UK: Weekly Tax Update - 7 December 2015

Last Updated: 9 December 2015
Article by Smith & Williamson

1. GENERAL NEWS

1.1 TAXE Special Committee report to the European Parliament

On 25 November 2015, the European Parliament´s plenary adopted the TAXE Special Committee's 'Report on tax rulings and other measures similar in nature or effect.'

The report, which covered a range of issues,:

  • comments on tax avoidance and a conclusion that the best response to aggressive tax planning is good legislation and international coordination;
  • encourages the EU to go further than the BEPS solutions in coordination and convergence and the avoidance of harmful tax competition;
  • expresses its support for mandatory publication of country-by-country tax information containing information on tax rulings;
  • favours a mandatory Common Consolidated Corporate Tax Base (CCCTB), including an interim regime for temporary cross-border loss offset;
  • is critical towards the presence of Big Four accountancy representatives in European Commission advisory groups like the Platform for Tax Good Governance and the Joint Transfer Pricing Forum on tax advisers;
  • recommends specific consideration of whether the combination of tax advice and auditing functions within the same firms can lead to conflicts of interest, and to propose measures accordingly, including by introducing mechanisms to keep departments within consultancy firms separate; and
  • identifies a conflict of interest for tax firms that advise both the private sector and governments on tax planning opportunities, and asks the European Commission to propose a code of conduct at EU level to prevent such conflicts of interest.

www.europarl.europa.eu/sides/getDoc.do?pubRef=-//EP//TEXT+TA+P8-TA-2015-0408+0+DOC+XML+V0//EN

1.2 Office of Tax Simplification (OTS) projects' surveys

The OTS is carrying out two major projects: on small company taxation and the closer alignment of income tax and NICs. The OTS is aiming to report by 1 March 2016. To progress the projects, it is seeking input to the work. To make it easy for people to contribute, it has published online surveys for both projects. To provide your views, go to:

http://freeonlinesurveys.com/s/z4sVG8aA (for small companies)

http://freeonlinesurveys.com/s/rsvER4IR (long version of IT/NICs - aimed at those involved as advisers)

http://freeonlinesurveys.com/s/koTX0Stv (short version of IT/NICs for all interested parties)

Alternatively, the OTS can be contacted at: ots@ots.gsi.gov.uk

1.3 Work on double tax treaties, protocols and information exchange agreements

HMRC has updated its list of planned negotiations on double taxation agreements and tax information exchange agreements. The USA is included in the list of countries with which HMRC will work on double tax agreements and protocols.

www.gov.uk/government/publications/double-taxation-agreements-developments-and-planned-negotiations/planned-negotiations-on-double-taxation-agreements-and-tax-information-exchange-agreements

2. PRIVATE CLIENT

2.1 Judicial review right to appeal – Ingenious investors

A group of taxpayers has been granted the right to appeal to the Court of Appeal in respect of the dismissal of their challenge to HMRC in the judicial review case over the issue of accelerated payment notices connected with Ingenious Media partnerships.

The case, involving over 80 taxpayers, is expected to take place towards the end of 2016.

www.out-law.com/en/articles/2015/december/court-of-appeal-highlights-real-prospect-of-success-of-accelerated-payment-notice-judicial-review/

3. PAYE AND EMPLOYMENT

3.1 Approved travel expenses

SI 2015/1948 sets out the approved method of calculating a meal allowance for costs incurred during 'qualifying travel', so that it is not a taxable benefit for an employee for the 2016/17 tax year and subsequently. This would be additional to any travel expenses incurred and reimbursed under ITEPA 2003 s.338 for attending a place of performance of duty other than the permanent workplace. The employer is required to ensure both that the employee actually incurs expenses and that it does not suspect the employee of not having incurred the expense. To be tax free for the employee, the allowance cannot be part of a salary sacrifice arrangement.

One meal allowance per day can be paid in respect of one instance of qualifying travel, where that amount does not exceed:

  1. £5 where the duration of the qualifying travel in that day is 5 hours or more;
  2. £10 where the duration of the qualifying travel in that day is 10 hours or more; or
  3. £25 where the duration of the qualifying travel in that day is 15 hours or more and is ongoing at 8pm.

An additional meal allowance not exceeding £10 per day in case a) or b) can be paid where the qualifying travel in respect of which that allowance is paid is ongoing at 8pm.

www.legislation.gov.uk/uksi/2015/1948/pdfs/uksi_20151948_en.pdf

4. BUSINESS TAX

4.1 Application of the unallowable purpose test to a deemed loan relationship

The First-tier Tribunal (FTT) has held in the Ladbroke case that an arrangement designed to convert a variable return on shares to a guaranteed return, thus deeming the shares to be a creditor loan relationship accounted for at fair value, had an unallowable purpose, so that the associated debits were disallowed. Once the shares had been deemed to be a loan relationship, the FTT held the unallowable purpose rule could apply to it. While this case refers to legislation now superseded, the amounts at stake are significant. It is not yet known if the decision will be appealed.

This case considered a disclosed avoidance scheme implemented by companies in the Ladbrokes Group seeking to achieve loan relationship debits of £254m in one company and £12m in another company. The larger debit arose from the fair value adjustment as a result of the tax treatment of an investment in shares subject to a total return swap, a swap drawn up within the group.

The transaction resulting in the £254m reduction in value arose from the novation of loan liabilities from one group company to another whose shares were subject to a total return swap. This was done on 11 March 2008, the day before the legislation was changed in FA 2008 to remove debits arising from the reduction in value of shares under these provisions from the scope of the loan relationship rules. The novation of the loans while the total return swap was in place caused the investing company to fair value downwards its holding in the shares of the company to which the loans had been novated, resulting in the £254m reduction.

The group continuity rules (now in CTA 2009 part 5 chapter 4), meant that there was no difference in the treatment of the novated loans on a group basis. However, the triggering of the application of the rules on shares with guaranteed returns meant that, had the scheme succeeded, there would have been a one sided tax deduction with a tax benefit in the region of £71m.

The loans remained in existence for a period after the novation, resulting in the other £12m disputed debits. HMRC succeeded in arguing that these also arose from an unallowable purpose, with their disallowance for tax resulting in the taxpayer being left with a one sided taxable credit for the group income from these loans.

Travel Document Service (1) Ladbroke Group International (2) v HMRC

www.financeandtaxtribunals.gov.uk/judgmentfiles/j8700/TC04728.pdf

4.2 Corporation tax instalment payment dates - very large companies from 1 April 2017

Draft regulations have been issued dealing with the accelerated instalment payment dates for very large companies for accounting periods beginning on or after 1 April 2017. They will be brought forward four months and will commence on the 14th day of the third month of the accounting period. Very large companies will need to pay all their corporation tax liability before the accounting year end.

For accounting periods beginning on or after 1 April 2017, instalment payments for companies with taxable annual profit of over £20m, as adjusted for the number of group companies, will commence in the third month from the start of the accounting period (2 months and 13 days after the first day of the accounting period) and every three months after that.

This will mean that a 'very large company' with a 31 March year end will have the following instalment payment dates for the year to 31 March 2018:

  • 14 June 2017.
  • 14 September 2017.
  • 14 December 2017.
  • 14 March 2018.

There are provisions to deal with payment dates for shorter accounting periods.

There is no change to the rules for other large companies with taxable profits of more than £1.5m but not more than £20m in an accounting period.

www.gov.uk/government/publications/draft-legislation-corporation-tax-payments

4.3 TV relief – cultural test

SI 20156/1941 adds the treaties signed by Brazil and South Africa to the list of international treaties where qualifying co-produced television programmes can be made and qualify for TV tax relief. It is effective from 21 December 2015.

www.legislation.gov.uk/uksi/2015/1941/pdfs/uksi_20151941_en.pdf

4.4 Advance assurance for R&D tax relief

HMRC has issued a form to be used to apply for advance assurance in respect of the first claims for Research and Development (R&D) tax relief. A company meeting the conditions for entering the arrangement that carries out R&D for itself or other companies, may seek assurance that its R&D claims will be allowed without further enquiry from HMRC for the first 3 accounting periods of claiming for R&D tax relief. We are currently evaluating the form and process and strongly recommend anyone considering applying should take advice first.

To be able to take advantage of advance assurance, the company must meet the following principal conditions:

  • no previous R&D tax relief claim;
  • annual turnover of £2m or less;
  • fewer than 50 employees.

Seeking assurance may involve a call or meeting with HMRC. Obtaining assurance that a claim will not be enquired into by HMRC may not mean that everything that could be claimed has been included in the claim, nor that all possible issues or changing circumstances affecting a claim will be covered. Please get in touch with one of our research & development tax relief specialists through your usual Smith & Williamson contact for further information.

As is often the case with new HMRC forms, HMRC say: 'You'll need to fill in the form fully before you can print it. You can't save a partly completed form so we suggest you gather all your information together before you begin to fill it in.' However, it is not possible to move to a new page to see what information is required until you have completed the previous page.

www.gov.uk/government/publications/research-and-development-tax-relief-application-for-advance-assurance-for-research-and-development-tax-relief-ct-rd-aa

5. VAT

5.1 Zero rating of construction costs for a relevant residential property

The First-tier Tribunal (FTT) has overturned HMRC's decision against Edmont Ltd to refuse zero rating for the costs of constructing a dwelling intended for occupation by a person involved in a particular business, where the disposal of that property required its disposal as one unit with the prior permission of the Council that had granted the planning permission. The FTT considered a number of other decisions in similar cases where different conclusions had been reached in respect of similarly worded planning conditions. As a result it held that each situation must be considered in its own context and in the light of these previous decisions.

HMRC had argued that one of the relevant conditions was not met. The condition not satisfied is set out in note 2(c) of VATA 1994 Sch8 group 5, that the separate use, or disposal of the dwelling is not prohibited by the term of any covenant, statutory planning consent or similar provision.

The planning application had arisen from the need to house a worker for an equestrian business. The planning consent was not, however, restricted to the separate use for the equestrian business concerned, and could encompass a worker of any equestrian business, or even an agricultural or forestry worker. The FTT considered that reference to 'separate use' in the context of this case meant separate use from the equestrian barn and other facilities that were included in the planning applications.

The FTT therefore held that the terms of occupation were sufficiently wide and as the building could be disposed of with the permission of the council, the requirements for zero rating were met. Output VAT of around £80,000 on the construction costs was as a result not payable.

www.bailii.org/uk/cases/UKFTT/TC/2015/TC04676.html

6. AND FINALLY..

6.1 Giving it all away

Children all over Europe have just celebrated the arrival and brief residence of that great Turkish non- dom himself, Nikolaus, Sinterklaas, St Nicholas, the patron saint of sailors, pawnbrokers, thieves, but mostly children, and, surely, his duties in each country are more than 'incidental' for tax purposes. Remittances, let's hope, were everywhere. It will take Santa the rest of the year to prepare the tax returns.

How appropriate then we can also salute a latter day gift worthy of Father Christmas himself. Mark Zuckerberg is to be doubly congratulated; first on the birth of his daughter and second on his promise of a vast gift of Facebook shares over his lifetime. The donation is apparently worth £30bn in today's values. His intention is that the money should be spent 'to advance human potential and promote equality for all children in the next generation'.

We wonder, though, if that gift to world causes had been made in the UK by a Briton, whether it would qualify for charitable purposes. If not, if the gifts had been made here, there could have been more CGT payable than the whole of the UK CGT take for 2014-15 (£5.6bn).

If they did qualify for charitable purposes, the further Christmas present of gift aid to charities may have made a rather large hole in the latest Autumn Statement – either way enough to make the OBR scratch its corporate head.

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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