1. GENERAL NEWS
1.1. HMRC toolkits
HMRC has published updated Toolkits as follows:
- CGT for land & buildings
- CGT for shares
- Chargeable gains for companies
- CGT for Trusts and Estates
- Property Rental
- Directors Loan Account Toolkit
- Company Losses Toolkit.
1.2. The Scotland Act
The Scotland Act 2012 gives the Scottish Parliament the power to set a Scottish rate of income tax to be administered by HMRC for Scottish taxpayers. It is expected to apply from April 2016. The Act also fully devolves the power to raise taxes on land transactions and on waste disposal to landfill – it is expected that this will take effect in April 2015, at which point the existing Stamp Duty Land Tax and Landfill Tax will not apply in Scotland. The Act also provides powers for new taxes to be created in Scotland and for additional taxes to be devolved.
For employees and pensioners, the income tax change will be applied through PAYE (Pay As You Earn). HMRC will issue tax codes to employers in the months before April 2016 which will identify those employees who are Scottish taxpayers, and employers will deduct tax at the appropriate rates, which may be higher or lower than or the same as those which apply in the rest of the UK. The definition of a Scottish taxpayer is based on the location of an individual's main place of residence – further guidance will be available on in due course.
2. PRIVATE CLIENTS
2.1. Mansworth v Jelley CGT loss claims
In February 2012 HMRC wrote to a number of taxpayers who had claimed Mansworth v Jelley losses inviting them to withdraw their claim so that all enquiries could be closed.
We are aware that many people responded to the effect that they believed that they had a legitimate expectation that the CGT losses calculated in accordance with the Revenue's original guidance would be allowable.
It appears that HMRC subsequently issued a standard reply to those letters which paid no regard to the detailed arguments put forward by the taxpayers and requested a further response by 1 May.
In that letter HMRC reiterated its interpretation of 'legitimate expectation' as follows:
"General guidance such as that published by the Inland Revenue on 8 January 2003 following the decision of the Court of Appeal in Mansworth v Jelley does not in itself necessarily generate 'legitimate expectation' for you. Whether you have a legitimate expectation will be determined by the facts and circumstances of your particular case.
Please bear in mind that your post Mansworth v Jelley loss claims were based on transactions which had already been carried out prior to the guidance note being issued. You did not undertake the transactions with a view to generating the losses; they were in fact a by-product of previous operations. It must follow that, in generating the losses, you could not have been relying on the HMRC guidance as the transactions had already occurred.
Please also note that the changes which have been made to HMRC guidance only return your position to what it was before the decision in Mansworth v Jelley. You are in the same position as you were when you when you undertook the initial transactions. HMRC opened enquiries into your claim to check the position, and as we have not closed our enquiry the claim has not been agreed. As you were aware that HMRC still had open enquiries into your loss claims, you should also have realised that these losses were, potentially, not going to be available to be set against capital gains in future tax years. It is therefore, at first sight, difficult to see how you can believe that you have a legitimate expectation that the losses would be allowed."
ICAEW Tax Faculty expressed its concerns to HMRC about the way that it was handling the matter and HMRC has written to the Faculty as follows:
"There are currently several hundred open enquiry cases where post Mansworth v Jelley losses have been claimed. In February 2012 HMRC issued a newsletter to those taxpayers inviting them to withdraw their claims so the enquiries could be closed and any appropriate adjustments made. Where customers considered it was not appropriate to withdraw their claim they were invited to explain the basis on which they believe their claim is valid.
In response to February's newsletter, a number of customers cited legitimate expectation as the reason they considered it was not appropriate to withdraw their claim but did not supply specific information relevant to their case. A letter was then issued to these customers asking them to provide further information/documents based on their own individual circumstances.
HMRC are currently reviewing the cases where legitimate expectation was cited and information has been provided. We will be replying to these customers individually."
There was considerable concern in the profession as to whether the correspondence issued by HMRC over recent weeks constituted a decision to deny relief for the losses where the taxpayer had claimed legitimate expectation. This was because where there is no possibility of an appeal to a tribunal, the taxpayer's only remedy would be to seek a judicial review hearing and there are strict time limits for taking such action.
In this connection the ICAEW Tax Faculty has now received the following additional comment from HMRC:
'HMRC does not see the February or March letters as decision letters. Decisions will be made in each case according to the individual circumstances. Therefore HMRC does not consider that the judicial review claims time limit runs from the issue of either of those letters.'
We will be monitoring further developments closely and if needs be we will consider seeking a judicial review on behalf of all clients who are affected. This will involve a case being taken in the name of just one person, but with the costs spread in a just and reasonable fashion.
3. IHT & TRUSTS
3.1. Trusts and Estates newsletter
The latest edition of HMRC's Trusts & Estates newsletter for trusts and estates practitioners is now available online, including items on the reduced rate of Inheritance Tax, Pre-Owned assets charge guidance, IHT421 and C1, changes to Inheritance Tax calculations practice, changes to the 2011/12 Trust & Estate Tax Return, R40 Claim Forms and the Personal Application process.
4. PAYE AND EMPLOYMENT MATTERS
4.1. Whether changes to EMI option terms amount to a new option
HMRC guidance on whether amendments to options amount to a new option for EMI purposes is found at www.hmrc.gov.uk/manuals/essum/ESSUM54600.htm. It comments:
Whether any changes amount to a new option is a question of fact and degree. Minor alterations that do not affect the terms of the option and do not increase the market value of the shares that may be acquired and are not contrary to the requirements of Schedule 5 will generally be acceptable. The date of grant of the option will remain unchanged.
However it will be a disqualifying event if the changes are a variation in the terms of the option and they increase the value of the shares that may be acquired under the option, or result in the conditions of Schedule 5 no longer being met. (Section 536 ITEPA)
If there is a change to any of the fundamental terms of an option to improve the rights of the option holder and the change is more than de minimis, the change will amount to the grant of a new option. The fundamental terms of an option are
- the number of shares to be acquired;
- the price at which they are to be acquired; and
- when they can be acquired.
A "de minimis" alteration to the fundamental terms of an option is one which results in only a very minor improvement to the existing rights and the advice of ESSU should be obtained before accepting that an alteration is a "de minimis" alteration.
If the change amounts to the grant of a new option, the existing EMI option is released. Any consideration received for the release will be chargeable to income tax under Section 477 ITEPA.
Thus when extending the period for which an option can be exercised (within) the limits permitted for the EMI scheme, consideration should be given as to whether this is a de minimis change or not.
An example of a change to option terms which could well result in reclassification as a new option might be extending the period in which it could be exercised from seven to ten years.
5. BUSINESS TAX
5.1. Lease premium informal consultation
HMRC has issued an informal consultation on reform of the lease premium tax legislation for property income. Although the regime is for individuals and companies, for discussion purposes the document refers to corporation tax. The area identified for consideration is CTA09 s243, the rules for determining the effective duration of a lease. The equivalent for income tax purposes is ITTOIA s303. The implications are that if a long lease can be identified as a short lease as a result of these rules, the tenant can get an income tax deduction for the relevant portion of any lease premium payment.
HMRC has identified difficulties with the operation of these rules where there is a dispute between tenant and landlord, and it also perceives there to be some abuse in this area where the landlord's property profits are tax exempt (such as for pension funds, government bodies and NHS Trusts) with the inference that tenants are asking for long leases to be drawn up so as to be classified as short leases under these rules.
The proposal for reform is the removal of the availability of lease premium relief where a long lease is deemed to be a short lease for tax purposes as a result of these rules. There is a request for information as to how behaviour might be affected as a result of this and whether there would be an adverse impact in situations where both tenant and landlord are subject to tax. The consultation was issued on 24 April and is open until 30 June.
5.2. Whether a film partnership was carrying on a trade
The First Tier Tribunal has found that Eclipse Film Partners No 35 LLP (Eclipse) was carrying on a business, but not carrying on a trade, with the consequence that sideways loss relief for losses incurred in such a trade was not available for the members, for the following reasons:
- The Tribunal considered an element of speculation was a characteristic of a trade and that there was no element of speculation in the way the partnership exploited the rights it had sublicensed, and in its limited exposure to counterparty risk.
- Although a right to certain contingent receipts arising from the exploitation of film rights was a part of the business, and these did encompass an element of speculation, prospect of receiving such receipts was so remote that there was little if any possibility in the Tribunal's view that these receipts might materialise.
- In its position as an intermediary between the film maker (Disney) and the next tier of distributors the Tribunal considered Eclipse did not offer any meaningful service to Disney and that it had no customer and did not provide or offer any goods or services by way of business on a meaningful basis.
- The Tribunal could not consider the arrangements similar to a
finance lease arrangement, as the financing position of Eclipse
depended on the financing arrangements of the members, and the
partnership retained no meaningful residual film rights as a result
of the leasing arrangement. They also considered a finance lessor
in the case of the lease of a single asset would usually be
regarded as carrying on a financial trade by reference to the
activities of entities with which it is associated, and Eclipse had
no such other activities or associated entities.
The tribunal did not go on to consider whether money borrowed by the members was used for the purposes of that trade, as their decision was that no trade was being carried on.
5.3. SDLT on Fixtures (Orsman v HMRC)
In March 2010 Miss Orsman bought a house together with certain chattels for a total of £258,000. Of that amount £8,000 was described as being for "Chattels". Based on this apportionment, the transaction was chargeable to SDLT at a rate of 1% on £250,000. However the Tribunal determined that the amount in the chattels identified as fitted units and a worktop in the garage and valued at £800, was in fact part of the land (being fixtures) and that the chargeable consideration was £250,800 at a rate of 3%. There were other items included in chattels which the Tribunal thought could well have been part of the land, but their remit for this case did not include a consideration of those other items.
HMRC's guidance on whether fixtures and fittings are chargeable to SDLT is included at SDLTM 04010.
That guidance includes the following comments:
Externally, any plants, shrubs or trees growing in the soil which forms part of the land, are not to be regarded as chattels.
HM Revenue & Customs is advised that the same principles will apply when considering the purchase of industrial or commercial property in which the sale may also involve the acquisition of plant, machinery or equipment.
With regard to forestry activities, a landowner may contract with a timber merchant and agree what is in effect a sale of timber while it is still standing (the timber merchant's workers or subcontractors cut and extract the trees agreed to be removed). For such a contract not to be subject to SDLT it would need to be drawn up such that it is for the sale of cut timber and not the standing timber.
5.4. HMRC guidance on Senior Accounting Officer rules
All guidance relating to Senior Accounting Officers has now been superseded by the guidance in HMRC's new SAO manual.
We have also been informed that HMRC has issued the following clarification note:
As we have previously pointed out, there are a few areas where we have changed our interpretation of the SAO rules and these are reflected in the updated guidance. For the avoidance of doubt I also thought I would reiterate our previous comment that we will not consider charging penalties where companies and SAOs have followed previous guidance for any period up to the first period commencing after the publication of this revised guidance. Additionally, we will apply a 'light touch' period to any companies that are brought into the SAO regime by our changed interpretation for the first period commencing after publication of the guidance – along the same lines as the 'light touch' approach that was applied when the regime was introduced. Finally, HMRC will not charge any penalties for previous periods where one would seem to be due under the previous guidance, but which would not be due under the revised guidance.
Of course, where HMRC's view has not changed there has been no need to update the content of the guidance and we would expect companies and SAOs to continue to apply the SAO rules consistently.
Please note that our quality assurance process has identified a couple of inconsistencies, however we did not want to delay publication of the updated guidance. Therefore, we will be shortly making minor amendments to the guidance at 16500, 16600, 16610 and 16620 to reflect HMRC's view that the late or non-provision of the SAO certificate can be disclosed to the company.
5.5. SDRT and HSBC/Bank of New York Mellon's claim
HMRC has decided not to appeal the decision in its dispute with HSBC over whether SDRT was due on its acquisition of Household International Inc (see Tax Update 2 April 2012). HMRC's note includes the following:
Implications for Stamp Duty Reserve Tax
The Tribunal held that the charge to SDRT at 1.5 per cent arose on the transfer of HSBC shares to the Bank of New York Mellon. It rejected HM Revenue & Customs (HMRC) arguments that Article 12 of the Capital Duty Directive permitted the transfers to be taxed and held instead that, because the transfer was integral to the raising of new capital by HSBC, charging it to tax under section 93 FA 1986 amounted to a tax on the issue of the HSBC shares. Accordingly the tax charge contravened Articles 10 and 11 of the Directive and was unlawful. The Tribunal therefore upheld the company's appeal.
In reaching its decision the Tribunal held that the Capital Duty Directive applies to issuers situated in the EU irrespective of where their investors are located. Acceptance of the decision means that HMRC will no longer seek to impose SDRT at the rate of 1.5 per cent on issues of UK shares to depositary receipt issuers and clearance services outside the EU. Following the decision of the European Court of Justice in 'HSBC Holdings plc and Vidacos Nominees Limited v Commissioners for HMRC (C-569-07)', which held that SDRT charges on issues of UK shares to clearance services (and, by extension, depositary receipt issuers) within the EU is unlawful, the overall effect is now that 1.5 per cent SDRT is no longer applicable to issues of UK shares and securities to such entities anywhere in the world.
HMRC does not consider that the Tribunal's decision has any impact upon transfers (on sale or otherwise than on sale) of shares and securities to depositary receipt systems or clearance services that are not an integral part of an issue of share capital. The Stamp Duty and Stamp Duty Reserve Tax charges under sections 67, 70, 93 and 96 therefore continue to apply to such transactions.
Repayment of Stamp Duty Reserve Tax
HMRC will make repayments of SDRT to those companies that have made repayment claims in respect of issues of UK shares to non-EU depositary receipt systems and clearance services and whose appeals are currently stayed behind the decision in this case.
HMRC also now invites statutory claims for repayment under Regulation 14 of the Stamp Duty Reserve Tax Regulations 1986 ('the SDRT Regulations') from any other persons who, pursuant to sections 93 or 96 Finance Act 1986 have paid SDRT in respect of an issue of shares in a UK-incorporated company to a depositary receipt issuer or a clearance service located within or outside the European Union.
Time limit for repayment claims
Regulation 14 of the SDRT Regulations requires any claim for a refund of SDRT to be made within a period of four years beginning with the later of the date on which the tax was paid and the relevant accountable date for payment of SDRT under the SDRT Regulations. Any claims made after the expiry of that period will be time-barred.
Interest on SDRT refunds
Where the amount of SDRT to be refunded is £25 or more, interest calculated at the rate applicable under section 178 Finance Act 1989 will be paid on the amount of any repayment, calculated from the time at which the SDRT was paid.
Making a Claim
In the first instance the information and documents listed in the Appendix to this statement should accompany any claim for repayment. It may be that in certain circumstances further information is required by HMRC before a claim can be processed.
Claims should state the subject matter as 'Claim made as a result of the First-tier Tribunal decision in 'HSBC Holdings plc and Bank of New York Mellon v Commissioners for HM Revenue & Customs (TC/2009/16584)' and should be addressed to Adam Shooter at HMRC Stamp Taxes, 9th Floor, City Centre House, Union Street, Birmingham B2 4AR.
5.6. Advocate General's opinion concerning UK consortium relief rules
The Advocate General has concluded in favour of the taxpayer that the UK consortium relief rules constitute a restriction of the freedom of establishment in relation to companies established in a member state other than the UK. The full decision of the Court of Justice of the European Union is awaited. For a discussion of other points in relation to the UK application of consortium relief with respect to this case and a case involving Hutchison 3G UK Ltd, see Tax Update 23 January 2012. Extracts from the Advocate General's conclusions include:
38. The answer to the first question must therefore be that the special conditions laid down by section 403D(1)(c) ICTA (now CTA10 s107(5)) for group relief in relation to companies established in a Member State other than the United Kingdom constitute a restriction of the freedom of establishment.
By its second question, the referring court wishes to know whether there is a justification for the restriction of the freedom of establishment. According to case-law, a restriction of the freedom of establishment is permissible if it is justified by overriding reasons in the public interest. (24) The referring court cites as possible justifications the balanced allocation of taxing powers between Member States, the risk of the double use of losses and a combination of the two.
On these grounds, the United Kingdom, as the host Member State, cannot rely on the justification of preserving the allocation of the power of taxation where it refuses group relief, under certain conditions, for UK-resident branches, in contrast with domestic companies.
This is clearly not the case in the United Kingdom with regard to the double use of losses of UK-resident permanent establishments of foreign companies. The condition under section 403D(1)(c) ICTA applies only to group relief. However, carrying losses forward and back over different tax periods is permitted for permanent establishments situated in the United Kingdom irrespective of whether such losses are also taken into account in the company's Member State. The tax rules on the deduction of losses do not therefore, on the whole, pursue in a consistent manner the objective of preventing the double use of losses.
68. The answer to the second question must therefore be that the restriction is not capable of being justified on the basis of the preservation of the allocation of taxing powers, even in combination with the aspect of the prevention of the double use of losses. It is also not capable of being justified solely on the basis of the prevention of the double use of losses, since that does not constitute an autonomous justification.
As a result of these multiple restrictions, I consider that section 403D(1)(c) ICTA is essentially geared to permitting group relief only where there is no provision in the Member State of the foreign company for losses of a UK permanent establishment to be taken into account at all . The situation in the individual case is, by contrast, almost irrelevant.
77. In any case, the third question should therefore be answered to the effect that, on the whole, the provision goes beyond what is necessary to prevent the double use of losses.
By its fourth question, lastly, the referring court wishes to establish the importance of a breach of the freedom of establishment in the main proceedings. Because a provision such as section 403D(1)(c) ICTA breaches the freedom of establishment, (48) this question must be answered.
Against this background, it is irrelevant that the taxpayer in the main proceedings does not exercise its right of establishment itself. Article 43 EC and Article 48 EC also require that the contested provision contained in section 403D(1)(c) ICTA be disapplied in the main proceedings.
V – Conclusion
90. In the light of the foregoing, I suggest that the Court answer the questions asked by the Upper Tribunal, Tax and Chancery Chamber, as follows:
(1) It is a restriction on the freedom of establishment granted by Article 43 EC and Article 48 EC for a Member State to prevent the surrender of the losses incurred in that Member State by a resident permanent establishment of a non-resident company to a resident company by way of group relief where any part of those losses, for the purposes of any foreign tax, is in any period deductible from or otherwise allowable against non-domestic profits of the company or any other person.
(2) That restriction is not capable of being justified on the basis of either the preservation of the allocation of taxing powers between Member States or the prevention of the double use of losses, or by a combination of both objectives.
(3) In a situation like that in the main proceedings, a Member State is required to disapply a provision which is contrary to Article 43 EC and Article 48 EC also for the benefit of the taxpayer who is claiming group relief.
5.7. EU Commissioner for Tax: opportunities in an ever closer union
Algirdas `emeta, EU Commissioner for Taxation and Customs Union, spoke on opportunities for an evercloser union at a Conference on Taxation in Brussels, 27 April 2012. He commented that greater efforts are necessary to shift taxation away from labour towards taxes that are less detrimental to growth, such as taxes on consumption, environment and property. He also commented that Member States also need to broaden tax bases by eliminating exemptions, which are often a source of complexity in the tax systems. In particular, the numerous VAT exemptions and sometimes broad application of reduced VAT rates should be addressed.
With respect to tax co-ordination, he was encouraged that Member States were committed to carrying forward the work on the Commission's proposals for Energy Taxation, the Common Consolidated Corporate Tax Base, the Financial Transaction Tax and Savings Taxation. The European Parliament gave its backing to developing the common consolidated corporate tax base (CCCTB) proposal on 19 April.
6.1. Updated VAT notice 742 on land and property
HMRC has updated its notice 742 on VAT concerning land and property. Included in the changes are the following:
- Definition of 'licence to occupy land' (Paragraph 2.5). The text has been refined and includes the following comment: "Where a licence to occupy is granted together with other goods and services as part of a single supply, the nature of the overarching supply will determine how it should be categorised for VAT purposes".
- Guidance on parking for dwellings (Paragraph 4.4). There has been a change of interpretation with respect to the VAT treatment of parking facilities associated with dwellings and the guidance has been expanded.
- Guidance on the treatment of land and buildings on hand at deregistration (Paragraph 7.8). The guidance has been clarified and made more specific.
6.2. Draft legislation concerning VAT and European Research Infrastructure Consortia
HMRC has published draft legislation to be introduced in autumn 2012 to provide VAT relief to a European Research Infrastructure Consortia (ERIC), together with a Tax Information and Impact Note.
6.3. The nature of accounting services for place of supply purposes
Matrix Securities Ltd has succeeded at the First Tier Tribunal in a case where HMRC had contended that what was described as accounting services (coming within the description of services supplied where received under the legislation in force at the time) were of a general administrative nature and therefore supplied in the UK (requiring reverse charge VAT accounting). The Tribunal concluded the services did constitute accountancy services that met the requirements for being supplied where received.
Since 1 January 2010 if the supply is to a relevant business person the place of supply of services is where the recipient belongs, and otherwise in the country in which the supplier belongs.
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.