UK: Weekly Tax Update - 16 November 2015

Last Updated: 24 November 2015
Article by Smith & Williamson

1. General news

1.1 Social Investment Tax Relief (SITR): contractor accreditation for 'spot purchase' Contracts

Proposed regulations and guidance and a consultation document have been issued on changes to the Social Investment Tax Relief (SITR) accreditation process for companies set up to deliver a Social Impact Bond (SIB) contract. These changes are intended to make the accreditation process easier for companies that enter into multiple spot purchase SIB contracts, by eliminating the need for separate accreditation of each contract. Responses to the consultation are requested by 30 November 2015.

Social Impact Bonds (SIBs) are a new tool to unlock private finance and public investment. Organisations, that are best placed to tackle social problems can do so on a payment-by-results basis. Companies set up to deliver a SIB contract ('Social Impact Contractors') are currently eligible for investment attracting SITR, where they have been accredited by a Cabinet Office-run accreditation process. SITR can offer investors income tax relief of 30% on qualifying investments, and the possibility of deferral of capital gains into such investments.

In a spot purchase SIB, a social impact contractor will, over time, enter into any number of SIB contracts in substantially the same form with different contracting authorities. All the contracts will commit the social impact contractor to deliver the same outcome(s) for a set price. This means that contracting authorities are able to 'buy' outcomes for as few as one beneficiary. The government has already committed to ensure that spot purchase SIB structures are eligible for SITR.

Under current rules a contractor would need to obtain accreditation for each contract it entered into with a contracting authority. The proposed changes would mean only the initial contract would need to be accredited if the following ones were in the same form, thus simplifying the accreditation process.

1.2 PAC publishes its report on HMRC performance in 2014-15

The House of Commons Committee of Public Accounts (PAC) has published a hard-hitting report on HMRC's performance last year.

The PAC bluntly criticised HMRC in a number of key areas and made some recommendations. These include that HMRC should identify and report the value of all tax avoidance schemes, including the value of those found legal by the courts. It states that the number of tax reliefs continues to grow but the scale and nature of tax forgone is invisible. It should therefore define the different types of tax reliefs and publish information on its monitoring of them.

Service to customers was also roundly criticised. The PAC said that HMRC is failing to provide an acceptable service to customers and the PAC had wide ranging suggestions as to how to deal with it. It also criticised the low level of offshore tax evasion prosecutions.

1.3 Summer 2015 Finance Bill

The 27 October 20015 version of the summer 2015 Finance Bill incorporates the late amendments and therefore revised clause numbers. It is at:

2. Private client

2.1 Mansworth v Jelley Losses, HMRC statements and legitimate expectation

In what appears to be an important judicial review decision, Mrs Justice Whipple has ruled firmly in favour of the claimant taxpayer over his legitimate expectation as to the tax treatment of share option gains following an unequivocal published statement by HMRC. HMRC's requirement that the taxpayer needed to show detrimental reliance on the guidance was too narrow a test.

The taxpayer, Ralph Hely-Hutchinson, had enjoyed unapproved share options gains in 1999 and 2000. In 2003, the judgement in Mansworth v Jelley [2003] STC 53 cast doubt on the then general understanding of the capital gains position on the disposal of shares obtained under unapproved employee options. HMRC issued a Technical Note (the 2003 Guidance), which reached the surprising but clear conclusion that, because of a credit to the employee available for amounts liable to income tax on the exercise of the option, it was possible, for capital gains tax purposes, for the base cost of the shares to be well above the actual market value and thus disposal of the shares could create a capital loss.

Notwithstanding criticism of the 2003 Guidance, not least by Smith & Williamson who raised it directly with HMRC at the time, HMRC remained adamant that its interpretation was correct. It was in fact wrong.

The legislation itself was amended in 2003 and again in 2005, but HMRC did not withdraw the Guidance until 2009 when, following further legal advice, they realised that the original losses were never due under the old legislation. At this stage, they issued a Revenue & Customs Brief (the 2009 Guidance) correcting the interpretation. There was, however, the issue of taxpayers who had relied on the previous advice. Mr Hely-Hutchinson was one of them.

The Guidance said that the primary duty of HMRC was that tax should be collected on the correct basis, but it accepted that to do so in some cases would be an abuse of power and in these cases HMRC would be bound by the guidance. It went on to say that such taxpayers had to demonstrate detrimental reliance on the 2003 Guidance.

In January 2003, Mr Hely-Hutchinson had duly made claims for his capital losses on his 1999 and 2000 share disposals. On 2 June 2003, HMRC had indicated they were opening an enquiry into his claims. It did not accept that they were due under the option scheme in question. This appeared in part to be because HMRC was disputing the scheme in question with his employer. Correspondence rumbled on until 2009 and the issue of the 2009 Guidance. HMRC then issued closure notices that stood or fell with the outcome of the judicial review.

In further correspondence, HMRC required the taxpayer to demonstrate he had reasonably acted on the 2003 Guidance and suffered detriment as a result. The taxpayer held his ground and complained HMRC were seeking to apply the change of law in the 2009 Guidance retrospectively.

Mrs Justice Whipple widely reviewed the jurisprudence relating to when HMRC should forgo tax otherwise legally due. She held: 'the circumstances in which [HMRC] may be required to forgo tax can travel beyond cases of detrimental reliance...[HMRC] can be required in an appropriate case to continue to apply the wrong tax treatment to ensure consistency of treatment, where the alternative would be conspicuously unfair and an abuse of power.' [judge's own emphasis].

'This is not just a matter of a private complaint by those who are in the subset [of those adversely affected] and have to pay more tax than their comparators, it is a public interest issue because taxpayers have been treated differently and that risks undermining public confidence in a fair and non- discriminatory tax system...'

Finding for the taxpayer, she added, 'I record my instinctive response which is that [the 2009 Guidance] and the Closure Notices based on it were very unfair.'

The Queen on the Application of Ralph Hely-Hutchinson v HMRC [2]15] EWHC 3261 (Admin).

2.2 Scottish rate of income tax (SRIT)

The Scottish Budget is set for 16 December 2015. The publication of the Scottish Government's financial plans is expected to include the announcement of the SRIT for 2016/17.

From 6 April 2016, a UK tax resident individual within any of three tests making him a Scottish Taxpayer will be subject to the Scottish Basic Rate, Scottish Higher Rate and Scottish Additional Rate on his taxable non-savings and non-dividend income. These rates are calculated based on each of the corresponding UK rates, less 10 percentage points, plus the SRIT. A SRIT of 10% would therefore mean the Scottish income tax rates would be the same as the rest of UK.

2.3 Reforms to the taxation for non-domiciles - comments of Smith & Williamson

Smith & Williamson's response to the consultation of 30 September 2015 on the reforms to the taxation of non-UK domiciles has been submitted to HM Treasury.

The response included suggestions on the simplification of the tax treatment of remittances from existing mixed funds for deemed domiciled individuals. The consultation covered potential policy changes on deeming long-term residents to be UK-domiciled, restricting non-dom status for those born in the UK with a UK domicile of origin and included an example of the draft legislation for these reforms.

3. Trust, estates and IHT

3.1 Whether property was 'excluded property' for the ten year charge applicable to Trusts

The High Court has held that property transferred from an excluded property trust and transferred back by the same settlor, but at a time when he had become UK domiciled, lost its status as excluded property for the purpose of the ten year charge applicable to trusts.

Trust No 1 was a Jersey resident discretionary trust, settled by a non-domiciled settlor, Michael Dreelan (MD), and which included MD in the class of beneficiaries. The trustees were Barclays Wealth Trustees (Jersey) Ltd (BW). Trust property settled by MD into Trust No 1 was 'excluded property' and so would have been free from the ten year charge applicable to such trusts had it stayed there. Some of it was transferred to Trust No 2, which had the same settlor (MD) who had by now become domiciled in the UK. It therefore ceased to be excluded property at that point. It was then transferred back to Trust No 1. The simple question was whether it had re-acquired excluded property status.

The MD and BW contended there was only one settlement concerning Trust No 1 in law and in fact. They suggested IHTA 1984 s.48(3)(a) meant that all the property in 'the settlement' is excluded property because at the time 'the settlement' [the original settlement] was made; MD was not domiciled in the UK.

IHTA 1984 s.81 treats property moving between settlements as remaining in the first settlement. They argued that because of its continuing effect, the funds were deemed always to have remained in Trust No 1 and so their transfer to the No 2 settlement and back had no effect on their status.

HMRC contended the return of the funds to Trust No 1 was a relevant disposition. It was a new settlement for the purposes of determining whether the property was excluded property or not. At the date of that act of settlement the settlor (MD) was domiciled in the UK and not outside it, so that it could not be excluded property under IHTA 1984 s.48(3)(a).

The High Court held that the deeming rule in IHTA1984 s.81 only applied for IHTA 1984 part III chapter III.

It did not apply for chapter I, including s.48, which decides what is excluded property. As a consequence, it was held that the transfer back to Trust No 1 meant that property was no longer excluded property. It would therefore be relevant property for the purposes of any ten year charge.

Barclays Wealth Trustees (Jersey) Limited (1) Michael Dreelan (2) v HMRC

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