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:

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

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.

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.

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).

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.

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'.

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.

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.

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.

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