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:

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.

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.

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.

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.

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.

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).

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.


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.'

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.

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

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