1.1 HMRC research findings – lessons for making tax digital
HMRC has published the report of research it recently commissioned into the online system for the transferable tax allowance for married couples and civil partners. Its findings, particularly those on 'customers' decision making processes' should be compulsory reading for anyone designing future digital systems and how to communicate those to taxpayers.
There was a low take up rate for the new allowance. Generally individuals seemed to carry out a mental cost-benefit analysis to decide whether to apply for the allowance. The report indicates that there has been much uncertainty and understandable concerns about the ramifications of making an incorrect claim or circumstances changing, together with some misconceptions and misunderstandings of the policy due to its unfamiliarity.
The message appears to be that those designing policy and new systems should not assume taxpayers have any level of knowledge of the tax system or confidence and ability in using online digital processes.
The report mentions that one of the aims of such customer insight projects is to help HMRC 'design, deliver and operate services for individual customers which ... maximise tax yield.' One can but conjecture if that was already achieved here.
2. Private client
2.1 Penalties for incorrect self-assessment concerning capital losses
The First-tier Tribunal (FTT) has allowed an appeal against penalties imposed on a taxpayer using a tax avoidance scheme. HMRC was not able to demonstrate that the taxpayer acted fraudulently or negligently in submitting an incorrect return. The penalties amounted to £45k.
Mr Bayliss submitted a claim to capital losses of £539k for 2006/07. He applied to offset that loss in 2006/07 and 2007/08, but later accepted that these losses were not available. The losses arose from a scheme marketed by Montpelier involving the purchase of a contract for difference and a loan. Mr Bayliss described the loss as arising on shares, though provided further detail on his tax return, where it appeared clear to the FTT that the scheme involved a contract for difference and loan.
HMRC sought penalties under TMA 1970 s.95(1)(a) in relation to the tax understated on the basis that the return was fraudulently or negligently delivered.
The FTT held that HMRC's arguments that the taxpayer had fraudulently or negligently submitted incorrect tax returns could not be sustained. The FTT believed that the taxpayer had fully relied on his accountant and the expertise of Montpelier and that the taxpayer believed that his tax return was correct.
In holding that the penalties should not be upheld, the FTT also criticised HMRC's penalty determination process for giving insufficient consideration to mitigating factors.
2.2 Income tax exemption from certain sporting events
The draft statutory instrument providing for income tax exemption for competitors competing in or supporting or promoting the London Anniversary Games 2016 and the World Athletics Championships 2017 has been formalised in SI 2016/771.
The London Anniversary Games 2016 took place on 22 and 23 July 2016. The income tax exemption is available from two days before until two days after the games.
The World Athletics Championships 2017 involves two events. The first is the IPC Athletics World Championships, for Paralympic athletes, which will be from 14 to 23 July 2017. The second is the IAAF World Championships which will be from 4 to 13 August 2017. The income tax exemption is available from two days before the first event until two days after the second event.
3. PAYE and employment
3.1 Employee expense reimbursement information to be reported by employers
SI 2016/17 reinstates a requirement for employers to report in respect of 2016/17 expense reimbursements made at 'unapproved rates', correcting a change made by an earlier statutory instrument.
With the introduction of the payrolling of benefits, SI 2015/1927 made a number of changes to the PAYE regulations (SI 2003/2682). One of those changes was to remove the requirement for employers to provide HMRC with 'information on any payments made by the employer or related third party to the employee by reason of the employment in respect of expenses', (Reg 87(1)(a)) – in respect of returns required for the 2016/17 tax year.
That removal was an error.
SI 2016/747, which comes into effect on 8 August 2016 and will therefore be effective for any reporting information required for 2016/17 and subsequently, restores the requirement for employers to provide HMRC with such information in relation to non-approved mileage or passenger payments.
3.2 Proposed Finance Bill 2016 amendment affecting the EBT settlement opportunity
An amendment to Finance Bill 2016 has been proposed to extend the date from 30 November 2016 to 31 March 2017 for withdrawal of transitional relief on investment growth currently available under Finance Act 2011 Schedule 2 para 59, as amended by Finance Bill 2016.
FB 2016 clause 18(6) withdraws the transitional relief on investment returns after 30 November 2016. The clause currently provides that where agreement is reached and payment is made by 30 November 2016 on outstanding disputes concerning 'employment income provided through third parties', relief is available on any investment return between taking the relevant step and the date of settlement.
HMRC has previously indicated that the relief was intended to work alongside the EBT Settlement Opportunity, which closed on 31 July 2015 and is not being extended. However, the Government is extending the relief to those that settle with HMRC before the new 31 March 2017 deadline.
Murray Group Holdings has been granted leave to appeal to the Supreme Court the Scottish Court of Sessions decision concerning whether loans made in arrangements involving Rangers football club and employee benefit trusts (EBT's) were earnings or not.
The extension should provide more time for employers and trustees to seek advice, for HMRC to apply resources to deal with cases and for the Supreme Court to resolve the Rangers case before the new March 2017 deadline. Anyone interested in seeking advice in this area may contact the Smith & Williamson employment taxes group or your usual contact.
3.3 Whether loan notes were restricted securities
The First-tier Tribunal (FTT) has rejected Cyclops Electronics Ltd and Graceland Fixing Ltd's appeals that the award of bonuses in the form of loan notes was an award of restricted securities. This decision will apply to several hundred 'related cases' that raise similar issues.
The terms of the loan notes awarded to the employees of Cyclops Electronics Ltd (Cyclops) and Graceland Fixing Ltd (Graceland) in 2004 included a forfeiture provision. The companies therefore argued that these loan notes were restricted securities for the purposes of ITEPA 2003 Part 7 and therefore exempt from income tax and NIC on receipt of the loan notes due to ITEPA 2003 s.425.
HMRC argued that as the forfeiture provision had no business purpose, the loan notes were not restricted securities, following the decision in UBS AG v HMRC; Deutsche Bank Group Services (UK) Ltd v HMRC  STC 934. On this basis the award of loan notes should be treated as a payment of cash and subject to PAYE and NIC, with ITEPA 2003 s.425 not being relevant.
The FTT concluded that the forfeiture provision was designed only to secure the benefit of the tax exemption under ITEPA 2003 s.425. On this basis the loan notes failed to meet the purposive interpretation of restricted securities under ITEPA 2003 s.423. The FTT therefore considered that the loan notes were a payment of earnings with a value equal to their principal amount.
4. Business tax
4.1 Capital allowances – designated assisted areas
SI 2016/751 designates certain areas as assisted areas for the purpose of 100% enterprise zone capital allowances. Amongst other areas included are the Cheshire science corridor, Blackpool airport, Luton Airport business park, Goonhilly earth station and areas around Part Talbot. The areas are designated with effect from either 16 or 18 March 2016.
4.2 Streaming of profits from different trades
The Upper Tribunal has reversed the First tier Tribunal decision Leekes Limited, with the result that the position on use of corporation tax trade losses of an acquired business is restored to that of HMRC's previous practise. When an acquired business is merged into an existing business, it will be necessary to stream the profits of the merged business so that brought forward trade losses of the acquired business can only be offset against future profits of that business, not the enlarged business.
Leekes Limited had acquired the loss making business of Coles Limited, which was similar to its own, by a share acquisition. It immediately hived the Coles' business up to its own business. The UT considered that the FTT had erred in contending that what was ICTA 1988 s.343(3) (now CTA10 s.944(3)) meant that the successor was to be treated as having incurred the brought forward loss of the acquired business.
4.3 Industrial buildings allowances on building leased from developer
The First tier Tribunal has allowed an appeal on the interpretation of a relevant interest for industrial buildings allowance (IBA) purposes. It held that the interest granted by the developer, an underlease from an existing lease owned by the developer, could be regarded as a 'relevant interest' by the purchaser, thus permitting the purchaser to claim IBAs.
The IBA legislation ceased to have effect for expenditure incurred on or after 1 April 2011 for corporation tax and 6 April 2011 for income tax purposes. In this case David Welstead had purchased an underlease from a connected developer in 2004 for £1m. He had sought to claim capital allowances of £840,880 in 2004/05.
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The Financial Conduct Authority does not regulate all of the services or products discussed in this publication.