1 General news
1.1 Budget 2014
Smith & Williamson's 2014 Budget commentary and a 2014/15 tax rate card are available to download from our website:
- link to the commentary booklet:
www.smith.williamson.co.uk/uploads/publications/budget-report-2014.pdf
- link to the Tax Rate Card:
www.smith.williamson.co.uk/uploads/publications/tax-rate-card-2014.pdf
2 Private client
2.1 Painting treated as plant, so CGT exempt
The Court of Appeal has upheld the decision of the Upper Tax Tribunal, finding in favour of the taxpayers, the executors of Lord Howard of Henderskelfe (deceased). This confirmed that a painting owned by the Executors of Lord Howard, but used by a company in its trade at Castle Howard, fell to be treated as plant and as such it was exempt from capital gains tax in the hands of the Executors.
This decision could have significant effects for owners of art and other chattels used in a business such as a stately home or for owners of significant art collections who consider allowing a business to use the art or chattels in their trade. Computations may need to be revisited where the exemption under TCGA 1992 s.45 has not been considered. Points of Interest
- TCGA 1992 s.45 states that capital gains tax is not due on wasting assets, although there are exceptions under s.45 (2) and (3), eg this doesn't apply to assets that are used solely for the purpose of a trade, profession or vocation from the time of acquisition to disposal. However the Court of appeal accepted that s.45 (2) and (3) did not apply to the case, so the exemption from CGT for wasting assets applied.
- TCGA 1992 s.44 defines a wasting asset as an asset with a predictable life of less than 50 years. Plant and machinery is deemed in s.44(1)(c) to always have a predicable life of less than 50 years.
- The case relied on the classic explanation of plant, which is to be found in Yarmouth v. France (1887) 19 QBD 647, i.e. 'whatever apparatus is used by a business man for carrying on his business, - not his stock-in-trade which he buys or makes for sale; but all goods and chattels, fixed or movable, live or dead, which he keeps for permanent employment in his business'.
- The Court of Appeal judges agreed that the painting was plant as the interest in the asset had a sufficient degree of permanence and it was used in the company's trade.
- HMRC had tried to argue that the executors, rather than the company, sold the painting and that as the executors were not trading they could not claim that the asset was plant. This assertion was rejected as TCGA 1992 s.44 did not impose the limitation that plant and machinery can only be subject to the exemption in TCGA s.45(1) if the disposal of the plant was by the trader who used the plant.
- The decision confirms that plant and machinery is to be regarded as having a useful life of less than 50 years and is therefore a wasting asset and is not affected by the fact that its useful life may be longer in reality and it may appreciate in value (as was the case here).
- It was acknowledged that the legislation inevitably raises potential difficulties in, for example, a case in which there is a significant delay between the use of the plant in a trade and the disposal. The legislation does not provide for any apportionment in such situations. However, it was decided that provided there is no significant gap between use as plant and sale, the CGT exemption is still available.
2.2 HMRC's view of the tax treatment of venture capital schemes
a. Following recent press reports of HMRC's withdrawal of VCT status from Oxford Technologies, which had exceeded the 15% maximum holding it could retain in an AIM listed vaccine company, HMRC has issued a note setting out its view of the tax treatment of venture capital trusts.
The note considers HMRC's interpretation of the wording around when a VCT loses approval. The legislation says that HMRC "may" withdraw approval in certain circumstances. While some commentators believe this provides an element of choice, HMRC considers that "may" should be interpreted as meaning "must". A similar interpretation of the word "may" has been used by HMRC in other areas.
www.hmrc.gov.uk/news/vct-note.pdf
b. Last week HMRC issued a note on the interaction between EIS and co-productions in film and TV.
Its general view was that co-productions generally fail the EIS test in ITA 2007 s.183 that no part of the qualifying trade is carried on by a person other than the company or a qualifying 90% subsidiary. We understand from HMRC that this view is concerned with arrangements which seek to exploit the tax benefits available from EIS and co- productions in film & TV (primarily through the use of newly incorporated SPVs).
This new view does not indicate a general principle that other joint venture arrangements entered into by EIS companies cause the ITA 2007 s.183 test to be failed. Budget 2014 announced an upcoming consultation on the use of venture capital schemes for activities with a low risk and contrived structures.
3 Business tax
3.1 Taxi driver Glenn Whittle case around requisite business records
This case makes interesting reading, particularly around TMA 1970 s.12B and requisite records. The taxpayer, Glen Whittle (GW), successfully appealed against assessments for additional tax and penalties levied by HMRC, following use of their business modelling to determine undeclared income. The lack of an enquiry into GW's wife's affairs entitled her to privacy.
The First-tier Tax Tribunal in Glenn Whittle v HMRC [2014] UKFTT 254 (TC) allowed the appeal by the taxpayer in full .The appeal considered whether the assessments were reasonable; if penalties were payable; what constituted sufficient records to maintain for a business; whether income was undeclared in the light of family expenditure and whether financial information was not supplied to HMRC because of secrecy rather than the fact that the information was available from his wife who was not the subject of the enquiry.
Points of Interest:-
- TMA 1970 s.12B concerns the requirement for records to be 'requisite for the purpose of enabling him to make and deliver a correct and complete return'. The meaning of 'requisite records' has been the subject of debates around Business Record Checks. HMRC had been asked to provide details of any requirements under TMA 1970 s.12B, in respect of GW's activities, but no details were supplied.
- GW had maintained an income and expenditure record book based on slips of paper (which had been destroyed). The fact that the slips were destroyed was not a reason to cite inadequate record keeping as they were not the primary records and were 'of no more evidential value than a weekly summary of the same'. The records were considered 'requisite'.
- HMRC had used a standard model of income and expenditure to suggest that GW's income was exceeded by his expenditure and therefore contended there was undeclared income. GW and his wife's domestic circumstances did not fit the standard model (for example the mortgage in joint names was effectively paid by his wife's income) and the tribunal decided that their joint income was commensurate with their joint expenditure based on the evidence supplied and therefore there had been no under-declaration of income.
- Using a standard model of expected income and expenditure to determine undeclared income for a year in isolation could produce an incorrect result. Part of the income receipts declared related to a 'drawdown' pension policy, which can allow for variable pension income amounts being drawn down in any tax year. Clearly if a taxpayer had drawn down a significant amount of pension income in one year and nothing in the next; they lived off the income in first year and the next and if HMRC investigated the later year it might seem that there was low income in the later year.
- HMRC did not raise an enquiry into GW's wife's tax affairs despite their ability to do so and therefore his wife was entitled to privacy and did not have to disclose information. She did provide information to assist with the enquiry but she was not obliged to in the absence of an enquiry into her tax affairs. The tribunal pointed out that HMRC, in contrast, repeatedly refuse to give information about other taxpayers when requested to do so by appellant taxpayers on the same grounds.
3.2 Investment manager exemption
SI 2014/685 expands the lists of 'investment transactions' that will not subject a fund to UK corporation tax (the white list).
The white list has two purposes:
" to identify activities that may qualify for the investment manager exemption; and
" to specify that, subject to the existing conditions in the relevant regulations, certain transactions ("investment transactions") are not treated as trading transactions for UK tax purposes.
According to the statutory instrument an investment transaction includes:
(a) any transaction in stocks and shares;
(b) any transaction in a relevant contract;
(c) any transaction which results in a fund becoming a party to a loan relationship or a related transaction in respect of a loan relationship;
(d) any transaction in units in a collective investment scheme;
(e) any transaction in securities of any description not falling within paragraphs (a) to (d);
(f) any transaction consisting in the buying or selling of any foreign currency;
(g) any transaction in a carbon emission trading product; and
(h) any transaction in rights under a life insurance policy.
www.legislation.gov.uk/uksi/2014/685/pdfs/uksi_20140685_en.pdf
3.3 OECD BEPS project - discussion draft on Action 6 (prevent treaty abuse) The OECD has issued a draft discussion document on preventing treaty abuse (Action 6 of the Base Erosion and Profit Shifting (BEPS) project) for comment by 9 April 2014. The discussion draft includes the preliminary results of the work carried out in the three different areas identified in Action 6 namely:
a) Develop model treaty provisions and recommendations regarding the design of domestic rules to prevent the granting of treaty benefits in inappropriate circumstances. A three pronged approach is put forward:
- use the title and preamble of tax treaties to clearly state that in entering into the tax treaty the parties wish to prevent tax avoidance and avoid creating opportunities for treaty abuse;
- include in tax treaties a specific anti-abuse rule based on the limitation-on- benefits provisions included in treaties concluded by the United States and a few other countries; and
- include a more general anti-abuse rule to catch situations not caught by the above;
b) Clarify that tax treaties are not intended to be used to generate double non-taxation. It is proposed that the title and preamble of tax treaties should clearly state that the prevention of tax evasion and avoidance is a purpose of tax treaties and that the parties enter into the treaty to eliminate double taxation without creating opportunities for tax evasion and avoidance
c) Identify the tax policy considerations that, in general, countries should consider before deciding to enter into a tax treaty with another country.
Some amendments to the introduction to the OECD model tax convention are proposed that articulate more clearly the policy considerations for entering into a tax treaty.
There will be a public consultation meeting on 14-15 April 2014 in Paris at the OECD Conference Centre to discuss the proposals.
In its 19 March 2014 publication on 'Tackling aggressive tax planning in the global economy' the UK Government indicated it fully supported the objective of preventing treaty abuse, and pointed out that it has:
".. included in its tax treaties provisions aimed at denying benefits where persons have a main purpose of taking advantage of a treaty's provisions (see for example the UK's tax treaties with Canada, France, Germany, Italy, Japan and Russia)"
www.oecd.org/tax/treaties/discussion-draft-action-6-prevent-treaty-abuse.htm
3.4 OECD BEPS project - action plan and hybrid mismatch arrangements
The OECD has issued two discussion drafts concerning its action points on hybrid mismatch arrangements. The documents are designed to generate comment and feedback is requested before 2 May 2014. The announcement includes the following comment:
'The first discussion draft (Neutralise the effects of Hybrid Mismatch Arrangements – Recommendations for Domestic Laws) sets out recommendations for domestic rules to neutralise the effect of hybrid mismatch arrangements and the second discussion draft (Neutralise the effects of Hybrid Mismatch Arrangements – Treaty Aspects of the Work on Action 2 of the BEPS Action Plan) discusses the impact of the OECD Model Convention on those rules and sets out recommendations for further changes to the Convention to clarify the treatment of hybrid entities. The recommendations set out in these discussion drafts do not represent the consensus views of the CFA [Committee on Fiscal Affairs] or its subsidiary bodies but rather are intended to provide stakeholders with substantive proposals for analysis and comment'.
Amongst other things the recommendations for domestic rules consider targeting specific hybrid arrangements, the possibilities of a co-ordinated approach by countries and the practicalities of parallel rules in different countries. HMRC's 19 March 2014 paper on 'Tackling aggressive tax planning in the global economy', mentioned above, also supports the OECD's work in this area and recognises the practical difficulties in arriving at workable rules. It also suggests consideration is required for special rules for intragroup hybrid regulatory capital instruments that are a direct consequence of regulatory requirements.
www.oecd.org/tax/discussion-drafts-action-2-hybrid-mismatch-arrangements.htm
www.oecd.org/ctp/treaties/hybrid-mismatch-arrangements-discussion-draft-treaty-issues-march-2014.pdf
4 VAT
4.1 VAT and zero rating of alterations to listed buildings
In the case of Ian Owen, the First tier Tribunal allowed the taxpayer's appeal and concluded that HMRC stuck too rigidly to the guidance in their manuals, which cannot cover every eventuality, in refusing zero rating for work done on an approved alteration to a listed building, so as to include an attached garage.
HMRC's guidance comments:
"VCONST08240 - Zero-rating the 'approved alteration' of a 'protected building': is the work to a 'protected building': garages A 'protected building' is a single building, with the single exception of a garage which can be in a separate building.
The law allows a garage to form part of a building designed to remain as or become a dwelling when it is occupied together with the dwelling and is either:
- constructed at the same time as the dwelling; or
- where the building has been substantially reconstructed, at the same time as that reconstruction.
Where a garage qualifies as part of the dwelling, it can take the form of a separate building or be part of the same building as the dwelling.
It is not necessary for the garage to have been constructed as a garage (that is as an enclosure for the storage of motor vehicles). It can also have been constructed as something different, for example a barn. Provided the enclosure is in use as a garage before the alteration (or reconstruction) and continues to be in use afterwards, and meets the remaining conditions stated above, it qualifies as part of the 'protected building'. However the work done in the Ian Owen case consisted of the alteration of the house (by adding on a garage), so that it was not necessary to import the words in VATA Sch8 group 6 note 2 to assess whether the garage was a 'protected' or 'listed' building. In the context of HMRC's guidance, the Tribunal commented:
"That general guidance cannot cover all of the wide variety of factual situations that arise in practice and we also accept that there will be specific situations where that guidance leads to the correct answer."
www.bailii.org/uk/cases/UKFTT/TC/2014/TC03384.html
We have taken care to ensure the accuracy of this publication, which is based on material in the public domain at the time of issue. However, the publication is written in general terms for information purposes only and in no way constitutes specific advice. You are strongly recommended to seek specific advice before taking any action in relation to the matters referred to in this publication. No responsibility can be taken for any errors contained in the publication or for any loss arising from action taken or refrained from on the basis of this publication or its contents. © Smith & Williamson Holdings Limited 2014
