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