UK: Weekly Tax Update - September 7, 2015

Last Updated: 14 September 2015
Article by Tina Riches

1 General news

1.1 Tax in Gulf Co-operation member states

The United Arab Emirates has issued a note on the possible implementation of VAT within its borders in co-ordination with similar moves by the other members of the Gulf Co-operation Council (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia). The note also refers to the possible introduction of corporation tax.

1.2 Agent repayment claim forms: HMRC standards

Customised forms used by agents for tax repayment claims on behalf of a client must meet certain standards.

Instead of HMRC forms, such as the R38, agents may use customised forms, which can be a combination of relevant documents, including agent authorisation and repayment claims, and may include agreements to terms and conditions or letters of assignment.

HMRC has issued guidance that such customised forms must meet certain standards of formatting and information. If they do not meet the standards, HMRC will consider them invalid and return them unprocessed.

HMRC will continue to accept customised forms that do not meet these standards if they were both:

  • printed and provided to customers before 26 August 2015; and
  • received by HMRC before 5 April 2016,

1.3 Updated DOTAS guidance

HMRC has updated its November 2013 DOTAS guidance. It has been updated for the following:

  • the introduction of a new information power enabling HMRC to obtain further information after a notifiable proposal or notifiable arrangements have been notified (effective from 24 July 2014);
  • Finance Act 2015 changes effective from 26 March 2015 as follows:
    • changes to the information that employers are required to provide to their employees and to HMRC in relation to avoidance schemes involving their employees;
    • increases in the penalty for scheme users who do not comply with their reporting requirements;
    • notes on protection for persons who wish voluntarily to provide information about potential failures to comply with DOTAS, despite restrictions imposed on them by promoters;
    • the requirement for promoters to notify HMRC if the promoter's details or those of one of their notified schemes change;
    • the ability of HMRC to publish information about schemes and promoters that HMRC receives under the DOTAS rules;
    • a note on HMRC's powers to obtain details of users of undisclosed schemes from introducers; and
    • the creation of a new power requiring additional information to be sent to clients/employees.

2 Private client

2.1 CGT enhancement expenditure

The Upper Tribunal (UT) has overturned the First- tier Tribunal's (FTT) decision in the case of Julian Blackwell. As a result his expenditure, incurred to remove his obligations over the way he had agreed to exercise his share voting rights, was not enhancement expenditure reflected in the shares at their eventual sale, and therefore not deductible in computing his capital gain on their disposal.

In 2006, Mr Blackwell had paid £17.5m to be released from obligations made in 2003 to Taylor Francis Group plc concerning the way he would exercise his voting rights on shares in Blackwell Publishing (Holdings) Limited, including on a takeover. The FTT had previously concluded that the 2006 payment was incurred in respect of the shares and that it enhanced their value by enabling the eventual purchaser's bid to be accepted.

The UT considered Mr Blackwell's shares were not affected by the agreements with Taylor Francis and the £17.5m payment. They concluded the FTT had made an error of law in concluding the agreement with Taylor Francis had changed the state of Mr Blackwell's shares. They also concluded that the payment to be released from the obligations did not 'preserve' or 'defend' any right over his shares, neither did it establish, preserve or defend his title over them, nor establish any right in them.

The decision in this case turned on the fact that, to be deductible in computing the gain under TCGA 1992 s.38(1)(b), the expenditure had to be directly related to the enhancement of the asset being sold and reflected in its state at the date of sale.

Although referring to different legislation (TCGA 1992 s.49(2)) the case of Sir Fraser Morrison (Scottish Court of Sessions XA145/13 December 2014), in contrast, concluded that there was no requirement for a direct link between a contingency payment and the disposal transaction, only that there be 'an adjustment in consequence of the contingent liability being enforceable'.

2.2 Only or main residence - was rebuilt property within original grounds?

The First-tier Tribunal (FTT) has held that a plot of land separate from the only residence of Mr & Mrs Fountain was not garden or grounds of their residence when it was subsequently sold for building. Private residence relief was not therefore available for the gain on disposal of that plot.

The case referred to HMRC guidance at CG64367, which sets out HMRC's view of circumstances when a plot of land separate from a residence can and cannot be considered part of its garden or grounds. Mr and Mrs Fountain originally owned a large residence principally used as their main residence. It was, however, divided into five plots and they moved into a new property built on plot four. They retained ownership of plot two, which they contended formed part of the garden or grounds of plot four, even though not physically adjoining it.

The Fountain's had contended that the fact that plot two had originally been part of the garden of their first property before division into five plots, supported their case that it was garden or grounds of plot four. However the Tribunal decided that consideration of the status of plot two by reference to the original residence (before division into plots) was irrelevant.

3 PAYE and employment

3.1 Advisory fuel rates change from 1 September 2015

The HMRC advisory fuel rates changed from 1 September 2015 as noted below (the rates applicable for 1 June to 31 August 2015, where different, are in brackets):

These rates can be used to reimburse employees for business travel in their company cars, or require employees to repay the cost of fuel used for private travel, to avoid taxable profit and class 1A NIC costs. The rates applicable prior to 1 September 2015 can be used instead of the new rates for the period up to 30 September 2015.

3.2 EIS and whether funds used for trading or investing

The First-tier Tribunal (FTT) upheld HMRC's refusal to authorise the appellant East Allenhead Estates Limited to issue an EIS 3 compliance certificate to an investor, the effective owner of the company, that would have entitled him to claim EIS deferral relief for an investment of £6,500,000 in its shares.

The appellant's business was the running of the East Allenheads Moor grouse shooting estate with associated high quality accommodation. Much of the £6.5 million was spent on additions and improvements to Allenheads Hall, the property in which accommodation was provided to clients of the business. This property was owned by the investor and not the appellant, though he did not live there. Part was also spent on high value antiques and art for that property including a Magritte painting bought for nearly £2.9 million.

The key disputes between the parties were:

  1. whether the appellant existed wholly for the purpose of carrying on a qualifying trade;
  2. whether the shares in question were issued in order to raise money for the carrying on of such a trade; and
  3. whether the money raised by the share issue had been employed wholly for the purposes of carrying on the trade within the relevant time limits.

The FTT found that the appellant did not exist wholly for the purpose of carrying on a trade on a commercial basis and the shares could not therefore have been issued in order to raise money for the purpose of carrying on a trade on such a basis.

By the time of HMRC's final refusal (November 2010), the two year qualifying period for expenditure following investment had expired and the money had been employed in part in the appellant's qualifying trade, but also (in large part) on providing personal benefits to the investor in the form of the improvements to Allenheads Hall, which the FTT considered could not form part of a qualifying trade and on an investment activity, namely, the purchase of very large amounts of art and antiques. The FTT strongly doubted, in the circumstances of this case, this could form part of a qualifying trade.

To read this update in full, please click here.

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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