UK: Weekly Tax Update - 18 April 2016

Last Updated: 21 April 2016
Article by Smith & Williamson

1. General news

1.1 Additional 3% SDLT charge and granny flats

Financial Secretary to the Treasury, David Gauke, has clarified to the House of Commons that the Government will table an amendment to ensure that a 'granny annexe' of a main dwelling, or, we infer, the main dwelling itself, will not attract the additional 3% SDLT charge for second homes.

He commented on 11 April 2016 as follows:

"I have been made aware that the Bill as drafted might lead to some main houses with an annexe for older relatives attracting the higher rates of SDLT intended to apply to additional properties. I thank my right hon. Friend the Member for Brentwood and Ongar (Sir Eric Pickles) for bringing that to my attention. I am happy to reassure the House that that is not our intention and the Government will table an amendment in Committee to correct the error and ensure fair treatment for annexes."

Press reports indicate that to qualify for the relief an annexe must:

  • be within the same grounds as the main residence;
  • have the usual facilities of a home; and
  • have a value not exceeding 1/3 of the total transaction cost.

If the Finance Bill amendment is drafted in these terms, a house costing £0.5m could have an annexe for an elderly relative or disabled dependant valued at up to £250k and be excluded from the higher SDLT rate.

1.2 Beneficial ownership information in Crown dependencies and overseas territories

On 11 April 2016, the Prime Minister announced that agreement had been reached with the majority of Crown dependencies and overseas territories to give UK law enforcement and tax agencies access to information on beneficial ownership of companies.

The Crown dependencies and overseas territories that function as financial centres had already agreed to exchange taxpayer financial account information automatically. They have now agreed to provide UK law enforcement and tax agencies with full access to information on the beneficial ownership of companies. Arrangements have been finalised with all but Anguilla and Guernsey, both of which are expected to follow in the coming days and months.

The extract from the Hansard record is as follows:

'For the first time, UK police and law enforcement agencies will be able to see exactly who really owns and controls every company incorporated in those territories: the Cayman Islands, British Virgin Islands, Bermuda, the Isle of Man, Jersey—the lot. That is the result of a sustained campaign, building on the progress that we made at the G8, and I welcome the commitment of the Governments of those territories to work with us and implement those arrangements.

'The House should note that that will place our overseas territories and Crown dependencies well ahead of many other similar jurisdictions, and also—crucially—ahead of many of our major international partners, including some states in the United States of America. Next month we will seek to go further still, using our anti-corruption summit to encourage consensus not just on exchanging information, but on publishing such information and putting it into the public domain, as we are doing in the UK.'

1.3 Corporate offence for failure to prevent the facilitation of tax evasion

On 11 April 2016, the Government announced it would bring forward plans to introduce a criminal offence for corporations who fail to stop their staff facilitating tax evasion. HMRC has now published a new consultation document setting out its proposals. Comments are due by 10 July.

The new condoc does not seek feedback on the policy, which was the subject of the previous consultation.

It seeks comments on the proposed legislation and guidance to implement the policy, which covers:

  • the nature of the offence;
  • those for whom corporations are liable – generally staff and contractors acting on behalf of a corporation;
  • definition of a corporation – companies and partnerships – and not just in the tax industry;
  • details of the tax evasion offence and failure to prevent this;
  • coverage - both UK and offshore tax evasion; and
  • authority to proceed with prosecution is not HMRC's as consent is required from the Director of Public Prosecutions or the Director of the Serious Fraud Office in England, Wales or Northern Ireland. In Scotland, it is the decision of the Crown Office and Procurator Fiscal Service.

HMRC is expected to provide assistance with industry guidance, which the Chancellor will have the power to approve.

On 16 July 2015, the Government had consulted on a new corporate criminal offence of failure to prevent the facilitation of evasion. A response document was published on 9 December 2015:

1.4 Phishing emails purporting to be from HMRC

HMRC has seen an increase in certain types of phishing emails. It has reiterated its request that taxpayers and their agents report all 'HMRC-related' phishing emails and bogus text messages to HMRC and refrain from opening attachments or clicking on links.

Even where the same or a similar phishing email or text message is received on multiple occasions, HMRC has asked for it to be forwarded to and then deleted.

HMRC recommends that recipients do not open any attachments or click on any links within the email or text message, as they may contain malicious software or links to a bogus website.

HMRC has posted examples of related phishing and bogus emails or text messages in their online guide. The last one relates to emails sent to offshore landlords and asks for significant personal information. This is particularly pernicious, as such taxpayers are amongst those least likely to be familiar with HMRC's style and to be able to spot a bogus email.

2. Private client

2.1 Discovery

The First-tier Tribunal (FTT) has found that HMRC was not entitled to raise discovery assessments on Mr Bubb for 2009/10 and 2010/11. Although discovery assessments were issued at a time when it would have been possible to raise a standard enquiry, those assessments would have been validly made if HMRC could prove Mr Bubb had been careless in preparing his tax returns. Mr Bubb had experienced difficulty in entering tax return figures using HMRC's online system from France and the FTT considered HMRC was unable to prove he had acted carelessly in relation to the matters for which discovery assessments were raised.

For the relevant tax years in question, Mr Bubb was working as a consultant in France, while also being in receipt of a UK civil service pension. There had been some confusion in the establishment of his tax code by the PAYE provider he used, and he had been given an emergency PAYE code (which remained in place) instead of the BR tax code.

In relation to the 2009/10 and 2010/11 tax returns, Mr Bubb had also omitted to include his state pension, which had been paid into his wife's bank account. Although the omission of his state pension was considered careless, the assessments related to the fact that the information HMRC received in the online submission of Mr Bubb's tax returns for occupational pension income was incorrect.

Mr Bubb explained that he had experienced considerable difficulty operating the online filing system from France and had been unable to get through to the HMRC helpline using HMRC's international help line number. Mr Bubb had difficulty getting the online system to properly register the figures on his tax returns, and apparently had eight failed attempts to enter the figures. After considering subsequent evidence from HMRC on problems international filers had in filing tax returns at the time, the FTT considered Mr Bubb's explanations did not evidence carelessness.

2.2 CGT treatment of corporate bonds convertible into Euros, if the UK legal currency

In another twist to something of a long-running saga, the Upper Tribunal (UT) has held that corporate bonds that would otherwise qualify as qualifying corporate bonds (QCBs) are non- qualifying QCBs by virtue of the inclusion of the provisions to convert to Euros if Euros become UK lawful currency.

The UT overturned the earlier decision of the FTT. The question in the case was simply the interpretation of TCGA 1992 s.117(1)(b). This requires that to be a QCB the bond must be expressed in sterling and one 'in respect of which no provision is made for conversion into a currency other than sterling'. The court held that the contingent conversion to Euros, if sterling ceased to be the UK currency, was such a provision. The bonds therefore fell foul of this requirement and were not QCBs.

At one level, this is the plain meaning of the words of the statute, on the grounds that if the UK joined the Euro, the Euro would not thereby become sterling. At another level, the contrary argument was that such provisions had been put into corporate bonds, not to permit a conversion, with a view to ensuring the bond was a non-QCB, with a very different CGT treatment, but simply to deal with the contingency of the UK entering the Euro and, on a purposive construction, Parliament had not intended this kind of drafting to be caught.

The case is therefore interesting not so much for its tax outcome, but, rather, it is an early revisiting of the purposive construction doctrine set out in Barclays Mercantile Business Finance Limited v Mawson [2005] 1AC 684 and recently refined and confirmed by the Supreme Court in the case UBS AG v HMRC; DB Group Services (UK) Ltd v HMRC [2016] UKSC 13. Asplin J held that the purposive construction rule was just that: a rule of construction. It was not the task of the court to import a different meaning to the provision in question that could properly be attributed to it merely because of a perception that such a meaning would better suit the purpose identified.

In a passage that could well matter to litigants in the future, whether taxpayer or HMRC, if the decision is not overturned, Asplin J stated as follows:

"There is also, in our judgment, a distinction between the policy behind, or the reason for, the inclusion of a particular provision in the legislative scheme and the purpose of that provision. Parliament might wish to achieve a particular result as a general matter, and legislate for that reason or in pursuit of that policy. But if the statutory language adopted by Parliament displays a narrower, or more focused, purpose than the more general underlying policy or reason, it is no part of an exercise in purposive construction to give effect to a perceived wider outcome than can properly be borne by the statutory language."

HMRC v Trigg (a partner of Tonnant LLP) [2016] UKUT 165

2.3 Rates and allowances: capital gains tax 2016/17

HMRC has updated its website for the 2016/17 CGT rates. Changes from last year are due to be implemented in this year's Finance Bill. Readers will note the long list, copied below, of categories and appropriate rates that now have to be considered. We welcome the reduction in rates for certain categories, despite it adding to complexity of the tax system.

he website says: 'The following Capital Gains Tax rates apply (the tax rate you use depends on the total amount of your taxable income, so you need to work this out first)

  • 10% for [basic rate] individuals (not including residential property and carried interest)
  • 20% for [higher rate] individuals (not including residential property and carried interest)
  • 18% for [basic rate] individuals for residential property and carried interest
  • 28% for [higher rate] individuals for residential property and carried interest
  • 20% for trustees or for personal representatives of someone who has died (not including residential property)
  • 28% for trustees or for personal representatives of someone who has died for disposals of residential Property
  • 10% for gains qualifying for Entrepreneurs' Relief
  • 28% for Capital Gains Tax on Annual Tax on Enveloped Dwellings - the Annual Exempt Amount is not Applicable
  • 20% for companies (non-resident Capital Gains Tax on the disposal of a UK residential property)'

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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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