UK: Weekly Tax Update - 9 May 2016

Last Updated: 17 May 2016
Article by Smith & Williamson

1. General news

1.1 Welsh tax collection and management

The Tax Collection and Management (Wales) Act 2016, permitting the establishment of a Welsh Revenue Authority and procedures for it to manage and collect devolved taxes, received Royal Assent on 25 April.

The taxes that have been or are to be devolved under current plans are: business rates, council tax, land transaction tax and landfill disposals tax. As announced in the November 2015 Autumn Statement, there is also provision for partial devolution of collection of income tax to Wales, without the need for a referendum.

1.2 Possible late enactment of Finance Bill 2016

We understand the summer parliamentary recess and the timing of the EU referendum may mean Finance Bill 2016 does not become substantively enacted until October 2016. In that event, measures scheduled to take effect from the date of Royal Assent would be unlikely to take effect in July as normal, but be more likely to take effect in October 2016.

Amongst the measures that are scheduled to take effect from Royal Assent are:

  • The widening of circumstances when royalty payments will be subject to withholding tax;
  • Changing the period in which 100% capital allowances are permitted in Enterprise Zones to a fixed period of eight years rather than by reference to the eight years beginning 1 April 2012;
  • Introduction of seeding relief for Property Authorised Investment Funds (PAIFs) and Co-ownership Authorised Contractual Schemes (CoACSs) and changes to the SDLT treatment of CoACSs investing in property so that SDLT does not arise on the transactions in units;
  • The publication of a tax strategy by certain large businesses by the end of the first accounting period commencing on or after the date of Royal Assent;

It is also uncertain what date the report stage will be, which is when draft legislation on the measures dealing with offshore avoidance of tax on profits from dealing in or developing immovable property in the UK is scheduled to be available.

1.3 Revised list of DOTAS schemes relevant for accelerated payment notices

HMRC has updated its list of DOTAS scheme reference numbers where an accelerated payment notice may be issued.

The additional scheme reference numbers added since April 2016 are:

04661079, 08901850, 16347675, 18192764, 27254809, 30362756, 35067458, 52811775, 62323951, 63547061, 65591679, 71670721, 74268508, 78138248, 79166218.

1.4 Making Tax Digital

Andrew Tyrie, chairman of the House of Commons Treasury Committee has written to Financial Secretary to the Treasury, David Gauke, to comment on a survey conducted by ICAEW on the likely impact of quarterly reporting by business as part of HMRC's Making Tax Digital (MTD) strategy.

The letter indicates this evidence seems to make the projected savings for business from the strategy implausible, with a likely increase in compliance costs for business. The letter recommends the production of an impact assessment before MTD implementation as a minimum requirement.

1.5 IFS slates Government approach to tax policy

In an illuminating study of present tax trends, Institute of Fiscal Studies (IFS) Briefing Note BN 182 criticises the Government for 'constant fiddling with more and more smaller taxes' and the 'increasingly complex tax system'.

The IFS highlights that against the backdrop of the truly staggering decline in government revenues in 2008/9 and 2009/10 of 9%, there is now a trend towards recovery in the overall tax take towards 2020/21 but the tax will be differently composed with more VAT and less other indirect taxes. The amount contributed by personal taxes will remain the same, but with more contributed by higher earners, as the overall number of those actually paying income tax falls.

The Briefing Note refers to the trend to this effect before 2007, as inequality increased and the richer had more income, but this trend is continued as a matter of policy. The IFS notes that this is inherently riskier both as to downside and upside as a smaller group of taxpayers is involved. Corporation tax is also set to decline.

The report also bemoans the lack of strategy around the previously tax-rich banking sector and effectively reports the end of North Sea oil receipts as a significant contributor to the Exchequer.

1.6 FATCA reporting deadline

Financial institutions required to report under the UK/US intergovernmental agreement have until 31 May 2016 to report any reportable information for the calendar year ended 31 December 2015.

2. Private client

2.1 Partnership tax avoidance

The First-tier Tribunal (FTT) has held in favour of HMRC that transactions in a tax avoidance scheme undertaken by a trading partnership to obtain a tax deduction through a mismatch were not trading transactions, and the legislation, which purported to apply to gain the tax advantage, did not apply in the way contended.

The scheme was designed to create a deductible trading expense for a partnership in purchasing the right to the dividend, but as a capital dividend it would not create the matching income.

In March 2006 a Jersey partnership, Clavis Liberty 1 LP, was established to trade in dated fixed income receivables, dividends and the rights to receive dividends. The partnership traded in various financial instruments, but on 31 March 2006 agreed to purchase from a BVI company (Dickens) the rights to £60m dividends on shares of a Cayman company (Helios). The dividend was paid on 5 April 2006. Some further trading took place after that date and the partnership was sold on 19 May 2006.

The dividends were to be paid from the share premium account of Helios. Under the legislation at the time (ICTA 1988 s.730), such dividends were to be treated as if income of the owner. On a strict reading of the legislation, the dividend would therefore not be taxable, being a capital dividend from a non-UK resident company. As the partnership was a trading entity, it was contended that the purchase of the right to the dividends was a trading transaction and therefore tax deductible.

The transactions for purchasing the rights to the Helios dividends and their receipt were held not to be trading transactions, so no deduction was available. It was also held that the purchase of the right to and receipt of the dividends was a composite transaction under the Ramsay principle. In holding that ICTA 1988 s.730 did not have the effect contended by the taxpayers, the recent House of Lords' decision in Deutsche Bank and UBS ([2016] UKSC 13) was considered, particularly the comment:

'...the provision under review in that case (Chapter 2 of Part 7 of the Income Tax (Earnings and Pensions) Act 2003 ('ITEPA')) 'was introduced partly for the purpose of forestalling tax avoidance schemes' and that that 'self-evidently makes it difficult to attribute to Parliament an intention that it should apply to schemes which were carefully crafted to fall within its scope, purely for the purposes of tax avoidance.''

As the tax advisory firm fees of approximately £760k were held to relate to non-trading transactions, they were also held to be non-tax deductible expenses.

2.2 Claim for share loss relief

This case involved the valuation of unlisted shares, resulting in partial success for the taxpayer. The First-tier Tribunal (FTT) has allowed a claim for share loss relief but at 60% of the amount originally claimed. The case involved a loan being converted into shares just prior to a prospective investor considering further investment. The investor did not invest and the company ceased trading approximately two months after the conversion of the loan into shares.

Mr Lewis loaned £100,000 to a company owned by his son and daughter-in-law on an 'equity basis' on the understanding that it would be converted to equity when the company reached the next stage of its requirement for fund raising. In the event the loan was converted into 99,900 shares of £1 each on 1 March 2011.

Shortly after the issue of the shares to Mr Lewis, on 2 March 2011, the company received an email from Mr Harding, the proposed new investor, discussing a possible investment in the company shares. A few weeks later, however, Mr Harding withdrew from the deal. The company was by this time running out of working capital. The company ceased trading on 3 May 2011 when the shares in the company were worthless.

HMRC contended that at the time the shares were issued the shares were worthless. Mr Lewis contended that at that time the company still had significant value embedded in the intellectual property which had already been developed and in the management team which was in place, even though it had severe cash flow problems.

Evidence was given by Mr Harding that he had been tempted to invest around £75,000 despite the lack of profits, but only for a controlling holding, interpreted as 51% by the FTT. The existing shareholders had been unwilling to give up control, so he did not invest.

On this basis the FTT considered an appropriate value for the shares immediately after they were issued to Mr Lewis was £60,000 and that this was their value for share loss relief purposes.

2.3 Change from cash basis to true and fair basis and overpayment of tax

The First-tier Tribunal (FTT) has applied the European Convention on Human Rights and the Human Rights Act 1998 in holding that discovery assessments needed to take account of overpaid tax when assessing underpaid tax, so that double tax on the same profits was eliminated.

A barrister, Mr Fessal, was in the 'transitional regime' applicable to barristers moving from the cash to the true and fair basis of recognising profits for tax purposes under what is now ITTOIA 2005 s.25 and s.25A for the three tax years 2005/06, 2006/07 and 2007/08. HMRC concluded that the correct application of the true and fair basis resulted in profits being decreased for the 2006/07 tax year and increased for the 2005/06 and 2007/08 tax years. As a result, further tax was payable for 2005/06 and 2007/08, but there was an overpayment for 2006/07. There was a delay in supplying further information to HMRC until late in 2011, and by December 2011 the then six year time limit had passed for Mr Fessal to claim overpayment relief for tax overpaid in 2006/07.

The FTT considered that the TMA 1970 s.29 assessment needed to be construed in accordance with the Human Rights Act so that the overpaid tax needed to be taken into account. As a result, the further liability for 2005/06 was eliminated by the 2006/07 overpayment, but an assessment remained outstanding for 2007/08.

3. Trust, estates and IHT

3.1 HMRC April 2016 trusts and estates newsletter

HMRC's April 2016 trust and estates newsletter covers the following points:

  • Budget 2016 issues:
  • inheritance tax and estate duty for heritage property;
  • IHT nil-rate band when downsizing;
  • legislation of ESC F20 on compensation for victims of persecution during the Second World War;
  • ceasing next day delivery through document exchange (DX): From 1 April 2016, HMRC Trusts and Estates no longer use the delivery service DX, and their letters and forms are being amended to reflect the change.

In addition, further to the item at paragraph 3.1 in Update on 4 April regarding trustees or personal representatives dealing with estates in administration not having to notify HMRC where the only source of income for 2016/17 is savings interest with a tax liability below £100, HMRC has indicated that it will provide further advice in due course.

3.2 Changes to inheritance tax electronic communications directions

On Friday 6 May 2016 HMRC issued an update, to take effect from Monday 9 May 2016, to the IHT electronic communications directions. The update sets out:

  • a revised approved method for authenticating the identity of the person sending information to HMRC;
  • the means of withdrawing consent to HMRC using electronic communication; and
  • to revoke the equivalent parts of earlier directions.

The key amendment is that from today the person sending information to HMRC:

  1. enters a User ID and password issued by the Government Gateway service;
  2. enters an access code sent to the person's mobile phone; and
  3. on first registration only, answers a series of identity verification questions.

For a taxpayer or a sole practitioner working alone, this seems to be a workable way forward with additional security. For a larger tax agent, multi-part authentication that involves the person receiving a code to its mobile phone (which one?) to input into the Government Gateway seems to be an impracticable development, for which a workable alternative is required.

We hope that this is addressed swiftly to enable agents to file online. The directions are under regulation 3(2) and (5) of the Inheritance Tax (Electronic Communications) Regulations 2015 (S.I. 2015/1378).

To read this update in full, please click here

The Financial Conduct Authority does not regulate all of the services or products discussed in this publication.

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