UK: Weekly Tax Update - Monday 26 October 2015

Last Updated: 3 November 2015
Article by Smith & Williamson

1. General news

1.1 Finance Bill 2016 draft clauses to be published on 9 December 2015

In a written statement Mr David Gauke, the Financial Secretary to the Treasury, has announced that draft clauses to be included in Finance Bill 2016 will be published on Wednesday 9 December 2015. That day will also see the publication of responses to policy consultations, explanatory notes, tax information and impact notes and other accompanying documents. The consultation on the draft legislation will be open until Wednesday 3 February 2016.

1.2 Justice Secretary mulls lawyers' levy further

On Thursday 22 October, The Times reported again on the plans for a lawyers' levy on turnover, to hit the top 100 corporate law firms. It is estimated that this could raise £190m. The idea had previously been aired by Mr Gove in June. This is as a response to the perceived need to replace the current funding of the criminal courts system through charges on guilty defendants and not to fund this as other public services through general taxation. The tax or levy would be payable by firms irrespective of the amount of criminal court work carried out. (paywall)

2. Private client

2.1 The Scottish rate of income tax (consequential amendments)

Amendments have been made to the income taxes acts in consequence of the power of the Scottish Parliament to set a Scottish rate of income tax (SRIT), which can come into force from April 2016. The changes will give wider effect to the SRIT from the date of its introduction, to areas such as pension contributions and gift aid, where it had originally been agreed following consultation that, at least for a temporary period, it would be administratively easier to use the rest of the UK (rUK) basic rate.

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The amendments include:

Income tax relief at source for contributions to a registered pension

Finance Act 2004 (FA 2004) has been amended so that the basic rate of tax added to the 'net of tax' pension contribution by the scheme, by way of a claim from HMRC, may be at the Scottish basic rate. As the use of the use of the Scottish basic rate is dependent on the scheme administrator being so notified by HMRC, it will be interesting to see how this will work in practice. It appears that the administrator will be able to use legitimately the rUK rate until told otherwise.

If the rate advised to the pension administrator subsequently varies, the administrator will not need to make retrospective adjustments.

So far as the pension scheme is concerned, new sections 192A and 192B in FA 2004 mean that, for the tax year in which a contribution is made, a Scottish taxpayer will be treated as having received income tax relief at the Scottish basic rate, even if the relief at source was under the rUK basic rate. The reverse will also apply, such that a non-Scottish taxpayer will be given relief at the rUK basic rate even if the relief at source was at the Scottish basic rate.

Any misalignment is sorted out outside of the pension scheme itself. The income tax relief and grossing up, in the individual's tax computation will be independent from the tax added to the contribution and therefore the amounts may differ. Where too little relief has been given at source, additional relief can be claimed by way of a tax reduction. Excessive relief will be clawed back though self assessment.

There are further changes so that a Scottish taxpayer will receive higher and additional rate relief at the Scottish rates and that Scottish basic, higher and additional rates will apply in calculating the pension annual allowance charge.

Deficiency relief in respect of a life insurance policy

Relief is available when an individual's life insurance policy or similar policy or contract comes to an end where a 'deficiency' arises if the net overall gain exceeds that previously subjected to income tax on historic partial withdrawal. ITTOIA 2005 s.539 is amended so that, if a deficiency arises, the Scottish basic, higher and additional rates are to be used in calculating a tax reduction given for a Scottish taxpayer.

Dealing with the reduction in the residuary income of a deceased's estate in certain circumstances

ITTOIA 2005 s.9, which provides for a reduction in the residuary income of a deceased's estate in certain circumstances, is amended so that it takes into account income charged at the Scottish higher rate or the Scottish additional rate as well as income charged at the rUK higher rate or additional rate. It also provides for the amount of extra liability to be calculated by reference to the Scottish basic rate instead of the basic rate in the case of a Scottish taxpayer.

The tax on a social security pension lump sum

FA(No 2) 2005 s.7 imposes a charge to income tax where a person becomes entitled to a social security pension lump sum. This is amended so that the Scottish basic, higher and additional rates will apply in the case of a Scottish taxpayer.

Transferable tax allowance for married couples

The provisions in ITA 2007 on the transferable tax allowance for married couples are amended to provide for those individuals liable to tax at the Scottish basic rate.

Gift Aid and other charitable gifts

For a Scottish taxpayer, the relief is to be treated as given at the Scottish basic rate with that rate used when grossing up the gift even though the grossing up by the charity is actually made at the rUK basic rate in all cases.

Note that ITA 2007 s.520 (special rule for income tax treated as paid by charitable trust) is not being amended so the charitable trust will recover tax based on the standard rUK basic rate. This is so whether or not the gift is from a Scottish taxpayer.

3.PAYE and employment

3.1 HMRC construction industry scheme manual

HMRC has updated its construction industry scheme (CIS) manual, including revisions to the guidance on CISR12080. The guidance explains when a property investment business might cross the line into being classified as a property developer, thus potentially attracting mainstream contractor status instead of deemed contractor status. This has implications for the point at which the business may be required to operate the construction industry scheme.

Mainstream contractors are liable to operate the construction industry scheme whatever the level of their expenditure on construction operations (FA 2004 s.59 (1)(a)). Non-construction businesses may also in some circumstances be deemed to be contractors for this purpose.

The main change to CIS12080 is to include revised text as follows:

'Where a business that is ordinarily a property investor undertakes some activities attributed to those of 'property development', they will not usually be considered a mainstream contractor during the period of that development. This is because the usual nature of the business is 'property investment' and not 'property development'.

Where the property investment business enters into multiple or substantial contracts relating to construction operations for the purposes of development of one or more properties, you will need to decide if the nature of that business has now changed from 'property investor' to 'property developer', in which case they would now be considered to be mainstream contractors as the nature of their business has changed. Where, at a future date, they revert to property investment activities only, then their status as a deemed contractor should be applicable once again. If their expenditure is likely to remain below £1m annually, then deregistration from CIS may also be considered appropriate.'

3.2 HMRC targets CFD schemes

HMRC has started to issue letters to employers inviting them to settle tax due on Contracts for Differences (CFD) schemes in order to avoid litigation. In a nutshell, these schemes work by issuing employees with a contract for differences or similar to a contract for differences. Such a contract is an employment related security and thus, in essence, the employee is taxable on the low value at award and the later proceeds are subject to capital gains tax only. We understand HMRC are maintaining that the contract awarded to the employee is not a true CFD, as not really being to secure profit for the employee but merely to pay him earnings.

Any precedent case may also test the broad brush approach of the Court of Appeal to such issues following the PA Holdings decision (PA Holdings Ltd v Revenue and Customs Commissioners [2012] STC 582). Employers are being offered an opportunity to settle the PAYE and NIC HMRC allege are due without resort to litigation.

HMRC often issues a specific 'Spotlight' where it believes a scheme does not work, but has not yet done so here.

There will, though, have to be litigation and it could take some time. Ironically, HMRC will be arguing that the legislation, clearly designed to catch and therefore govern purported CFD arrangements, will not apply here. The legislation even refers to 'pretended purpose'.

The possible sting in the tail is that HMRC may consider the scheme to have been notifiable under the DOTAS rules and thus susceptible to the Accelerated Payment Notice (APN) process, with employers required to pay the alleged tax due first and argue the toss later.

4. Business tax

4.1 CGT group relief on settlement of a debt

The Court of Appeal has confirmed the earlier decisions of the First-tier (FTT) and Upper Tier Tribunals (UT) that DMWSHNZ Limited and another group company were not entitled to make an election in December 2003 to transfer a gain accruing from one to the other under a TCGA 1992 s.171A, as the gain did not arise on a disposal to a non-group member.

The gain arose on the settlement of qualifying corporate bonds into which a gain of £203.7m had been rolled over on a disposal in 1998.

The satisfaction of 43% of the bonds triggered the realisation of the £88.6m of the gains rolled over. The company attempted to treat the gain as arising in another group company to which losses had been successfully transferred that would have covered the gain.

As the satisfaction of the debt did not amount to the acquisition of an asset by the non-group third party, the Court of Appeal agreed there was no disposal outside the group. As a result the provisions of TCGA 1992 s.171A as drafted at the time could not apply and the gain was chargeable in full.

S.171A was amended by FA2009. The amendments mean that in similar circumstances now, a s.171A election might have been possible. In addition, the substantial shareholdings exemption has applied since April 2002, and if that had been in operation in 1998, there would not have been a chargeable gain in this case.

4.2 HMRC withdrawal of business records check programme

The Chartered Institute of Tax (CIOT) has been informed by HMRC that it is withdrawing its business records check programme. This, as the CIOT mentions in its press release, is a victory for common sense. HMRC found that the majority of businesses visited had adequate records.

4.3 New real estate exchange platform

There have been reports that a team of high profile figures from the City of London are setting up an exchange to trade shares in companies that own single commercial property assets. It will trade as IPSX (the 'International Property Securities Exchange'). IPSX will be open to both domestic and international commercial real estate owners, subject to satisfying the admission criteria and rules for the exchange and the FCA.

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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