UK: Weekly Tax Update - 7 March 2016

Last Updated: 15 March 2016
Article by Smith & Williamson

1. GENERAL NEWS

1.1 3% charge on additional dwellings in Scotland

Amendments have been proposed to the draft land & buildings transaction tax (LBTT) legislation concerning the extra 3% charge on second homes.

The amendments provide for the following:

  • The extra charge only applies if the chargeable consideration exceeds £40,000.
  • In determining whether a buyer owns more than one dwelling, dwellings in Scotland or elsewhere bought for investment or dealing purposes are excluded. This means that a person owning only buy-to-let properties will not face the additional 3% charge on the purchase of their first dwelling which is not bought for investment or dealing purposes.
  • Subject to a claim, the 3% extra charge will not apply to purchases of six or more dwellings in a single transaction.
  • Special rules apply for trustees, personal representatives and beneficiaries, including liferenters.
  • The ability to amend an LBTT return to recover the extra 3% charge if you sell your previous main residence within 18 months of acquiring the new main residence is to be permitted only if the buyer submits a land transaction return in respect of the new purchase.

The SDLT consultation document at section 2.16 had commented that the extra 3% charge will not apply to non-residential property and that the current treatment of mixed use property as non-residential will not change. In contrast, the (Scottish) LBTT legislation at para 4(3)(b) of Sch2A provides that so much of the consideration on a just and reasonable apportionment as is attributable to the acquisition of an interest in a dwelling, is subject to the extra charge.

The SDLT consultation also commented at paragraph 2.20 that the first purchase of a dwelling by a company or collective investment vehicle would be subject to the extra 3% charge. The LBTT legislation appears to extend that rule to individual buyers who purchase the property for an investment or dealing business. This is not, however, in an initial version of the draft guidance.

It is understood the Scottish rules are intended to operate differently from the SDLT rules operational for the rest of the UK in some respects.

www.scottish.parliament.uk/S4_Bills/Land%20and%20Buildings%20Transaction%20Tax%20(Amendment)%20(Scotland)%20Bill/SPBill85AS042016.pdf

www.scottish.parliament.uk/parliamentarybusiness/Bills/96000.aspx

1.2 House of Lords Economic Affairs Committee Report on the Draft Finance Bill 2016

The Committee looked in detail at three areas of the draft Bill: the clauses reforming the taxation of savings and dividends; those providing new powers for HMRC to issue Simple Assessments of an individual's tax liability; and those establishing the Office for Tax Simplification (OTS) on a statutory basis. It considered each of these from the perspective of how far they simplify the tax system and their impact on the compliance burdens of taxpayers.

The Report states that forthcoming changes to the taxation of savings and dividends are:

  • complex;
  • confusing; and
  • poorly communicated.

The Lords Committee said that HMRC's communications strategy was 'inadequate' and that there are concerns about:

  • communication: important changes to the taxation of savings and dividends will come into effect in a matter of weeks. Taxpayers are unaware of this and should be notified directly of the changes. HMRC's current communications strategy is inadequate.
  • complexity: the complexity of the tax system and compliance burden placed on individual taxpayers is growing. The Government must demonstrate how it is delivering a simpler tax system.
  • consultation: the consultation required by the 'new approach' to tax policy making is not being carried out consistently.
  • confusion: the absence of any roadmap for changes to the taxation of savings and dividends results in confusion and hinders taxpayer's ability to plan for the longer term.

The Committee also commented on the introduction of Simple Assessment and made some recommendations for HMRC to improve communications around this.

The Report also called on the Government to provide a comprehensive assessment of the impact on businesses and individuals of the longer-term move to digital accounts and that HMRC must take responsibility for plans to educate and support taxpayers.

The Committee welcomed the move to put the Office of Tax Simplification on a statutory basis. It recommended that the OTS should be given a bigger role in the design of tax policy and greater resources to support its important work.

www.parliament.uk/business/committees/committees-a-z/lords-select/economic-affairs-finance-bill-sub-committee/publications/

2. PRIVATE CLIENT

2.1 Denial of entrepreneurs' relief on a disposal of shares

A recent First-tier Tribunal (FTT) case has highlighted the need to be an employee at the date of disposal when selling a 5% plus interest in shares in order for entrepreneurs' relief to apply. The situation arose because a departing director ceased employment before the company's approval of the arrangements to buy back his shares.

A dispute as to the direction of a business, Alpha Micro Components Limited, led to the resignation of John Kenneth Moore as a director on 28 Feb 2009. He continued to work for the company through a contract for services via his personal service company. His shares in Alpha were bought from him on 29 May 2009.

Mr Moore contended that the disposal occurred on 28 February, the date when agreement was reached on the exit package. Approval for the purchase of shares and further financing for the company was not made, however, until 29 May 2009. It was held that the disposal happened on 29 May 2009 when Mr Moore was no longer an office holder or employee and therefore he was not due any entrepreneurs' relief on the disposal of his shares.

www.financeandtaxtribunals.gov.uk/judgmentfiles/j8882/TC04903.pdf

3. PAYE AND EMPLOYMENT

3.1 End of Easement for Micro Employers - on or before payroll reporting

HMRC has also issued a reminder that the RTI reporting relaxation for small employers ceases on 5 April 2016. Until the end of this tax year, employers, who at 5 April 2014 employed fewer than 10 employees, are able to report their PAYE information for the tax month by the date of the last payment in that month, rather than 'on or before' each payday.

From 6 April 2016 most employers are expected to report in real time on or before the date of the payment to the employee even where the number of employees is as low as one; for instance, a nanny.

www.gov.uk/government/uploads/system/uploads/attachment_data/file/502266/5178_Agent_Update___WT_52_accessible.pdf

3.2 Zero-Rate of Employer Class 1 NICs from April 2016

HMRC has issued a reminder for employers of eligible apprentices under the age of 25 that they will no longer have to pay employer Class 1 NICs on their earnings, up to the new Apprentice Upper Secondary Threshold. For 2016-2017 this will be £43,000.

HMRC guidance for employers on how to apply the new rate is at:

www.gov.uk/government/publications/national-insurance-contributions-abolition-of-employer-contributions-for-apprentices-under-25

3.3 HMRC Share schemes technical note

HMRC has produced a guide for anybody who needs to report events as part of their Employment-related Securities (ERS) annual return and wants to create their own bespoke ERS files to capture share-related event information during the tax year.

www.gov.uk/government/uploads/system/uploads/attachment_data/file/503722/other-technical-note.pdf

3.4 Advisory fuel rates changes from 1 March 2016

Advisory fuel rates in pence per mile that can be used by employee company car drivers changed from 1 March 2016, with small changes to some of the rates, following the recent stabilisation of pump prices:

HMRC has continued to confirm that people can use the previous rates for up to 1 month from the date the new rates apply. They apply when:

  • an employer reimburses employees for business travel in their company cars;
  • an employer requires employees to repay the cost of fuel used for private travel; and
  • a VAT registered trader determines the VAT element of mileage allowances.

www.gov.uk/government/publications/advisory-fuel-rates

4. BUSINESS TAX

4.1 Loan relationship derecognition, accounting and tax arbitrage rules

The First-tier Tribunal (FTT) has held that the derecognition (the removal from part of the parent's balance sheet) of a portion of a loan relationship used to settle a forward subscription agreement (FSA), did not result in a loan relationship debit for the lender. The contended debit was in respect of the accounting entry recognised as an investment by the lender in the entity whose shares were being subscribed for.

This was a disclosed tax scheme that was designed to obtain a corporation tax deduction where there had been no economic cost to the company.

Stagecoach Group plc (Group) entered into a scheme in 2010 to recapitalise two of its subsidiaries, Stagecoach Holdings Ltd (Holdings), and Stagecoach Services Ltd (Services), each with an amount capped at £20m using an FSA for the subscription of shares. The source of the funds was a portion of the £88m loan receivable by Group from one of its other subsidiaries, Integrated Transport Company Ltd (ITCO).

As a result of the FSA arrangement, FRS26 required Group to derecognise the portion of the loan receivable and increase its investment in Holdings and Services by £39.7m. Services and Group recognised the nominal value of the subscription agreement in equity and the present value of the right to the contingent proceeds in their balance sheets.

CTA 2009 s.320 permits loan relationship credits and debits relating to certain capital expenditure to be brought into account for tax when allocated to a fixed capital asset/project. Stagecoach contended that CTA 2009 s.320 meant that the debit to investments (£39.7m) arose from the derecognition of the relevant portion of its loan with ITCO, and was an amount deductible under the loan relationship regime.

The FTT held that the debit arose from the FSA. The debit to investments did not represent an amount that would otherwise have gone to the P&L as required by s.320 – as in reality the recoverability of the loan was never at issue.

A derecognition of a loan by a lender is a situation where some title to the benefits of the loan have been given up. Where a loan is simply recognised at a discounted value under FRS102 amortised cost basis of accounting, it is thought that the accounting for the discount in the books of the lender is not a 'derecognition'.

www.financeandtaxtribunals.gov.uk/judgmentfiles/j8863/TC04866.pdf

4.2 Consultation on insurance linked securities

HM Treasury has issued a consultation on the design of an administration, regulatory and tax regime to encourage alternative risk transfer business from insurance special purpose vehicles (ISPVs) to be located in the UK. The aim is to design a robust regulatory and tax regime that makes the UK an attractive location for insurance linked securities (ILS) business. The consultation discusses a form of look-through tax treatment similar to the real estate investment trust (REIT) regime. Comments are due by 29 April 2016.

ILS – background

ILS are an alternative form of risk mitigation for insurance and reinsurance firms. They offer a means of transferring risk to the capital markets. They provide protection buyers with cover, which is generally less exposed to counter-party default.

The consultation focuses on two main types of ISPV:

  • catastrophe bonds (CAT bonds) - debt backed ISPVs that raise capital to cover loss associated with natural catastrophe, such as extreme weather conditions, or other non-natural catastrophic perils; and
  • collateralised reinsurance transactions - equity backed ISPVs, typically smaller in scale than CAT bonds and privately placed with a small number of investors.

Current tax rules

SI 2007/3402 provided a separate regime for ISPVs designed to tax these entities on a similar basis to a securitisation company within the main securitisation tax regulations.

Debt backed ISPVs

Updating SI 2007/3402 would make the UK an attractive location for debt-based ILS vehicles, such as those that issue CAT bonds, although the time scale of the task would be challenging.

Equity backed ISPVs

Updating SI 2007/3402 is unlikely to deliver a competitive tax outcome for equity backed ISPVs. This is because these vehicles are funded through preference shares on which the ISPV pays a dividend that is non-deductible when calculating the ISPV's taxable profit.

For equity backed ISPVs, it is the investors who are directly exposed to the profits or losses arising from the underlying risk transfer contract as if they had entered the contract directly. The consultation therefore proposes it is the investors who should bear the tax consequences.

UK investors in equity backed corporate ISPVs would receive taxable income from their participation in the vehicle. The treatment of overseas investors is more complex and the consultation asks whether a withholding tax should be applied in a similar way to REIT distributions, or otherwise.

The consultation indicates the Government believes this approach could also be suitably adapted for debt based ISPV's getting round the complexity involved in updating SI 2007/3402. It is thought the trust arrangements typically used by ISPV's should still permit access to the UK's double tax treaty network.

www.gov.uk/government/uploads/system/uploads/attachment_data/file/504046/Insurance_linked_securities_consultation.pdf

4.3 Banking surcharge information regulations

Draft regulations have been issued for comment by 31 March 2016 that set out the details of information to be provided by a banking company or building society subject to the 8% banking surcharge due on banking company profits from 1 January 2016. As the surcharge is paid alongside a company's liability to CT, the regulations are being made so that HMRC can accurately identify all surcharge payments made for its reporting purposes.

The draft regulations propose that the following information is provided:

  • the accounting period to which the surcharge payment relates;
  • the unique tax reference (UTR), if provided by HMRC; and
  • the date on which the company intends to make the payment, if not yet made.

Where the company has already paid or allocated an amount to settle another liability in respect of any tax and this is available to be reallocated to cover the surcharge, the company can submit a written reallocation request. HMRC must treat this as a payment towards the surcharge. The draft regulations set out the detail of what the reallocation request should include.

www.gov.uk/government/publications/the-banking-surcharge-information-regulations-2016

www.gov.uk/government/uploads/system/uploads/attachment_data/file/502263/The_Banking_Surcharge__Information__Regulations_2016.pdf

www.gov.uk/government/uploads/system/uploads/attachment_data/file/502275/Explanatory_Memorandum_to_the_Banking_Surcharge__Information__Regulations_2016.pdf

4.4 Country by Country reporting regulations

SI 2016/237 comes into effect on 18 March 2016 and sets out the procedure, scope and penalties relevant to country-by-country (CBC) reporting obligations for those required to report to HMRC. Penalties of up to £3,000 may be charged for inaccurate uncorrected returns.

CBC applies to any multinational group with consolidated group revenue of €750m or more in an accounting period (AP) straddling or ending on 31 December 2015 or a subsequent AP. The CBC report will cover the next accounting period (AP+1), so for most MNCs the first report will be for the AP commencing on or after 1 January 2016.

CBC reports may need to be filed by the UK entity of a multinational group. It will only be required to report in respect of the UK entity and the entities required to be consolidated in its accounts or that would be so if the UK entity were quoted. Reporting by such a UK entity will be required if any of the following applies:

  • the ultimate parent is not required to file a CBC report in the jurisdiction in which it is tax resident;
  • none of the jurisdictions in which the ultimate parent is tax residence has entered into an information exchange agreement with the UK; or
  • where HMRC has notified the UK entity or a constituent entity of the multinational group that information exchange agreements with the jurisdiction where CBC reports are filed are not working properly.

Reporting by UK entities in this way can be avoided if before the filing deadline the UK entity provides HMRC with the name of the constituent entity of the multinational group that has filed a CBC report containing the information on the UK group and the date that report was filed. In some cases the name of the jurisdiction in which the report was filed will also be required.

The content and form of the report and its filing method is to be specified by HMRC, but is generally expected to be in line with the template issued by OECD in its final report on BEPS Action 13.

www.legislation.gov.uk/uksi/2016/237/pdfs/uksi_20160237_en.pdf

4.5 ATED requirements

With effect from 1 April 2016, the threshold value on 1 April 2012 or at acquisition if later for residential properties coming within the ATED regime falls from more than £1m to more than £500,000. Affected businesses and individuals may need to consider whether a return is required and whether a relief can be claimed.

30 April 2016 is the deadline for filing a return for a property potentially within the charge on 1 April 2016, along with any ATED payment due. In contrast with previous threshold changes, there is no grace period for filing returns and payment of ATED for those newly within the charge. HMRC has advised that no returns for the 2016/17 ATED year should be submitted before 1 April 2016. A relief declaration return can be submitted to claim a relief for all properties used in a business that qualify for that ATED relief where, as a result of the relief, the ATED charge is nil.

www.gov.uk/guidance/annual-tax-on-enveloped-dwellings-the-basics

4.6 OTS review of small company taxation

The Office for Tax Simplification (OTS) has published its review of small company taxation. The report identifies three further areas for review including:

  • The possibility of a look-through approach so that instead of paying corporation tax, a company's shareholders would pay income tax on the profits directly. This would be aimed at companies that do not intend to grow in size, are effectively one-person businesses, distribute all or most of their profits, have few assets or need for investment funds;
  • Further consideration of the merits of cash accounting; and
  • Consideration of a 'sole enterprise protected assets' structure, which could give a sole trader the key aspects of the liability protection they currently incorporate to secure.

Other recommendations include:

  • Closer alignment of taxable profit with accounting profit;
  • The study of a consolidated tax model for micro businesses - this looks like an interesting concept that could simplify matters considerably for smaller businesses and warrants serious discussion, especially given the imminence of digital record keeping and reporting;
  • Alignment of filing and payment dates across all Government departments;
  • Simplify expenses claims for small companies by building on the existing flat rate allowances; and
  • Simplifying a number of VAT issues for small businesses.

The report comments that the OTS is formally involved in the development of Making Tax Digital to ensure simplification issues are considered. It also notes a strong desire on the part of small companies for:

  • a 'one stop HMRC shop' approach to an out-of-hours service, helping to reassure companies trying to do the right thing when things go awry;
  • a desire for a truly digital service that provides pop-ups and prompts as on line forms are being filled in; and
  • a system that links Companies House and HMRC.

www.gov.uk/government/uploads/system/uploads/attachment_data/file/504850/small_company_taxation_review_final_03032016.pdf

4.7 New XBRL accounts taxonomy for charities

The Financial Reporting Standards (FRC) and the Charity Commission (CC) have issued a new charity taxonomy, created in line with the charity Statement Of Recommended Practice (SORP) (FRS 102) and the FRC's financial reporting standard FRS 102. HMRC plans to update its systems in April 2016 to accept Company Tax returns containing accounts that have been tagged with this new taxonomy.

Large charities with income over 6.5m must fully tag their accounts with new charity taxonomy if the accounts are:

  • for a period of account starting on or after 1 January 2016;
  • submitted as part of a Company Tax Return; and
  • filed with HMRC on or after 1 October 2016

The charity taxonomy can be used by all charities that have to prepare accounts under the charity SORP (FRS 102).

www.gov.uk/government/publications/taxonomies-accepted-by-hm-revenue-and-customs/company-tax-return-new-xbrl-accounts-taxonomy-for-charities

5. AND FINALLY

Buried Treasure

Our job isn't all fun. We wade through, begging the lawyers' pardon, some pretty turgid cases to bring you tax nuggets and leave the unwanted ones safely in the vaults of the law reports.

We came to this one this week: BPP plc v HMRC [2016] EWCA Civ 121. Our attention was first drawn by the case citation for the court of appeal – it looked important – but the heart sank. It was, we thought, the driest of dry procedural issues.

And then we found this in the judgement:

"I found the approach of HMRC to compliance to be disturbing. At times it came close to arguing that HMRC, as a State agency, should be treated like a litigant in person and that the constraints of austerity on an agency like the HMRC should in some way excuse unacceptable behaviour. I remind HMRC that even in the tribunals where the flexibility of process is a hallmark of the delivery of specialist justice, a litigant in person is expected to comply with rules and orders and a State party should neither expect to nor work on the basis that it has some preferred status – it does not."

We know times are hard, but to misquote a phrase used elsewhere more pungently but not with greater feeling, HMRC cannot have been serious. Could it?

www.bailii.org/ew/cases/EWCA/Civ/2016/121.html

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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