UK: Weekly Tax Update - 23 May 2016

Last Updated: 31 May 2016
Article by Smith & Williamson

1.General news

1.1 Payments to HMRC from overseas

HMRC recently changed their bank account arrangements to Barclays for those paying from overseas, although it seems that the details have not been widely published. Advance notice of the change was included in a few HMRC publications, but this excluded international bank account number (IBAN) references. It seems that a number of overseas businesses were not aware of the new references and have continued to make payments to the former HMRC bank account with Citibank, resulting in the issue of late payment penalty notices.

The HMRC accounts for payments made from an overseas account for the following heads of duty have been changed to:

You may wish to check HMRC's current details before making any payments. Full details of how to pay HMRC, including other taxes and duties, are at:

www.gov.uk/topic/dealing-with-hmrc/paying-hmrc

2. Private client

2.1 Entrepreneurs' relief and the meaning of 'ordinary share'

The First-tier Tribunal (FTT) has held that shares redeemable at par, that carried a right to a dividend of 0%, were not ordinary shares for the purpose of entrepreneurs' relief. While this decision appears to be against the generally accepted view of the status of such shares for tax purposes, it was consistent with the economic reality in the case of Mr and Mrs Mcquinlan, who were then held to have more than a 5% interest each in the target company upon a sale and hence entitled to entrepreneurs' relief.

The Tribunal also held it did not need to determine whether its answer would be the same in all other contexts or circumstances.

Entrepreneurs' relief in respect of a sale of company shares requires, amongst other things, that the individual holds shares in a personal company for a one year period. A holding in a personal company is at least 5% of the ordinary share capital and entitlement to at least 5% of the voting rights by virtue of that holding.

In this case, in 2006, in order to meet requirements for the receipt of grants from Invest Northern Ireland, loans by Mr and Mrs Pennick had been converted into non-voting ordinary shares redeemable at par from March 2009 with no dividend rights.

In autumn 2009, a large business offered to buy the company. As a result the company resolved to redeem the ordinary non-voting shares on 14 December 2009, with the company being sold on 1 January 2010.

The respective interests as at 13 December 2009 were as follows:

At disposal Mr and Mrs Mcquinlan each only had a 33% holding in voting shares. However, this level of interest had not been held for the 1 year period leading up to the date of sale.

HMRC guidance at ESSUM43230 indicates that shares with no dividend rights can be accepted as ordinary shares (as a dividend of 0% is not a fixed rate dividend), and this appears to be the generally accepted view. The FTT interpreted the HMRC guidance as follows:

This form of wording could be taken to suggest that share[s] with no dividend rights may be treated as having a fixed dividend of 0% for certain purposes in certain contexts, but not others.

In view of the fact that the non-voting shares arose out of loans and no substantive change was intended by the conversion of the loan into shares, other than to facilitate entitlement to grants, and as entrepreneurs' relief could not be foreseen in 2006, the FTT considered that in this case the non-voting shares should not be regarded as ordinary shares. As a consequence the Mcquinlan's shareholdings qualified for entrepreneurs' relief.

www.financeandtaxtribunals.gov.uk/judgmentfiles/j9055/TC05074.pdf

3.PAYE and employment

3.1 Reporting deadline for short term business visitors (STBVs)

Those operating short term business visitor agreements with HMRC have until 31 May 2016 to submit reports of payments to short term business visitors, who stayed in the UK for no more than 183 days, during the 2015/16 tax year.

An STBV agreement relaxes strict PAYE requirements and can apply provided that it can be shown that the UK company or branch will not ultimately bear the cost of the remuneration for specifically named employees, whose presence in the UK is 60 days or more and who are:

  • resident in a country with which the UK has a Double Taxation Agreement under which the DependentPersonal Services / Income from Employment Article (Article 15 or the equivalent) is likely to becompetent;
  • coming to work in the UK for a UK company or the UK branch of an overseas company, or are legallyemployed by a UK resident employer, but economically employed by a separate non-resident entity;and
  • expected to stay in the UK for 183 days or less in any twelve month period.

Where agreement is reached and the employee falls within the guidelines in all other aspects, then that part of the remuneration not ultimately borne by the UK Company or branch can fall within this arrangement.

The reporting requirement relates to specific information on employees who visit the UK for between 60 and 183 days, with slightly different rules for those staying 60 to 90 days, 91 to 150 days and 151 to 183 days in the tax year. This must be submitted by 31 May following the end of the overseas tax year where the visitor is claiming non-UK tax residency.

www.gov.uk/hmrc-internal-manuals/paye-manual/paye81950

www.gov.uk/hmrc-internal-manuals/paye-manual/paye82000

3.2 Liability for settling tax and interest arising from an EBT settlement agreement

The High Court has held that the funds used to settle PAYE/NIC liabilities and associated interest, arising from an employee benefit trust (EBT) settlement agreement, should come from the funds settled in the EBT rather than the employer who set up the EBT.

Insafe International Ltd set up an EBT with £1.25m in 2006. Insafe was the trustee. After being allocated to four subtrusts in favour of two Insafe employees and their families, the funds were gradually lent to the company subject to interest. Mr Shah was one of the employees benefiting from the subtrusts. Subsequently Insafe entered into an EBT settlement agreement with HMRC, to which Mr Shah was not a party, at a time when Mr Shah was no longer working for the company.

As a result of the settlement agreement, the loans were repaid and the PAYE/NIC liabilities together with interest were settled by the company. Agreement had been reached to wind up the settlements. Mr Shah maintained that the EBT funds should be paid to him before the deduction of PAYE/NIC, as that liability was due from the company and the funds in the trust could not be used for the benefit of the company.

The High Court noted that if the Murray Group Holdings decision had applied the PAYE point could have been at the point the funds were contributed to the EBT. The settlement reached with HMRC had been on the basis the PAYE/NIC was due at the point of allocation to the subtrusts; however, the High Court held the PAYE/NIC and interest were due from the trust funds and not the company employer.

The judgment, does not go into detail about employer's NIC. The judge also understandably relied on Murray, so it will be interesting to see whether the Murray analysis survives in its present form in the Supreme Court.

www.bailii.org/ew/cases/EWHC/Ch/2016/1036.html

4.Business tax

4.1 Two new Office of Tax Simplification (OTS) reviews

The Office of Tax Simplification (OTS) has published terms of reference for two new reviews and written a letter to Financial Secretary to the Treasury, David Gauke, setting out its future plans.

Closer alignment of income tax and national insurance contributions (NIC)

There are two strands to this review:

  • the impact of moving employee NICs to an annual, cumulative and aggregated basis, similar to incometax collected under PAYE. NICs are currently calculated on a pay period basis; and
  • the reform of employer NICs to a payroll based charge. We interpret this as an intention to consideraligning the method of calculation of employer's NIC with income tax rules.

Corporation tax computation

With the digital agenda in mind, this review will concentrate on the reasons for and possible simplification of the ways in which the amounts of different sources of corporate income are calculated for tax purposes. The recommendations will consider:

  • the potential for reducing the differences between accounting profit and tax profit;
  • the legislative, practical and Exchequer impacts of so doing, while taking into account anyimplications for general transitional and loss relief rules (including the reforms announced at Budget2016), and maintaining a separation between capital and revenue; and
  • the relative significance and impact of the issues identified on companies and groups of different sizesor in different sectors, and the potential for having simpler rules for smaller companies.

www.gov.uk/government/publications/ots-review-of-income-tax-and-national-insurance-alignment-phase-2-tor

www.gov.uk/government/publications/ots-review-of-the-corporation-tax-computation-tor

www.gov.uk/government/uploads/system/uploads/attachment_data/file/524204/OTS_letter_to_David_Gauke_120516.pdf

4.2 Implications of retirement from a partnership

The Court of Session has determined that where a partnership agreement did not disapply general law on the retirement of a partner from a partnership. The partnership was treated as technically dissolved and a new partnership formed after the retirement. Here, the retiring partner was therefore entitled to a share of the partnership assets according to general law. While there did not appear to be significant tax issues at stake, this case highlights potential commercial issues with incomplete partnership agreements.

The case concerned a Scottish partnership of solicitors, Munro and Noble, and its requirement for partners to retire at age 65. David Easton was required to retire due to age; however, the partnership agreement did not provide specific terms for the partnership on such a retirement. As a result, the Court held that because the firm was technically dissolved, David Easton was entitled to his share of the partnership assets on retirement. For tax income purposes, the partnership was not treated as dissolved as at least one partner was continuing the partnership business after this retirement.

Partners responsible for managing partnership affairs should consider whether their partnership agreement adequately provides for procedures on the retirement of a partner, or whether there is a risk that the partnership will be deemed to have ceased and a new one created as a result of a retirement.

www.scotcourts.gov.uk/search-judgments/judgment?id=2b8412a7-8980-69d2-b500-ff0000d74aa7

4.3 Minutes of the Business Forum on Tax Competitiveness

The 21 January 2016 minutes of HM Treasury's Business Forum on Tax Competitiveness have been published. They discuss:

  • Feedback from business on the current economic environment and climate for business investment.
  • Business Tax Roadmap.
  • Base Erosion and Profit Shifting (BEPS).

www.gov.uk/government/uploads/system/uploads/attachment_data/file/523921/20160121_bftc_minutes.pdf

4.4 Deductibility of corporate interest expense

HM Treasury and HMRC's consultation on the tax deductibility of corporate interest expense sets out further detail on how the restriction on deductibility could apply from 1 April 2017. Responses to the document are requested by 4 August 2014.

Key points from the document include:

  • the restriction will only apply to the portion of group net interest expense exceeding £2m;
  • UK group net interest expense for tax purposes above the fixed ratio rule (30% of the group's UK taxEBITDA) will not be deductible in the current year unless it can be covered by the group ratio rule.This is a ratio equal to net qualifying group interest expense/Group EBITDA, calculated usingaccounting figures of the worldwide group. There is further discussion of possible computational rulesand anti-avoidance;
  • restricted interest will be carried forward indefinitely for future use, but can be allocated toparticular companies in the group. Such restricted interest will not be a loss. When it is used in future,it will be used to determine the current year profit or loss before application of the new loss carryforward rules. It will also be possible to carry forward spare capacity to cover future interest expense,but only for a maximum of three years. There are no proposals to carry back restricted interest orspare capacity. Spare capacity cannot include any unused element of the £2m de minimis limit;
  • the group ratio rule should mean most public benefit infrastructure projects are unaffected. Aproposal for an ability to elect for a public benefit project exclusion is discussed, which has tightlydrawn conditions. No grandfathering of existing projects is proposed; and
  • the possible impact on the regime on particular sectors is discussed. There is also an update ondiscussions with the OECD for the application of interest restrictions to the banking and insurancesectors, with the suggestion that a modified regime would apply. There is a request for comments onwhether or not non-resident landlords should be brought within the scope of the regime.

www.gov.uk/government/uploads/system/uploads/attachment_data/file/522936/tax_deductibility_second_consultation.pdf

5.VAT

5.1 Abuse of rights and property refurbishment

The Court of Appeal has confirmed the Upper Tribunal's (UT) decision in the University of Huddersfield case, that a VAT scheme to reduce the incidence of VAT on property refurbishment was an abuse of rights.

The scheme involved the lease of the property by the university to a discretionary trust, the option to tax being made by the trust. The refurbishment was then carried out by a university property company registered for VAT and the property was then leased back from the trust to the university on a repairing basis only. The intention was to collapse the structure, removing the discretionary trust after a period. This was held to be abuse of rights.

The concluding comments of the case summary were:

'Having found that the tests for abuse of rights were both met, the Upper Tribunal (UT) then had to redefine the transactions. This is where Mr Lasok's [counsel for the University] fourth principle comes into play. They decided that the way to do this was to disregard the artificial steps (ie the creation of the Trust and the creation of the leasehold structure). Mr Lasok took issue with this, arguing that the University could have achieved the same tax advantage by entering into a similar leasehold arrangement as part of an arms' length financing package. However, in my judgment the question of redefinition does not enable past history to be completely rewritten. The fact is that the University did not enter into any financing package. On the facts found it paid Properties Ltd out of its own funds. Properties Ltd was merely the conduit through which monies passed from the University to the contractor. The fact that other, non-abusive, structures could have been adopted does not undo the abusive nature of what the University in fact did.'

www.bailii.org/ew/cases/EWCA/Civ/2016/440.html

6.And finally....

Mexican standoff

It really isn't this column's place to single out VAT repeatedly for comment, but you need to understand that the courts are all off next week, civil servants are on extended Referendum purdah (watch out for a surge of content in the Update of first week after the result) and the footie has finished for now. Where else do we look?

This week our eye was caught by the great Mexican burrito case. Up there with Jaffa cakes, pasties and, our current favourite, Spot the Ball, we just had to mention the case of Mucho Mas and the hot burrito before it is lost to the archives.

Were burritos hot food? Looking at the case, it does seem difficult to resist the notion that wrapping the product up in tin foil was probably not to keep it at room temperature even if it did prevent leaks. So, burritos are not cold. But are they hot? According to VAT rules, yes. Hot, if you are a VAT person, is 'above ambient temperature.' Barely lukewarm for the rest of us.

Fair's fair. What do we want? A reduced rate of VAT! When do we want it? Before they get cold.

www.bailii.org/cgi-bin/format.cgi?doc=/uk/cases/UKFTT/TC/2016/TC05071.html&query=(chilango)

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

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 Topics
 
Related Articles
 
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
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions