UK: Weekly Tax Update - 14 March 2016

Last Updated: 18 March 2016
Article by Smith & Williamson

1. General news

1.1 Budget - 16 March 2016

Smith & Williamson will be sending out its usual communication to clients and contacts on the evening of the Budget on Wednesday, linking to comment and analysis that we will place on our website. This will be available from:

www.smith.williamson.co.uk/budget-2016

1.2 Finance Bill publication date

The Financial Secretary to the Treasury, David Gauke, has announced that the Finance Bill will be published on Maundy Thursday, 24 March 2016. The Finance Bill should be published on the Parliament website (the second hyperlink is for bookmarking) and the related explanatory notes on gov.uk.

http://www.parliament.uk/business/publications/written-questions-answers-statements/written-statement/Commons/2016-03-11/HCWS610

http://services.parliament.uk/bills/

1.3 HMRC to charge credit card fees

With effect from 1 April 2016, HMRC will be able to charge a fee for payments made to it by credit card.

This is so that HMRC recovers the cost of processing credit card payments.

The Schedule to SI 2016/333 sets out the rates, which vary by type of credit card.

www.legislation.gov.uk/uksi/2016/333/contents/made

2. Private client

2.1 Entrepreneurs' relief: deferred shares count as ordinary shares

In a recent entrepreneurs' relief case, Mr Castledine lost his appeal in connection with his disposal on his interest in Dome Holdings Limited (DHL). He held just under 5% of the share capital if deferred shares were included, but exactly 5% and therefore entitlement to the relief if excluded.

The First-tier Tribunal (FTT) held that the deferred shares fell within the meaning of 'ordinary share capital' in ITA2007 s.989 as applied to entrepreneurs' relief, and that the appeal failed.

The case includes a useful summary on the interpretation of tax legislation and when the FTT considers a literal approach or a purposive interpretation can be taken. The FTT decided to follow the strict wording rather than an alternative judicial interpretation because:

'It would appear that parliament is here making it clear that there are to be no fine distinctions or special exceptions in the matter; that a simple, broad brush, easily workable, approach is mandated. Moreover, there is no explicit evidence of parliamentary intention relevant to the point we have to decide; and it is questionable whether even if there had been such evidence in the form, for example, of Notes on Clauses or extracts from Hansard, it would have been proper for the tribunal to take it into account.'

In contrast, in tax abuse cases, the GAAR now requires regard to be taken of the principles on which provisions are based and their policy objectives.

www.bailii.org/uk/cases/UKFTT/TC/2016/TC04930.pdf

3. PAYE and employment

3.1 Rangers going to the Supreme Court

Rangers' liquidators BDO have succeeded in obtaining permission to appeal the EBT case, Murray Group Holdings and others v HMRC [2015] CSIH 77, to the Supreme Court. The decision could have seminal influence not only for EBTs generally but also in the wider employee benefits area. It may well become the leading case for other EBTs to distinguish themselves from or to follow as a precedent, depending on the outcome.

We hope the court takes the opportunity of laying down clear and comprehensive guidelines for this whole area of employment tax. It has been a long wait since the original Special Commissioners judgment in Dextra in 2002 (STC (SCD) 413), which only partially covered the issues at first instance and is anyway not

precedent (see MacDonald v Dextra Accessories Ltd & Others [2005] STC 1111 for the House of Lords decision on corporation tax aspects).

www.bbc.co.uk/news/uk-scotland-glasgow-west-35753304

www.bailii.org/cgi-bin/markup.cgi?doc=/uk/cases/UKHL/2005/47.html&query=dextra&method=boolean

3.2 UBS and Deutsche Bank lose landmark case

The Supreme Court has laid down statutory interpretation principles for the employment-related securities legislation and beyond. The case was concerned with composite transactions designed to avoid the payment of income tax and NIC on bankers' bonuses. The court allowed HMRC's appeal on the basis that, following Barclays Mercantile, by interpreting the tax legislation purposively, the requirement for share restrictions in the legislation had not been met. The restrictions inserted, whose only purpose was fitting into the legislation, had no business or commercial purpose.

In a judgement that will reach well beyond the confines of the instant cases, UBS AG v HRMC and DB Group Services (UK) Ltd v HMRC [2016] UKSC 13, Lord Reed revisited the principles of statutory interpretation of tax legislation that started with the Ramsay case, W T Ramsay Ltd v Inland Revenue Commissioners [1979] STC 582 and reached its final form in Barclays Mercantile Business Finance Ltd v Mawson (Inspector of Taxes)[2004] UKHL 51. Put at its simplest, following Barclays Mercantile, the court reiterated it will interpret tax legislation purposively.

It is important to note as well that the court has not developed a general doctrine against tax avoidance, whatever you may have seen or read elsewhere. That is not to say that tax avoidance will not be struck down, but, rather, it will only be defeated if the context and purpose of the legislation, as here, requires it.

The schemes themselves worked broadly as follows. Bonuses were paid in the form of shares in a special purpose vehicle company as restricted shares purportedly within the restricted shares regime of ITEPA 2003 part 7 chapter 2. The purpose of the restrictions on the shares was to exempt them from tax on receipt under Chapter 2.

As a second stage, the scheme used the special exception in the legislation to prevent a charge when the restrictions were lifted by virtue of the provisions of ITEPA 2003 s.429. At the time this ensured there was no charge to tax either where the company concerned was employee controlled or the majority of shares of the same class were held by employees and all the shares were affected. Thus, if read literally, the legislation provided for there to be no charge to income tax at acquisition or at any later event.

The flaw in the scheme for Lord Reed, whose judgement was agreed by the other judges, was that the initial restriction was uncommercial. The employees were not materially at risk of loss of value and the restrictions bore no commercial purpose. He thus held that the requirement in the legislation for restrictions on the shares had not been met because the provision in question (ITEPA 2003 s.423(1)) had to be construed purposively as being limited to a restriction having a business or commercial purpose and not a commercially irrelevant condition whose only purpose was fitting into the legislation.

Thus, the shares were not restricted shares and tax was due on their acquisition. Lord Reed did, however, refute HMRC's argument that the amounts received were money. The actual restrictions on the shares did not have to be disregarded for earnings purposes because ordinary taxation principles required the tax to be based on true value.

This important decision may have a wide impact on statutory interpretation and purposive approach. In the employment tax area it may have an impact on the outcome of the Rangers case [see section 4.1] and must raise questions as to whether the broad approach of the Court of Appeal in PA Holdings Ltd v Revenue and Customs Commissioners [2011] EWCA Civ 1414 should still be followed. It may also cause HMRC to look at how it has treated this rule in other cases, as no one has hitherto taken the point that restrictions might have to be commercial to fall within the purpose of the section.

www.bailii.org/uk/cases/UKSC/2016/13.html

3.3 Closer alignment of income tax & national insurance

The Office of Tax Simplification (OTS) has issued a report on its review into the closer alignment of income tax and national insurance contributions (NICs). It made a number of recommendations aimed at improving the interaction of income tax and national insurance.

The OTS found that the current national insurance system no longer supports the UK's flexible work system and business structures, that it was overly complex and introduced distortions for those with similar income derived in different ways.

It recommends:

  • Moving to an annual, cumulative and aggregated assessment period for employees' NICs on employment income, similar to PAYE for income tax;
  • Basing employers' NICs on whole payroll costs, making it easier to understand and reducing distortions created by the current system;
  • More closely aligning the NICs position for the UK's 4.7 million, and rising, self-employed with that of employees;
  • Increased transparency around NICs, possibly helped by the availability of personal tax accounts;
  • Aligning the legislation for income tax on employment income and NICs;
  • Bringing taxable benefits in kind into Class 1 NICs and abolish Class 1A NICs; and
  • A fully joined up approach to the two taxes across policy and administration requiring the alignment of legislation and procedures, and where possible the matrix of rates and thresholds.

The next stage, assuming ministers accept the OTS recommendations, will be to establish in more detail, and consult on, the impact of the recommendations.

The self-employed will be particularly interested that the OTS recommendations did not address the point of employer's NIC not applying to them directly but it did note as follows 'the absence for the self- employed of an equivalent to employers' NICs for the employed is believed by some to be a driver for engagers to insist individuals contract as self-employed rather than join the payroll'.

www.gov.uk/government/uploads/system/uploads/attachment_data/file/505610/PU1909_cover___prelims_web.pdf

4. Business tax

4.1 Discovery assessments and closure notices

The Upper Tribunal (UT) has held that HMRC was bound by an earlier agreement to vacate discovery assessments and penalties, and could not subsequently seek to obtain further information by raising an enquiry, within the normal time limits, into the previously disputed tax return. The decision reverses an earlier FTT decision, and may cause HMRC to avoid issuing discovery assessments while still within the enquiry window, without first opening an enquiry.

Instead of opening an enquiry into Easinghall Ltd's 2011/12 tax return, HMRC issued a discovery assessment and penalty for the 2011/12 tax return on the basis of conclusions they had reached after an enquiry into the company's 2010/11 return. HMRC issued the discovery assessment and penalty under FA 1998 Sch18 para 41, relying on para 43. Easinghall appealed against the assessment and penalty and following an HMRC review these were subsequently vacated on the basis of lack of evidence.

HMRC then subsequently opened an enquiry into the 2011/12 tax return under FA 1998 Sch18 para 24 and sent a notice for the provision of information. The company applied for closure notice with respect to that enquiry.

Reversing the decision of the FTT the UT held that, as a result of TMA 1970 s.54, HMRC was bound by its review panel decision concerning the vacation of the further 2011/12 tax return assessments and penalties. As a result, these matters could not be re-opened and HMRC was required to close their enquiry into that return.

www.tribunals.gov.uk/financeandtax/Documents/decisions/Easinghall-v-HMRC.pdf

5. VAT

5.1 Zero rating and conversion of non-residential property into residential property

The First-tier Tribunal (FTT) has held that the conversion of a ground floor public house area into two dwellings did qualify as a zero rated conversion of commercial property into a dwelling. The case of Languard New Homes Ltd considered the conversion of a property consisting of a manager's flat above and pub property below into four residential properties, two above and two below.

The case followed on from the recent cases on whether or not conversion of a non-residential part of a building into residential property qualifies for VAT zero rating. It considered that the decisions and reasoning in the earlier cases of Alexandra Countryside Investments Ltd ([2013] UKFTT 348) and Jacobs ([2005] EWCA Civ 930) were to be preferred over other case law. This meant that in the case of Languard New Homes Ltd, the conversion of the ground floor property into two dwellings did qualify for zero rating.

www.financeandtaxtribunals.gov.uk/judgmentfiles/j8896/TC04917.pdf

5.2 Production & broadcasting services provided by the BBC to the Open University

The Court of Appeal has rejected an appeal by HMRC against the Upper Tribunal's (UT) decision that it should refund output VAT of £21m (before interest) previously charged by the BBC to the Open University for services that should have been treated as exempt education and training.

The Court of Appeal levelled some criticism against both the FTT and UT decisions, though came to the same overall conclusion that the Open University's claim should succeed. In their view the UT should have placed greater weight on the requirement in the EU VAT directive concerning the education exemption, that only the six specified types of education and training fell within it and that the designation by a member state of an organisation as having general educational aims may be insufficient.

The Court also noted that that neither the FTT nor the UT appears to have explained clearly the CJEU case law examining the scope of the education exemption and how Member States should have defined the scope of the exemption. In case C-319/12 ( Minister Finansów v MDDP sp z oo Akademia Biznesu, sp komandytowa [2014] STC 699 the CJEU commented that the member state must lay down 'the rules in accordance with which the definition may be granted' to private organisations. Article 13A(1)(i) of the 6th VAT Directive is now article 132(1)(i) of the VAT Directive.

The concern had been whether the UK legislation in VATA 1994 Sch9 group 6 had been too narrow in defining the scope of the exemption. The Court of Appeal in the case of the Open University held that:

Either the UK had defined the BBC as having 'similar objects' within Article 13A(1)(i) or, if the United Kingdom had not, the BBC and the OU are entitled to rely directly on that Article because the failure of the UK was a failure to implement the Sixth VAT Directive.....To exclude the BBC from the exemption would both be contrary to the objective of the Sixth VAT Directive and contrary to the principle of fiscal neutrality.

www.bailii.org/ew/cases/EWCA/Civ/2016/114.html

To continue reading this update, please click here

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.