1.1 Fiscal events and new Treasury ministers
The new Chancellor of the Exchequer, Rt Hon Philip Hammond MP, has confirmed in a television interview that there is no intention to have a 2016 emergency Budget but that there will be an Autumn Statement in the normal way. We look forward to his statement later in the year.
Jane Ellison MP has been appointed as the new Financial Secretary to the Treasury, replacing David Gauke, who has been promoted to Chief Secretary to the Treasury.
We welcome them to their new roles and wish them all the best. Following the various delays in issuing consultation documents, we would urge them to take stock of the making tax digital timetable before proceeding.
1.2 Finance Bill 2016
An updated version of Finance Bill 2016 is available with amendments included. The Bill has passed the House of Commons Committee stage, with the next stage being the House of Commons Report stage scheduled for 5 September 2016.
The House of Commons Report stage gives MPs an opportunity, on the floor of the House, to consider further amendments (proposals for change) to a Bill that has been examined in committee.
The third reading is the final chance for the Commons to debate the contents of a Bill. It usually takes place immediately after report stage on the same day. Debate on the Bill is usually short, and limited to what is actually in the Bill, rather than, as at second reading, what might have been included. Amendments (proposals for change) cannot be made to a Bill at third reading in the Commons. At the end of the debate, the House decides (votes on) whether to approve the third reading of the Bill.
Once the Bill has been passed by the House of Commons it is substantively enacted for accounting purposes.
1.3 Tax avoidance litigation decisions
HMRC has published a list of tax avoidance litigation decisions for 2015/16 demonstrating their high success rate in such cases.
Of the 26 cases listed, HMRC lost two, one case produced a 'mixed' result and HMRC won the rest. Some cases are still going through the Court process such as Newey T/A Ocean Finance and Murray Group Holdings Ltd.
1.4 Availability of EIS relief
The Upper Tribunal (UT) has confirmed the view of the First tier Tribunal (FTT) that shares issued by Flix Innovations Limited had a future preferential right to the company's assets on a winding up and therefore failed to satisfy the conditions for enterprise investment scheme (EIS) relief. Careful consideration of all the requirements of an EIS scheme is needed in assessing whether an investment in shares will qualify for favourable EIS reliefs.
Flix Innovations undertook a share reorganisation intended to create an opportunity to introduce new investors. As a result of the reorganisation ordinary shares carried a right on liquidation to repayment of nominal capital before the repayment of nominal capital on other deferred shares. After repayment of nominal capital in this way the ordinary shares were entitled to the balance of any funds available for distribution. The nominal values of ordinary and deferred shares were equal at £0.0001, with deferred shares representing around 14% of the total nominal value.
ITA 2007 s.173(2)(aa) provides that EIS shares must be ordinary shares that do not carry any present or future preferential right to assets on a winding up. The UT noted that this provision refers to 'any present or future' right, holding this did not permit an interpretation that ignored a small or de minimis amount.
In contrast to the FTT, the UT considered that whether something was small or de minimis in the context of Flix Innovations needed to be by reference to nominal value and on this basis was not de minimis.
2. Private client
2.1 Bank rewards and the personal savings allowance
Individuals receiving certain rewards on their current accounts may have a liability to tax as the cash rewards are not covered by the new personal savings allowance or the starting rate for savings income. The rewards are not interest (savings income) but may be taxable as annual payments or miscellaneous income, which complicates the tax position, determining whether the bank has to deduct basic rate tax from the reward payment.
The current account rewards paid by banks such as Halifax, Barclays and Co-op are taxable as follows:.
- Barclays: The reward is a 'miscellaneous payment', as there is a monthly fee, and it is therefore paid gross.
- Halifax and Co-op: These reward payments are annual payments and are therefore paid net.
In each case, the income is not interest and therefore not within the scope of the new personal savings allowance nor the savings income starting rate. Any additional tax due will depend on the individual's circumstances. The extra tax can be settled through the self-assessment tax return or an adjustment in the PAYE coding notice.
A reward in the form of cashback on spending is not taxable.
Care is therefore required when reporting such receipts. The position regarding such payments had been highlighted in the personal savings allowance consultation.
3. Business tax
3.1 Whether HMRC bound by agreements not to pursue outstanding PAYE and NIC
Spring Salmon & Seafood Limited has won its appeal at the Upper Tribunal (UT). HMRC was barred from assessing the company for PAYE and NIC on bonuses, due to undertakings given by HMRC in order to restore the company to the register.
Among other things, there was uncertainty as to the correct treatment of bonuses of £900,000 alleged to have been paid and credited to the directors' loan accounts in either 2003/04 or 2004/05. An agreement was reached between the company and HMRC in 2007 that in exchange for not obtaining a corporate deduction for the bonus, there would be no assessment of PAYE/NIC on these bonuses. The UT considered this to be a valid agreement, subject to either party breaching the terms of that agreement. As a result of that agreement, the company was dissolved and struck off the register in 2007.
In 2010 HMRC sought to restore the company to the register. They gave an undertaking to issue closure notices and assessments in respect of all the company's outstanding enquiries into the company's liabilities. The UT considered that the terms of this undertaking were clearly directed at the company's outstanding corporation tax liabilities, and not any outstanding PAYE/NIC.
3.2 OECD discussion draft on design and operation of the group ratio rule
The OECD has issued a consultation on the design of the group ratio rule for restriction of corporate interest deductions arising from its base erosion and profit shifting (BEPS) action 4 report. Comments are requested by 16 August 2014.
The consultation considers three possible approaches for determining group interest expense, being:
- the use of consolidated net interest expense;
- the use of consolidated net interest expense as adjusted to include items economically equivalent to interest and for example, capitalised interest, but possibly excluding related party interest; or
- identifying items of expense economically equivalent to interest and measuring them based on the group consolidated accounting approach.
The consultation also considers the options for determining group EBITDA suggesting, amongst other things, possible adjustments from the group consolidated figure to take account of:
- items to be included in the adjustment for interest income and expense;
- items to be included in the adjustment for depreciation and amortisation;
- the treatment of dividend income and a group's share of the earnings of an associate or joint venture; and
- the treatment of non-recurring items.
4.1 Whether the provision of deposit accounts was a supply for consideration
The Upper Tribunal (UT) has agreed with the First tier Tribunal (FTT) that ING Intermediate Holdings Ltd's (ING) supply of a deposit account to retail customers was a supply of a service in return for consideration. As a result input VAT incurred in attracting deposit account business was not recoverable to the extent that the deposit funds were used for investment activity to generate an investment return from non-EU investments.
ING contended that the business activity of the company was earning a profit in excess of normal deposit account interest paid to depositors for providing funds to finance the investment activity, via the acquisition of bonds. As the investment activity was partly into non-EU investments, it contended that the profit earned on these investments should have generated a right to input VAT recovery on the related costs of attracting deposits in the first place. The reclaim for VAT periods from 2002 to 2011 amounted to £6.1m.
If ING had been providing a service to its customers in providing deposit accounts, however, then it was agreed this was a VAT exempt activity without a right to input VAT recovery on associated costs. The company contended there was no supply to its customers, who were merely lending money to the bank, which in this context was not a supply for VAT purposes.
The UT agreed with the FTT that there was a supply of services of the provision of deposit accounts to customers. Although the consideration for the service would have been difficult to value, it was nevertheless possible.
Having already decided the case in favour of HMRC, the UT went on to consider whether the activity of investing the deposit funds in bonds represented an economic activity for VAT. If there was no economic activity, there would be no entitlement to input VAT recovery. The UT doubted whether there was an economic activity, but in order to resolve this point considered it would have been necessary to refer the matter to the CJEU. As this was not necessary to determine the appeal, no reference was made.
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The Financial Conduct Authority does not regulate all of the services or products discussed in this publication.